How Will Integrity Fees Affect Sportsbooks?

With US Supreme Court decision on NCAA vs Christie approaching, all of the stakeholders seem to be caught in-between the states of fear, hope, and caution. If the rumors are to be trusted, US Supreme Court will soon overturn a nationwide ban on sports betting and allow individual states to pursue sportsbook-friendly legislation.

The effects of this decision would be far-reaching, from the increased tax revenue for the states and potentially the major sports leagues like NBA, NFL, NHL, and MLB, to new opportunities for betting enthusiasts and recreational bettors.

With the expectation that the proverbial pie is about to experience a huge growth spurt, everybody is scrambling for a piece. For decades the Big Four (NFL, NBA, NHL and MLB) have been opposed to sports betting, as they found the industry to be damaging to the integrity of their sports.

In a short time span, two major leagues (NBA and MLB) have made a 180-degree turn and now support a legal sports betting model and have an official stance supporting new legislation.

Even the NFL, who has for years been the strongest opponent of the sports betting industry, has been cautiously flirting with the support for the new legislation and have decided to explore the potential for additional revenue and growth through sports betting. NHL is the only league which seems to have no stance, but they have always been more of a follower than a leader in terms of change.

Integrity Fee

Out of this new-found interest in sports betting, the NBA and MLB have declared an official stance in which they expect an “Integrity Fee” of 1% of total money wagered, on their respective games, to be paid to them by the sportsbooks, as a compensation for the expenses that the leagues will incur trying to maintain the integrity of their sport.

In addition to that, the NBA and MLB feel that their sports are at the center of sportsbook models and because of that they deserve a share of the revenues. With NFL and NHL likely to follow, if only for the fear of missing out on additional revenue opportunities, the Big Four seems to be prepping for a legal battle with states and sportsbooks to protect their interests.

But how will this affect the sportsbook industry?

As you might expect, the sportsbooks have been quite vocal about the “Integrity Fee”. The argument they are using is based on the notion that such fee would render most of the sportsbooks unprofitable or near break-even and therefore, render their business model obsolete. In order to see the effects of the proposed “Integrity Fee”, we have to see how profitable sportsbooks are currently.

For the 12-month period ending in 2017

Sportsbooks in Nevada have taken in more than $4.8 billion (handle) in wagered bets and they have won around $233 million (hold), for an average of 4.82% win percentage.

With 195 registered sportsbooks in Nevada, that amounts to about $1.2 million per sportsbook. The handle of the sportsbooks is subject to 0.25% excise tax and the hold for further state tax (in case of Nevada, 6.75%). This already significantly affects the revenues of Nevada sportsbooks and an introduction of an “Integrity Fee” of 1% of the sportsbook handle will further lower the profitability of the business model.

We will use the Nevada example, where an average sportsbook had a hold of $1.2 million, to demonstrate how the “Integrity Fee” would affect the bottom line of the sportsbooks. A hold of $1.2 million was generated from a handle of around $25 million (using the average win percentage of 4.82%). Sportsbooks will have to pay the 0.25% excise on that handle, or $62,500, as well as the 6.75% state tax on the hold, or $81,000. If the “Integrity Fee” is introduced, the sportsbooks will have to pay a further 1% on their handle, or in this case $250,000.

As you can see the net revenues of an average sportsbook would be $1.2 million minus the $393,500 for the excise tax, state tax, and the “Integrity Fee”, or $806,500 in total. This net revenue of $806,500 is not the actual profit that the sportsbook generates since the expenses for running the sportsbook have to be subtracted from this amount, as well as the salaries of employees and all the other taxes that come with that.

From this, we can see why sportsbooks feel that a 1% “Integrity Fee” on their handle is excessive since it eats up more than 20% of their gross revenues. Many companies feel that under such conditions, they would rather not run a sportsbook since the potential for profit is so low and it would be even worse in other states where the state tax rate is higher than Nevada’s 6.75%.

The NBA and MLB don’t necessarily agree with this notion since they feel the sportsbooks are not honest regarding their actual margins. They have used the examples of off-shore, European and Asian sportsbooks which report a higher win percentage (hold) between 7 and 9 percent in their online sportsbooks and between 15 and 20 percent in their brick-and-mortar sportsbooks. If those numbers are to be applied to Nevada sportsbooks, a different picture might arise.

The Black Market

With Americans expected to wager around $250 billion on sports by the year 2023, there is a huge concern from both legislators, leagues, and sportsbooks regarding the prevalence of black market sports betting. Different sources have come with estimates that between 60% and 90% of the total money wagered on sports by US citizens is made at either off-shore or illegal sportsbooks. This practice negatively affects the legal sportsbooks, Federal Government, individual states and major sports leagues, as a lot of potential revenues never see their pockets.

Sportsbooks see the “Integrity Fee” as a major obstacle to tackling the black market and illegal sports betting problem.

Given a similar offer of odds between legal and illegal sportsbooks, most of the sports bettors will choose the legal and regulated sportsbooks. The “Integrity Fee” might seriously affect the bottom line of the legal sportsbooks, that they might be forced to offer less competitive odds and put them at a serious disadvantage in comparison to illegal sportsbooks. While some customers might switch to legal sportsbooks due to convenience and availability in their states, a huge percentage of volume bettors might stick with the illegal and off-shore sportsbooks and continue to avoid US laws and taxation.

What will the future bring?

With two sides at odds on the issue of the “Integrity Fee”, the current stalemate will have to be broken and both sides will have to give way if the industry is to take off in the near future. Some of the things that we should expect are:

  • Major sports leagues will not give up on the “Integrity Fee” and will tie up the sportsbooks in court proceedings if they try to ignore them. Most of the individual states will try to include this in their legislation regarding sports betting.
  • States might have to make concessions in their tax rates in order to make the business model more feasible to sportsbooks.
  • A lower “Integrity Fee” is something that seems more realistic at this moment.
  • A part of the cost of the “Integrity Fee” will have to be transferred to the consumers, in the form of less favorable odds on sports events.
  • Mature legal sports betting market will increase the overall value of the industry and open it to investment from mainstream business sources.
  • A penetration of Big Data into the industry will reshape how sportsbooks set odds and help them improve the profitability of their business model.

As the deadline for US Supreme Court decision approaches, the state of the US sports betting market is about to be reshaped.

As the major sports leagues continue to request the “Integrity Fee” from the sportsbooks, compromises will have to be made to make the new legislation work.

With the amount of money in play, it seems unlikely that any of the opposed sides will ruin their chances for additional revenues. It seems that the ultimate cost of the new legislation and the “Integrity Fee” will be borne by sports bettors.