Integrity Fees: Where Did They Come From, Where Did They Go?

Of the thirteen states that have now passed sports betting legislation, none have adopted statewide integrity fees. Further, the proposed federal sports wagering legislation that came and went last year failed to include any integrity fee provisions.

So, what happened to the integrity fees that NBA Commissioner, Adam Silver, once described as a league “entitlement”? And how will leagues manage without them? Perhaps a better question, what were the proposed integrity fees intended for in the first place?

The Integrity/Royalty Fee Shuffle

The introduction of proposed legislative integrity fees started last year in Indiana when Representative Alan Morrison introduced HB 1325.

The bill called for an “integrity fee of one percent (1%) of the amount wagered on the sport’s governing body’s sporting events.” Two weeks after the introduction of that bill, NBA Executive Vice President and Assistant General Counsel Dan Spillane testified that integrity fees were essential to, “compensate leagues for the risk and expense created by betting and the commercial value our product creates for betting operators.”

Public outcry against Indiana’s proposed integrity fee began immediately. Media outlets and interest groups questioned the amount, need, and validity of such a fee.

To avoid these negative connotations, politicians and league lobbyists began moving away from the unpopular integrity fee moniker towards a more neutral one. Adam Silver commented last February:

[W]e feel — just in the same way a musician that receives a royalty for the music that’s being played, we should receive some sort of royalty. So call it a royalty, call it an integrity fee, we will have additional expenses and it’s ultimately our intellectual property, and we think we should be compensated for it.”

Despite the shift in nomenclature, Indiana ultimately passed HB 1085 in May of 2019, which authorized legal sports betting in the state as of July 2019. The final version of the new law is devoid of any statutory integrity fees or royalty fees, but the discussions started in the Indiana legislative debate have since reverberated to many other states and the U.S. Congress.

Integrity Fees for What?

Since the Royalty Fee rebranding, leagues have reduced their requested amount from the sportsbook operators from 1% to .25% of the hold. But either way, we are talking a whole lot of money.

As America’s sports betting renaissance has only just begun, it is hard to put a firm estimate on this number, but analysts are predicting the number to be in the billions. According to a post by I. Nelson Rose, a 1% fee could translate to a 24% tax on gross gaming revenue.

Not all of the leagues have pushed for integrity fees. Notably, the NFL and the NCAA have publicly opposed the fee. For the leagues still trying to get their piece of the new sports betting pie, they have finally pointed to sportsbook operators use of League data and increased enforcement cost as the primary needs for an integrity or royalty fee.

According to MLB Executive Vice President of Gaming and New Business Ventures, Kenny Gersh on royalty fees:

“MLB invests significant resources and capital to produce a fast, reliable and rich data feed that will allow sports books to create more engaging products for our fans and generate additional revenue from the ability to offer more types of markets and keep those markets open longer… The right to use our official data requires a direct license from MLB and the data will be supplied by one of our authorized data distributors.”

In theory, increased enforcement costs would follow increased use of league data that is sure to follow the sports betting boom we are now experiencing. Or at least that’s what Silver says. “We’re going to have significant additional costs because we need to monitor that information, we need to monitor line movements [and] we need to monitor aberrational bets on games.”

True Costs of Integrity Fees

Combined with the existing federal tax on sports betting and the proposed future state taxes, an over-excessive integrity fee could have serious repercussions for sports betting operators and the newly formed market at large.

The American Gaming Association has been a staunch opponent of integrity fees in legislative arenas around the country. An AGA commissioned report by Oxford Economics surmounted that a 1% integrity fee would:

• Limit the attractiveness of legal sports betting relative to the illegal market
• Generate less than half the state tax revenue compared to scenarios that do not include the integrity fee
• Do less to create mainstream, safe, taxable jobs and economic activity.

The Oxford report, which was released in March of 2018, also pointed out that no information demonstrates the need for an integrity fee to bolster the sports leagues’ integrity monitoring efforts.

Out of necessity, the leagues for integrity fees have presented more information about their request for the fees as these discussions move out of the legislatures and into boardrooms.

Integrity Fee Negotiations

Having struck out in legislative arenas, we are now seeing leagues pursuing the royalty fee matter in private negotiations with sportsbook operators on a state-by-state, company-by-company basis.

The NBA has started to use its official data as a bargaining chip for royalty payments by sports betting operators. Something they have eluded to over the past year, “We provided a season-long grace period for other betting operators to have access to official NBA data while we discussed partnership terms.” said Adam Silver.

On May 25, 2019, ESPN reported that NBA’s authorized data distributor, Sportradar, had sent out letters to sportsbook operators saying the league was forcing them to “cease providing to you NBA Official Data for use in the United States unless and until you are an Authorized Gaming Operator of the NBA.” A timely request as the NBA finals started two days later. But it has been reported from an anonymous source at Sin City book that the NBA’s letter was an empty threat.

Sin City book, an unauthorized sportsbook operator, had not experienced any interruptions to the NBA’s data feed via Sportradar as of the start of the NBA finals between the Warriors and the Raptors. Whether this lax enforcement will remain throughout the end of the finals is anyone’s guess. Although such disruptions would have huge implications for existing bets with unauthorized sportsbook operators.

Sports Book operators wishing to skirt the ambiguities have entered into direct agreements with the leagues. Most notably, a data and sponsorship deal between MGM and the NBA to become the first NBA-authorized operator.

For a hefty fee that is sure to include some sort of royalty/integrity fee, MGM receives the rights “to use league highlights, logos and a direct data feed from the NBA that will be used to help fuel the company’s growing sports betting footprint,” according to ESPN.

Federal Concerns

As mentioned above, the Sports Wagering Market Integrity Act of 2018, which died at the end of the 115^th Congressional Session, failed to include any provisions about Integrity or Royalty Fees.

While the proposed bill did not establish such fees, it also did not prevent states from their own statutory integrity or royalty fees. Even though no state has opted to do so on its own, recent federal movement on regulations might see a reintroduction of a federal integrity discussion.

With the DOJ’s new interpretation of the Wire Act, it is clear the federal government has the authority to regulate and has the executive eagerness to do so. It should be noted that new interpretation is under attack as we speak, but either way, it goes to show the federal government is not shy when it comes to involving itself in these matters.

If Congress decides to act with federal legislation, you can be sure the same interests that have been jockeying for and against integrity fees will come out of the woodwork again.

Any future discussions on the federal level will be illuminated by the market’s current reaction to league demands for integrity fees and royalties. Hopefully, then, a more informed discussion can be had rather than what feels like a blatant money grab by the leagues.