How Big Of A Problem Is Free Money In Sports Betting?

In a blog post, Regulus Partners called the use of gross gaming revenue (GGR) to assess the sports betting market fools gold. The reason, in some locales, GGR doesn’t account for promotional spend.

As Regulus puts it:

The routine use of GGR as a revenue proxy is misleading, short-sighted, and self-defeating for the global gambling market. In the US and elsewhere a focus on GGR is generating poor economic, consumer, and policy decisions.

Promotional spend is something that has raised the ire of some sports betting industry watchers, and something Betting USA has kept a close eye on. In locales where it can be deducted from GGR, it juices the sports betting numbers and dramatically reduces the tax revenue states receive from betting activity.

Regulus identifies three problems with using a “revenue proxy that inflates actual revenue by up to 2x and routinely by c. 35%,” they are:

1. Market sizes and therefore potential economic returns are over-estimated
2. Operators may be tempted to game the system
3. Regulators and tax authorities can make some very bad decisions in how policy is designed

For example, in Michigan, GGR is used to tout the industry’s success but adjusted gross revenue (AGR) for tax collection purposes. Other states considering sports betting legalization are seeing Michigan tally nearly $140 million in GGR since launch. That would result in $11.7 million in state taxes based on Michigan’s meager 8.4% tax rate.

However, promotional spend deductions (and loss carryover provisions) has resulted in just $52.9 million in AGR and a tax collection of $3.4 million to date.

Problem #1: These Aren’t the Numbers You’re Looking For

The first problem with GGR is that it floods the market with money, which gets recycled multiple times (inflating handle too) before it disappears or is withdrawn from the ecosystem. That means that every $100 gifted to customers could result in several hundreds of dollars of wagers and an inflated betting handle and GGR. And keep in mind that promotional spending is measured in the millions per month.

Per Regulus:

The most obvious problem with using a revenue proxy that is 15-67% too high is that stakeholders can completely misread the market (especially given the wide variation by operator, product, and geography).

Operators that are very close to the detail may do this cynically or naively but stating a TAM of US$35bn for the US, for example, is not all that meaningful if US$10-15bn of it is not really revenue at all.

Problem #2: The Rich Get Richer

The second problem has manifested in several markets already. That problem is access to promotional spend, which is deducted from an operator’s tax burden, to acquire customers. That allows well-heeled operators to flood the market with promotional money other operators may not have access to, and because of playthrough requirements, customers will have to bet this “free” money many times over before they can make a withdrawal.

That pumps up the performance of the big players in the market, making them more attractive to investors and more appealing to states with bidding processes and companies looking for partners.

As Regulus wrote:

For big gaming markets that give GGR breakdowns by licensee like New Jersey, Michigan and Italy, the easiest way to show a market share gain is to issue more attractive customer incentives. The fact that this is not really revenue, not paying any bills and is probably suppressing underlying customer expenditure is tomorrow’s problem… 

Problem #3: Sports Betting Promises Undelivered

The final problem is an extension of the second problem and is something discussed throughout this column. The problem is that states that allow for promotional deductions are losing out on tax revenue.

Again, quoting Regulus:

There is a degree of fiscal-regulatory schadenfreude to the gambling industry’s embrace of GGR as a sloppy revenue proxy, albeit it is still accidental (and therefore even more dangerous)… the push to focus on GGR rather than net revenue (ie, real money paid by customers and recognised in audits) has left several jurisdictions dangerously exposed.