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Analysis: Why NY Sports Betting Is A ‘Trap’ For Sportsbook Operators

Be careful what you wish for. After years of pushing for NY sports betting, the industry has its market.

But it is not the one they wanted.

Gov. Andrew Cuomo ultimately got his way with a relatively restricted market run through the state lottery.

Operators will bid via RFP for a license. There will be at least two platform providers picked with a minimum of four skins. Those platform providers will pay $25 million each for a 10-year license, and will have to share more than 50% of total sports betting revenue.

NY sports betting is a ‘trap’

Beyond the confusing language around platforms and partnerships, the economics simply do not add up.

“Taken as a whole, the New York framework is in danger of being unworkable,” said Paul Leyland, a gaming industry analyst at Regulus Partners. “It is a trap. But it is a trap for those who do fall into it and for those who don’t.”

What does Leyland mean?

Doing the New York math

Firstly, a winning bidder might not make any money.

Sportsbooks in competitive markets spend around 25-30% of gross gaming revenue (GGR) on marketing. Add the 50% tax, and an NY brand is potentially giving away 80% of GGR immediately.

That is before other costs like official league data and payment processing fees. That’s not to mention the $25 million upfront license fee and $5 million in server costs for the casinos.

In short, the economics do not work if bonuses are taxed at such a high rate.

But the companies who do not want to commit financial harakiri are also in trouble. They are locked out of the largest market in the US for at least 10 years and their total addressable market (TAM) takes a huge hit.

New Hampshire comparison is flawed

Cuomo has been clear that New Hampshire is the inspiration for this system. That is why the governor expects bidding for a license start at a 50% tax.

DraftKings won an RFP to run NH sports betting in 2019 by bidding a 51% tax rate for a full monopoly. Of course, a monopoly means it does not need to keep pumping money into marketing and bonusing.

As part of that bid, DraftKings also offered:

  • 21% of GGR for a license in a market with two or three operators
  • 16% of GGR if it were one of four or five operators in the market

In New York, we are going to see at least four brands, and potentially six or more. So if NH is anything to go by, 16% GGR is a fair tax rate, not 50%.

Remember as well, DraftKings won that bidding process in NH by a mile. BetMGM came in second, bidding 20% of GGR for a monopoly.

So what’s the solution for NY sports betting?

Leyland sees two potential outcomes.

  1. Cuomo’s political troubles force him out of office. The industry collectively decides (without colluding) that something less than 40% of GGR is a more workable tax rate, and builds its bids around that. This is an option because the law itself is not actually that onerous. It calls for a minimum 12% tax rate in bids. The 50% tax angle is Cuomo administration rhetoric and goes against what the legislature wanted. 
  2. Far more likely is that operators step forward and give Cuomo his 50% tax rate and hope to work it out later. As Leyland put it:

“Someone invested in the long-term US market with deep pockets could justify losing money for five years because its New York. Then they turn around and say, ‘Look, we tried to play the game by the rules but it’s unworkable. Let’s work out a new game where we both can win.’”

Investors want their lofty returns

Of course the second option is more likely because US sports betting is still in growth mode. A company like DraftKings has a $22 billion market cap because investors are expecting massive future expansion. It and other listed companies are not going to let those expectations slide easily.

“The industry is in danger of screwing itself,” Leyland said. “Whenever this industry been presented with a trap, it has walked into it”

Unfortunately, the trap is such that operators are hit whether they walk into it or not.

The industry’s best hope now is Cuomo departing, or else the NY sports betting dream could quickly become a nightmare.

Photo credit: Terry Robinson/Flickr

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