The Rise of Sports Betting
The sports gambling industry has long been an industry primed to explode with the stroke of a legislative pen - and that legislation is here.
Sports gambling is an American pastime. Millions of Americans wager their money on fantasy football, March-Madness brackets, pick-em pools, and Super Bowl bets, even though its legality has always been rather blurred.
Over 100 years ago, scandal shocked the sports world when it was uncovered that the Chicago White Sox had thrown away their chance at a title.
The professional baseball team had taken bribes to purposefully lose the World Series to the Cincinnati Reds in a fixed gambling syndicate led by Arnold Rothstein.
During the NCAA basketball season of 1961, 37 students were arrested from 22 different colleges for participating in a fixed gambling cohort.
Eighteen years later, Boston College was found taking bribes to purposefully “point shave” or win by a small amount to cover the spread.
As history tells us, our sports culture is not complete without gambling. Even thousands of years ago in the Roman colosseum, nearly everyone from the royalty to the poorest peasant gambled. Even emperor Augustus himself once lost the modern day equivalent of over $100,000 gambling on a colosseum match.
In America, sports gambling seemed to come to a stop with the passage of the Professional and Ameteur Sports Protection Act (PASPA) in 1992. PASPA, aimed at protecting the integrity of sports matches, prohibited states (other than Oregon, Montana, Nevada, and Delaware) from sanctioning sports gambling.
In 2012, however, the state of New Jersey sought to revitalize their failing casinos by legalizing sports gambling. After they passed legislation, they were sued by the National Collegiate Athletic Association (NCAA), along with the four professional sports leagues who claimed that their laws violated PASPA.
After many battles in court, and initial losses for New Jersey’s Governor Murphy, the case was finally appealed to the Supreme Court. In December 2017, the Supreme Court heard Murphy v. NCAA.
The NCAA’s argument was simple: Congress can exercise their right to regulate interstate commerce. New Jersey, on the other hand, felt that congress was overstepping their bounds and involving themselves in state affairs, breaking the “anti-commandeering” clause of New York v. United States.
This clause states that congress cannot force a state to enforce a federal regulatory program. On May 14th of 2018, in a 6-3 decision, the Supreme Court sided with the state of New Jersey. The decision held immense implications for the sports betting world; all states were able to legalize sports betting.
Since the ruling just two years ago, a list of states legalized sports betting: Arkansas, Illinois, Colorado, Delaware, Indiana, Iowa, Mississippi, New Hampshire, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, and West Virginia. Commissioners Adam Silver and Rob Manfred (of the NBA and MLB, respectively) have publicly embraced the future of sports gambling.
Despite NFL Commissioner Roger Goodell’s opposition to sports gambling, the relocation of the Oakland Raiders to Las Vegas may serve as a soft introduction for the NFL to the world of legal gambling by ensuring that sixteen games per year are played in the gambling capital of the world.
Legalizing sports betting is sensical on the state level - the first reason being popularity. In 2019, a Seton Hall poll found that 80% of Americans supported the legalization of sports gambling. Secondly, sports betting serves as another way for states to collect tax revenue.
Although a gray area, states can now legally provide services for their constituents and take in small, likely volatile, tax revenue instead of using offshore gambling sites like Bovada and MyBookie.
In the last year, the industry of private sports gambling exploded. The rise of sports gambling companies is remarkable, especially during the current period of suspended professional play due to COVID-19.
The stock of PENN National Gaming, which owns casinos and racetracks, has increased from $18/share in June 2019 to $53/share today. The loss in market share MGM and Caesars Entertainment Corporation have experienced in the past year is due to their reliance on physical travel to Vegas.
Then lies DraftKings, which is in its first full year as a publicly traded company. A few months ago, sports gambling provider DraftKings was selling for $11.30/share. Today, it trades at $36.32/share with a market cap of $11.8 billion. Investors in DraftKings view this opportunity like a Silicon Valley start-up - its P/E ratio currently sits at 745.42.
DraftKings began as a daily fantasy league. Every player pays real money to enter a competition. They can draft a team using what is essentially DraftKings dollars that they’ve been given by the app. Then, if they do well enough in the competition they paid to join, they receive a payout. States, however, started to ban DraftKings from operating.
Morgan Stanley Analyst Thomas Allen called DraftKings, “an almost pure play on the early stage legal US sports betting and iGaming growth opportunity, with a customer acquisition advantage.”
DraftKings, anticipating the future of legalized sports gambling nationwide, began to develop a sportsbook. Instead of solely offering daily fantasy challenges, they would be ready to deliver an online product identical to what Las Vegas casinos have to offer. Legal, easy to use, and heavily funded, Draftkings has the potential to become the worldwide leader in sports gambling.
Of course, the road ahead for DraftKings isn’t a cakewalk. They will first have trouble differentiating themselves from the rest of the competition, like fellow popular daily fantasy company FanDuel (which has yet to go public).
Additionally, the company currently outsources odds-making. If they hope to stay ahead of competing sportsbooks, they must eventually begin to odds-make in-house, giving them an advantage over sportsbooks who pay other companies to set their odds.
Next, since the entire business of sports gambling can be taken away with the swipe of a pen in Washington D.C., DraftKings must also spend significant resources on lobbyists.
Written by Ethan Samuels
Edited by Alexander Fleiss, Glen Oh, Corina Perez-Cobb, Rohan Mehta, Gihyen Eom, Calvin Ma & Michael Ding