Winning Post: US tribes scrabble for market advantage

Regulus Partners observes that US wagering’s heritage stakeholders are playing unsustainable word games to maintain market advantages…


Among all the drivers shaping sports betting adoption in the US, a very important factor often left out of accumulating lists is grammar and the meaning of words. On one level the importance of what words mean to the evolving landscape is unsurprising: domestically regulated gambling requires positive legislation, that requires lawyers and that’s how lawyers get paid. It is also the only way to test what old and/or badly written laws mean without comprehensive (and therefore time-consuming and hard to control) review.

But on a more fundamental basis, playing word games is a great way to replace accidentally bad law (written to do one job, with no inkling of a post-PASPA internet age) with almost wilfully bad law. We have already written on the importance of the errant comma in the 1968 Wire Act and whether ‘expansion’ means what the customer can do or simply refers to the last 10 yards of a technical wagering capture and settlement process. Some Connecticut legislators and tribal stakeholders are now having fun with the meaning of the word ‘gaming’.

Connecticut has six legal gambling sectors. The biggest by some margin is the casinos of the two tribes, which in 2019 generated revenue of US$1.8bn (about half of which is from in-state footfall). The lottery generates net revenue of c. US$500m, almost 30% of which is from high-value scratch cards. The pari-mutuel wagering monopoly, owned and operated by Sportech, was a US$35m revenue (85% directly gambling) business pre-pandemic.

Charitable gaming has been in precipitate decline since its US$60m staking highs in the 1990s and now generates less than US$10m of stakes. Connecticut attempted to regulate a. c. US$5m DFS market in 2017 by explicitly carving it out of the state definition of gambling, though this is pending after the AG’s office flagged Compact definition concerns. Out of state but still legal is a c. U$15m revenue ADW horseracing betting footprint.

From a fiscal standpoint (and pre-pandemic policy impact), the tribes pay 25% of slots revenue under their Compact (c. US$240m), while Sportech pays a GGR equivalent tax of c. 15% (c. US$3.5m). The lottery’s GGR equivalent tax footprint is 73% (c. US$350m). The proposed DFS tax was set at 10.5% of ‘gross receipts’, which is potentially punitive but untested on a 90% payout model.

The key point here is that the tribal casinos might be easily the biggest contributors in terms of size, but their tax arrangements are reasonably favourable compared to other in-state gambling, set (for obvious historical reasons) at a ‘commercial’ rather than ‘exclusivity’ level (25% in absolute terms, an effective rate of 13% factoring in non-slots revenue including table games, which is not taxed). However, in lobbying, size matters a lot more than details.

There can be no doubt that generations of painful history have given US tribes a clear moral prerogative to be treated both differently and favourably. From a commercial standpoint, gaming is the key area where that difference manifests itself.

However, two other things are in no doubt. First, gambling is a complex and multi-faceted area of economic activity meaning that if policy is not joined up the economic, financial and social costs can far outweigh any benefits. Second, while the tribes may be sovereign on their own land, they cannot perforce be sovereign beyond it, even virtually.

There are two effective ways to cut through this complex maze of stakeholders, fiscal-balancing, constitutional issues and social policy outcomes. First, as mentioned, is to undertake a complex legislative review to seek policy balance based upon clear stated aims, recognising in effect that CT’s gambling framework overall is ‘not fit for a digital age’. Second, is to limit expansion to uncontroversial stakeholders with uncontroversial aims.

Given the mix of stakeholders, the second seems barely possible in CT, but the coalition of Foxwoods and DraftKings, combined with the significant impact of Covid-19 policy responses on casino trading (revenue, tax, jobs, and the need for state aid), seems to have given significant impetus to such a fix. Seventeen lawmakers (4 senators and 13 representatives: a material 9% of the total) have supported a skeleton bill which gives omnichannel sports betting and also igaming to the tribes, while allowing the lottery a digital and keno footprint, tellingly – if the tribes agree.

And here come the word games. In order for this fix to work, sports betting must be a form of casino gaming, and therefore covered in the Tribal Compact: giving legal cover to the de facto exclusivity (including one DFS player) and allowing the expansion to be seen as an extension of the status quo. Sports betting can clearly be undertaken in some casinos.

In some jurisdictions, sports betting is limited to casinos, but this is very much the exception to the rule. However, by relying on external agency (the sporting contest) and introducing an element of skill, betting is not gaming: that’s why there is a different word. There is perhaps an irony that one DFS operator might benefit from the broadest possible definition of ‘gaming’ in one state, while simultaneously arguing for much narrower definitions elsewhere. Such tergiversations are sometimes required pragmatism, but too much spinning risks tripping up.

The risks of tripping up here are threefold, in our view. It might be the right policy choice to grant tribes betting exclusivity, but to suggest that it is already granted in either the spirit or the letter of the Compacts is mere sophistry, in our view, and as such avoids effective legislative scrutiny and effective regulatory frameworks.

A case for exclusivity should be made on first principles, not word games: why would the tribes be the best operators for the state, upon what basis should others be excluded and how does the sovereign tribal border work in terms of the Wire Act (especially given igaming is included). All of these questions might be able to be answered, but if they aren’t then CT’s new-found legislative impetus is just storing up problems, specifically:

  • Once a (quasi) tax rate is set it will have to be ‘renegotiated’ rather than simply changed; the state will lose a significant amount of fiscal flexibility over what its own citizens are doing on its own soil (NB, this does not apply to landbased betting or even digital gambling on tribal lands); this is potentially an especially big problem given the high tax rates applied to lottery due to the importance of high-value scratch cards
  • Similarly, the levels of regulatory oversight the state can introduce will be both low and subject to jurisdictional issues; this does not look like a problem now but if online sports betting and igaming grows to be a c. US$200m domestic revenue market with de minimis regulatory oversight, then it may very well present significant problems down the road
  • Consumer choice is critical to making sports betting and especially igaming work; a market of two risks weak channelling, while a ‘skins’ mechanism would simply abrogate CT’s fiscal and regulatory powers over its own gambling sphere rather than following the logic of exclusivity (which at least contains theoretical accountability)
  • Finally, while Sportech might be a small player in CT’s overall gambling market it is likely to be a key victim of product and channel shift with no apparent benefit in the skeleton bill as presented, reducing in-state employment and potentially direct taxes (depending upon the rate and mechanism set) for every dollar transferred; and demonstrating how precarious even ‘entrenched’ gambling businesses can be if they don’t deliver the scale necessary to move the political dial (a potentially dangerous lesson for all those small sports betting markets if they stay small)


Article edited by SBC from ‘Winning Post’ Sunday 17 January 2020 (click on the below logo to access a full unedited version)




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