Why the Sports Betting Industry Is About to Be a Crowded Race to Zero Margins

Why the Sports Betting Industry Is About to Be a Crowded Race to Zero Margins

During the last Super Bowl, when the Philadelphia Eagles upset the New England Patriots, Americans bet $4.76 billion on the game, but it’s estimated that about 97 percent of the money was wagered illegally. All of that is likely to change when an underground sports betting economy worth billions could turn legit, thanks to a Supreme Court ruling on Monday that stuck down the federal ban on sports wagering.

In a hotly anticipated move, the Supreme Court ruled in Murphy v. National Collegiate Athletic Association that the Professional and Amateur Sports Protection Act of 1992, which forced all states except for Nevada to prohibit competitive sports gambling, is unconstitutional. The decision paves the way for all 50 states to legalize and regulate sports betting through state legislation. Justice Alito, who wrote the court’s opinion, said Congress can pass a federal law, but states are free to pass their own regulations.

The opportunity for investors, entrepreneurs, and big corporations could be massive. Each year, an estimated $150 billion is wagered illegally in the U.S., according to the American Gaming Association. The AGA, which is in favor of the decision, estimates that the decision could lead to a cascade of economic activity, predicting that if 40 states pass legal sports betting laws, the industry could produce around $8 billion in local taxes, create hundreds of thousand of jobs, even add $20 billion in gross domestic product.

Greg Bettinelli, a partner at Santa Monica, California-based Upfront Ventures who has made investments in sports betting startups, predicts the legal sports betting industry will be extraordinarily crowded. “I think there have been a lot of entities that have been waiting for this, and investing against it, for decades,” says Bettinelli.

Bettinelli, who invested in daily fantasy sports mobile app Draft–which was acquired for $48 million by European sports betting company Paddy Power Betfair–says it’s not only startups that will jump into the ring. Massive corporations are primed to get in on the action, including everyone from professional sports leagues and media companies to gaming companies, state lotteries, Native America tribes, and European sports betting platforms like Ladbrokes, SkyBet, and Bet365. Already, speculation is beginning that companies including AT&T, ESPN/Disney, and Verizon/Oath will compete for a piece of this.

New Jersey, which was the victor in the Supreme Court case, will likely be the first state to pass legislation regulating the industry 电竞博彩. But other states that have been anticipating the decision, including New York, Delaware, Mississippi, Pennsylvania, and West Virginia, also have legislation in the works.

In 2016, daily fantasy sports platforms like FanDuel and DraftKings, which allow users to compete for cash, successfully convinced regulators to consider fantasy sports contests games of skill, not chance. But after the Supreme Court decision, both companies say they will get into gambling.

“Assuming there will be enabling legislation, we will have a product for the NFL 2018 season,” says Matt King, the CEO of FanDuel. Jason Robins, CEO and co-founder of DraftKings, said in the statement that his company will also be releasing “innovative online sports betting products.”

However, Bettinelli warns, “people need to manage their expectations, because what most do not understand is that it’s not a high-margin business–it’s only about a 5 percent margin,” he says. “As a consumer product, it’s not super-profitable.”

Customers, especially big spenders, will be looking for the platforms with the lowest take rate (the price a bookmaker charges to take bets). As the customers demand lower prices, the margins will be further depressed. Bettinelli says he thinks the sports wagering industry will follow the same trajectory as online securities trading. “Back in the day, it used to be $50 to trade a stock. Then Charles Schwab created the online trade, and then E-Trade and Scottrade came after. Now we have Robinhood, and it’s a negative margin business,” says Bettinelli. “The same thing will happen with sports betting, and it’ll turn to a competition of lowest price and product innovation.”

Jeffrey Standen, the dean at Northern Kentucky University’s Chase College of Law, predicts “the dominant players will be the ones with economies of scale in place,” with a wave of consolidation after the first movers get up and running. However the dominant players may not end up being casino companies or media companies. “I would bet on the companies that have close ties to the bettors themselves–maybe companies like Facebook and other social media companies,” says Standen. “The betting industry is not difficult; you don’t need sophisticated structures. This is something people have been doing for hundreds of years in the back of the grocery store. Like poker, it’s all about getting the players to the table.”

Upfront’s Bettinelli predicts that companies focused on regulations–keeping underage and out-of-state users off the platform, anti-money-laundering technologies–will do well. But the platforms competing for customers will trigger a race to zero margins. “This is not going to end well for most,” he says. “There will be a few winners, but there will be way more losers.”


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