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SCOTUS Launches New Economy with Legalized Sports Betting

Wed, 05/16/2018

Decision Raises More Questions Than It Answers

By Joshua Gardner, Vice President & North American Lead, Global Energy Practice and Wyeth Ruthven, Vice President, MSL

The bookies in Las Vegas give the Golden State Warriors the best odds to win the NBA Finals this year. At 5/8 odds, if you were to bet $100 on the Warriors – winners of last year’s NBA championship – to win the NBA Finals, then you would win $162.50. But if you were to bet that same $100 on the Cleveland Cavaliers – runners-up in last year’s NBA Finals – to win the whole thing this year, you would win $900.00.

You needn’t be a seasoned gambler to see what’s at work here: these numbers are designed to entice basketball fans to level the betting playing field and wager evenly on both sides of a game. 

Since 1992, the betting playing field has been anything but level.

Signed into law by President George H.W. Bush, the Professional and Amateur Sports Protection Act (PASPA) banned states outside of Nevada, Delaware, and Oregon from regulating (and taxing) sports betting. 

In other words, if you wanted to gamble legally on a sport you had to do so in one of those three states. For a state like Nevada, this was a great business.The state took in $4.5 billion in bets in 2016 and earned $219.1 million from taxes. 

It’s easy to see why other states would want in on this action. According to the American Gaming Association (AGA), at least $150 billion a year is gambled on sports in the U.S. and 97% of that amount is bet outside of Nevada, Delaware, or Oregon. And if other states could regulate and tax sports betting, they might not face revenue shortfalls

Fortunately for those states, the U.S. Supreme Court agrees. In a 6-3 decision in the case Murphy vs. National Collegiate Athletic Association, SCOTUS ruled that because Congress exceeded its constitutional authority when it passed PAPSA. In essence, Congress tried to prohibit state legislatures from repealing their existing statues that outlawed sports betting. Under a line of Supreme Court precedent known as the anti-commandeering doctrine, federal efforts to coerce states into enforcing federal law are unconstitutional violations of the Tenth Amendment.

To say this is just the beginning would be cliché, but what SCOTUS has wrought with its decision will have lasting consequences that go far beyond sports betting. 

Seven “futures” we’re placing bets on:

1. A complete re-contextualization of how we consume sports.

Anthony Downs wrote in An Economic Theory of Democracy that there were only four types of information: production information, consumption information, entertainment information, and political information. 

  • Production information helps you make smarter business decisions. If you’re a stockbroker, The Wall Street Journal is production information for you. 
  • Consumption information makes you a better consumer. If you’re going to a movie this weekend, Rotten Tomatoes is consumption information for you. 
  • Entertainment information is self-explanatory – anything you consume primarily to be entertained, whether high culture (a great novel) or low (a Kardashian). 
  • Political information is anything that makes you a more informed voter.

    
Why does this matter? Because an awful lot of sports journalism is about to move from entertainment information – stuff you read because you enjoy it – to production information – stuff you read because you think it’ll help you make money.

2. Information = POWER.

Most traditional and local outlets can’t take advantage of this shift, but for national outlets this means everything. Want to subsidize information gathering that also benefits a wider audience? Convince readers to pay top dollar for information that has real value and measurable results.  

Still, sports media has a long and complicated history of gambling. Traditionally, outlets were reluctant to air, or placed outright bans on, commentary directly referencing the lines. As The Ringer’s Bryan Curtis notes, “After the new century dawned, writers and broadcasters started talking gambling more freely.” 

So, even if sports betting becomes legal, will “big” media companies be comfortable participating? Or, more specifically, just how close to this can they get? Recall that in 2015, Disney’s ESPN was set to invest directly in Draft Kings, but the deal fell apart at the last minute, and the suggestion was that Disney’s top executives weren’t comfortable aligning Disney’s brand with betting. Will that change now?

The fact is, it’ll be hard for many of the big media to pass up the revenue. Spend by online bookies – on average they spend over 25% of their total revenues on marketing – will be the next big driver of growth in sports sponsorship. And will these new investors crowd out traditional sponsorship deals with beer, automotive, and CPG brands?  

3. Separating the Haves from the Have-Nots.

For major pro sports, there’s just too much free information out there – much of it produced by the leagues themselves – for a paid product to demand more than a niche audience. But there have been some successes: fantasy sites, both those that offer league infrastructure and those that promise inside dirt on who to sit or start. Most fantasy leagues aren’t big-money endeavors, but players really want to win – and people are willing to pay for things that help them win. 

Add legal sports betting to the existing (and thriving) fantasy infrastructure and the entire ecosystem of paid sports information is about to get a big boost. And because this is producer information, its exclusivity is a big part of its usefulness. If everyone knows a player’s injury is acting up and he can’t get perform at 100%, the information isn’t valuable anymore. 

Imagine, then, a premium tier upon a premium tier upon another premium tier … and on and on. 

4. An explosion of new investments and new products.

Legal sports betting will lead to a rush in new apps and services. Fantasy sites like Yahoo Sports, DraftKings and FanDuel will lead the way. Media companies like ESPN, Fox Sports and Turner Sports will also play a major role. And there will be new startups who move into this space offering direct betting services or new content built around betting.

We’ll also see tech giants take the plunge, much like Google did when it streamlined the flying experience with Google Flights.

The point is, we’re entering a new frontier for content around sports betting, including news, analysis, and data analytics. And for sports teams, this means more money for them. A surge in sports betting would almost certainly drive a surge in sports viewing. As Dallas Mavericks owner Mark Cuban told CNBC: “I think everyone that owns a top four professional sports team saw the value of their team double.”

5. Congress isn’t done yet.

Both sides of the gaming debate on Capitol Hill have reacted to the Supreme Court’s decision. Senator Orrin Hatch (R-UT), one of the original authors of PAPSA, stated that "At stake here is the very integrity of sports. That’s why I plan to introduce legislation in the coming weeks to help protect honesty and principle in the athletic arena." Justice Alito’s opinion concedes that Congress has the power to regulate sports betting directly, only that Congress cannot prohibit states from repealing their own bans on betting. Senator Hatch held back the details of his proposal, but it may be a hard sell in the current political environment. 

Meanwhile, Representative Frank Pallone (D-NJ) was well-prepared for the Supreme Court’s decision. Pallone had circulated a legislative discussion draft of the Gaming Accountability and Modernization Enhancement (GAME) Act, which would remove federal obstacles to legalized gambling in states that have implemented basic consumer protections, including mechanisms for age and location verification; safeguards to protect privacy and data security of players; and recourse mechanisms for consumers. Congressman Pallone’s legislation is unlikely to gain traction in a Republican-controlled Congress, meaning some voters are going to have to “bet the House” on a Democratic wave in November’s midterm elections.

6. State Legislatures Just Got a Lot More Important.

By weakening the power of the federal government to commandeer state laws, a whole host of state-level initiatives just received constitutional cover. For example, supporters of so-called “sanctuary cities” – cities that refuse to cooperate with federal immigration officials to enforce immigration laws – have cited the Tenth Amendment in recent challenges to the federal government’s efforts to implement conditions on grants for state and local law enforcement. States have also made Tenth Amendment constitutional challenges to the federal government’s recent efforts to enforce federal marijuana laws in states that have legalized the drug for either recreational or medical use. State governments, once hailed by Justice Louise Brandeis as “laboratories of democracy,” have received new constitutional authority to continue their experiments.

7. A New Argument in Favor of Paying Players.

The Murphy decision might be only the beginning of the NCAA’s woes. One of the NCAA’s key arguments against compensating college athletes is that money would threaten the integrity of the games. With the rise of sports wagering, that threat will only increase. Paying players fairly is a common-sense deterrent to bookies seeking scouting reports or tempting players to shave points. And revenue from sports betting could bankroll players without cutting into the revenue schools already receive from television and licensing deals. A 2011 Business Insider article estimated that equitable payment of college athletes under a federal work-study program would cost approximately $200 million per year. Such a sum could be raised by adding a 25 cent vig for every $100 wagered on professional and college football every year – wagers that were illegal under PAPSA.

* * * 

We’ve witnessed a sea change in the world of sports and gambling – the launch of a new economy built on vice, not unlike the end of prohibition or the legalization of marijuana. We have a sense for what it means for businesses; we don’t yet know what it will mean for society and culture. 


Joshua GardnerJoshua Gardner is a vice president in MSL’s Washington D.C. office and also serves as the North American lead in MSL’s Energy sector.
joshua.gardner@mslgroup.com

 

 

 

Wyeth RuthvenWyeth Ruthven is a vice president in MSL’s Washington D.C. office who has taken the lead in developing strategies that integrate emerging social media with the practice of public affairs.
wyeth.ruthven@mslgroup.com

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