New York should learn from the mistakes of Germany when issuing online sports betting licenses



New York is set to award online sports betting licenses, but the process is both limited and cloudy for operators and bettors.

New York sports betting is headed online

The state of New York is moving forward with online sports betting in the state and applications from potential operators are now in the review process. On August 10th, New York announced the applications it received to run online sports betting operations statewide. They included the following:

 - FanDuel Sportsbook using FanDuel, Draft Kings, BetMGM and Bally Bet as the sportsbooks that would operate on the web (also known as skins)
 - Kambi Group using Caesars Sportsbook, Resort World, PointsBet, Rush Street and WynnBet as skins
 - Kambi Group using Barstool Sportsbook and Fanatics Sportsbook as skins
 - Bet 365 operating as a sole skin
 - Fox Bet operating as a sole skin
 - theScoreBet operating as a sole skin

NY online sports bettingUnder the plan, the state is expected to choose two of the operators as the winning bids, although it is possible, they may only choose one. The state will allow betting on any professional sports or competitions, such as the Academy Awards, but will not allow betting on any high school sports or events that include children under 18 years old (which could exclude the Olympics and eSports). It will also not allow betting on any college sports that involve teams from New York State. While not explicitly stated, it is presumed that college sporting tournaments that take place in New York State would be off limits too.

NY keeping score

New York is using a bizarre scoring system to decide winning bids, with the state scoring each company on the following factors with a weighted average.

 - Market Expertise worth 25 points,
 - Integrity, sustainability, and safety worth 20 points,
 - Past relevant experience (i.e., online experience) worth 15 points,
 - Advertising and promotional plans worth 7.5 points,
 - Ability to launch efficiently worth 2.5 points,
 - Efforts to foster ethnic, racial and gender diversity worth 2.5 points,
 - Miscellaneous factors worth 2.5 points.

One other factor built in is the tax rate the company is willing to pay the state. If a company says they will only pay up to 30% tax, it scores 3 points. If they agree to pay 30% to 40% tax, they score 10 points. If they agree to pay 40% to 50% tax, they score 15 points. And if they agree to pay the maximum 50% tax to the state, they score 20 points. And applicants that push the taxation envelope will be awarded one extra point per every percentage point they go above 50%. Since it is believed all the companies will be extremely close in all the other categories it could come down to tax, so it’s almost a guarantee that every company will agree to the 50% tax on gross revenues, unless they collude to pay a lesser percentage, although that is risky. Without question 50% is extreme and would be the highest tax on any sports betting jurisdiction to date, but New York estimates that the online sports betting market could be worth $500 million and some analysts expect it to be closer to $1 billion in a couple of years, which would still justify the investment.

Togetherness

The most surprising bid has to be the FanDuel bid, since they are teaming up with DraftKings to win a license. The two companies have been ardent competitors since Daily Fantasy Sports began and that has continued after states began licensing sports betting companies.

FanDuel DraftKings NY licensing partnershipIn states with licensed and regulated online gambling, FanDuel and DraftKings make up over 70% of the licenses and both companies are even running sports betting at many of the physical sportsbooks. Most of the other licenses are run by BetMGM, which is also part of the same bid. Considering FanDuel is owned by Flutter Entertainment, DraftKings is its own public entity and MGM is the largest casino company in the world, it's a bit confusing of how the skins and profits would be divided up if FanDuel wins the bid. One must assume Bally Bet, which has online licenses in Iowa and Colorado, are part of the bid only to provide a leg up in the media area, since they own many regional sports stations and web applications throughout New York State. But, Fox Bet is also owned by Flutter entertainment, so it’s likely Fox will also be brought in as a major media source, even though Fox Bet is a separate bid.

One analyst I spoke to said he believed the reason they all teamed up on one bid was to shut out other competing bids. While New York says it will choose two operators, there is hope by the group that New York would agree that they could maximize profits using these skins only and none of the companies in the bid really want to compete with Caesars, Wynn or Barstool Sports, which are seen as the main competitors as part of the two Kambi bids. New York said it will announce the winners in December of this year and would begin operating by February 2022, likely to take advantage of March Madness.

Trust the Process?

So, the process now begins to choose the winning bid(s) and there is a big hiccup with Governor Andrew Cuomo stepping down next month. But, it is believed that shouldn't interfere too much with the process, since the next governor should just agree to whoever is chosen. What is most important is for the state to be completely transparent in how it chooses its licensees.

In this respect they could learn from the German mess of what to avoid.

NY licensing Germany problemsFor those unfamiliar with the licensing fiasco in Germany, in 2010 the German federal government announced a plan to legalize online sports betting. The country said they were going to license 20 companies to offer sports betting (online casino gambling would remain illegal), and when the 20 licenses were chosen, they all went to local operators, shutting out many of the big named European companies like Bet365, William Hill, Ladbrokes, etc. The losing bidders took Germany to the EU court arguing that the bidding process was flawed and violated EU law, and the EU courts sided with the complainants. The German government initially fought the challenges, but decided to increase the licenses to 40,, which allowed some of the losing bids in, hoping this would solve the dispute. This was deemed by the EU courts as an insufficient solution, since the courts said it wasn't solely the number of licenses that was the problem but rather the whole method they used to choose the licensees, which lacked transparency. And even the German courts agreed with the EU that the process had to be reviewed. Throwing their hands up in frustration, the German government finally capitulated and this year the country launched their new federal law that allows unlimited licenses for sports betting, as well as the ability to offer online casino wagering.

There is, however, a catch.

Licensing fees and taxes in the new German regulations are exorbitant, including a 5.3% turnover tax (i.e., 5.3% of every single wager goes to the government which would eat up almost all profits), and rules were put in place to limit the amount of money players can actually wager, how they can wager and limited the times companies are allowed to advertise on TV and other media. These rules and taxes caused several companies to balk and pull out rather than operating under those rules. And almost half of German bettors said in a poll that they would continue to play offshore because the limits and payouts (necessary due to the hefty turnover tax), made wagering with these "legal" Germany licensed companies not worth it.

While New York does not have to deal with an entity like the EU court, since U.S. law says the state can make their own rules. However, NY could lose a lot of goodwill with the likes of Bet365 and The Score if they are not at least seriously considered for a bid. It’s likely these foreign companies would pose no concern now, but if there are ever international gambling treaties that take place allowing international betting pools, it could raise concerns with international courts. If these companies ever took New York to an international court like the WTO, they could say they were never seriously considered for a bid. And it’s almost certain that if New York chooses the FanDuel bid exclusively that Caesars and Penn National (who owns Barstool Sports and The Score) will launch a challenge with the New York courts into the vetting and scoring process if it is not completely transparent. It’s also possible, and likely, that if New York chooses the FanDuel bid and one of the Kambi bids that the other companies in the losing Kambi bid will also file a suit with New York courts and demand that New York offer more licenses as happened in Germany.

The best way New York can overcome these scenarios is to be completely transparent. When the winning bids are announced regulators should explain line by line why they assigned each bid a score as they did and highlight every deficiency that made them rank the losing bids the way they have. It would be difficult for lawyers to challenge the process and scoring if the state can indicate why a bid was worse than its competitors, and more importantly they could justify why one bid only was the best way to maximize revenue for the state, if they choose to go that route.

As for the winning operator(s), they will have to find a way to still offer competitive odds, good promotions and realistic upper and lower betting limits, or as is the case in Germany, bettors may look at the odds being offered and decide that it is in their best interest to continue betting offshore or with illegal bookmakers than take a lesser offering. Also, since this is New York, bettors can also take a short drive to New Jersey, Delaware or Pennsylvania and bet there where sports betting is also licensed and regulated. So not only is the winning bidder competing with the illegal bookmaking industry, they are also competing with neighboring states, most of which have far lower taxes and less restrictions for in-state college betting. Ironically, this could be a blessing to New York bettors as it will allow them to still wager on their own state's college sports by simply driving a few minutes to the next community and bet at a different state's land-based or online sportsbook. And for those in upper New York State, Canada is set to start offering regulated sport betting shortly, which includes betting on any college sports. So, operators may view this as a gold mine now. But, one must wonder if, when they look at the big picture after winning the bid, it will turn out like the German situation, wondering if the investment is really worth giving half their revenue to the state, while still having to pay all of their expenses. 

This is indeed an exciting time for New York sports bettors, but they better hope the state is completely transparent on how they choose winning bids or, as in Germany, it could turn out to be a decade long kerfuffle.

Read insights from Hartley Henderson every week here at OSGA and check out Hartley's RUMOR MILL!


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