By Dean Towers
In April, Nevada sports books set yet another monthly handle record, this time taking in $292 million in bets. According to David Payne Purdum of ESPN, this represents almost three straight years of month-to-month positive revenue for the books, and it's estimated this once small industry in Las Vegas will surpass $5 billion in handle in 2016. Back in 2006, the industry brought in about $2.7 billion in handle, in 2010, about $3 billion. The growth rates, by almost any measure, are astronomical.
Long-time Las Vegas bookmaker Jimmy Vaccaro is as surprised as anyone.
“I'm just flabbergasted,” Vaccaro told the Las Vegas Review-Journal recently. “People can't get enough of it. It's growing and growing and growing, and it's going to get bigger.”
No two ways about it: Sports betting is booming.
What makes these numbers particularly striking is that this is in one state, with one set of players. These are sports books in Las Vegas only and don't include offshore betting or the underground economy. This is not a national lottery, horse racing (which is offered in 40-plus states and many other countries) or casino gaming, which in this day and age you can seemingly find quicker than a 7-11 anywhere in North America.
How is this recent surge in sports wagering explained? Here are four potential reasons.
1. Technology: Several years ago William Hill and CG Technology created sports betting apps that could be used over mobile phones. Since that time, every sportsbook of note has followed. This spring during March Madness, over 40% of all bets were made via mobile, and at one book, wagering was up $1.2 million for the tournament.
Mobile betting has also done what most businesses hope it will do–add to revenues, by being accretive. There has been no evidence of any cannibalization, that so many worry about with new technologies. Jay Kornegy of the Westgate book told the Las Vegas Review-Journal earlier this month that the counter business at his book has not suffered.
Technology and innovation has grown the pie.
2. Daily Fantasy Sports: The massive rise in revenues from those playing daily fantasy sports since 2010 cannot be denied. Those fielding teams on DraftKings or FanDuel–and brought in through the company's massive, high funnel marketing spend–are in some proportion newbies to this form of wagering. It appears (although there are no studies completed as of yet on the phenomenon) “DFS” is acting like a gateway to sports betting. It's a complementary good, and sports betting is reaping the benefits.
3. Mainstream Media Coverage: Slowly but surely, the taboo tag no longer applies to sports betting. Yes, sports betting has gone mainstream, whether it be the betting line being mentioned on NFL telecasts or with commonplace on ESPN, “DFS” teams being fielded right on your TV screens, or the hundred or so prop bets being mentioned without any fanfare for the Super Bowl. It's gotten so mainstream that this year during March Madness, Fox Sports actually broadcasted directly from a Vegas sports book.
Even the sports leagues are making it more and more mainstream. NBA chief Adam Silver is a big proponent of sports betting and wants it to come out of the shadows. Mark Cuban has been asserting similar, and both have an audience. It's clearly not 1990 anymore.
4. Churn: In 1916, sports betting on street corners in Chicago or New York involved about a 5% takeout rate. In 2016, Las Vegas sportsbooks charge about the exact same rate. Despite the rapid growth in sports betting since 2006, you've never seen one sportsbook talk about “raising takeout to make more money.” That's because of churn.
Breaking your customers early and often pushes them away to other games. And sports bettors are very savvy in the first place. Although Vegas books do offer some higher takeout bets, the betting public shuns them. In 2015, only 7% of all sportsbook revenue came from high takeout parlay cards, with 93% from 5% holds. Sports wagering customers are playing, and they are winning enough to keep them coming back.
What can racing learn from sports betting's growth, if anything?
In terms of new technology, one of the great mysteries in horse racing is that despite having a near-monopoly on Internet wagering since 2006 with the passage of the UIGEA, it simply has not grown the wagering pie. I think much of that hinges on racing's protective nature, and unwillingness to embrace disruption. Through the internet, racing has clung to average cost pricing, where average cost pricing makes little sense to online users. An average cost pricing-marginal cost pricing hybrid was needed, because in the 21st century, gambling over the web is a high volume, low margin business. Racing has tried to stuff square pegs into round holes. It just has not worked.
Despite huge industry pressure and infighting, a proper pricing mechanism for Internet wagering is a necessity to keep customers playing.
While sports betting has used a complimentary good like “Daily Fantasy Sports” to their advantage, racing has not done similar with their complimentary goods. I firmly believe both tournament contest play and exchange wagering are gateways to the pari-mutuel pools, just like DFS is to sports betting. What we've seen in this vein in horse racing is the exact opposite to what we've noticed empirically in sports betting. Lawsuits wanting to ban tournament sites, and an unwillingness to embrace or unleash the power of exchange wagering are dominant in today's horse racing headlines.
If horse racing treated new ways to wager as complimentary goods (when there's strong evidence they are), I think the sport would be much better off.
While churn is paid attention to in sports wagering, in racing it's simply not respected, despite copious evidence it should be. Back in 1946, money-hungry tracks and state boards saw hiking takeout as an easy way to make money. In New York, they did exactly that, charging a new 5% surcharge on wagers. The following year–according to America's National Pastimes, a History–racetrack attendance dropped 14.5% and wagering fell 17.5% and revenues to the state dropped for the first time since the Great Depression. That evidence should've made anyone in the industry pause, but since that time, takeout has just gone up and up and up. Higher takeout means lower churn, which in turn makes it harder to keep customers. Your New York bookie with a degree in hard knocks learned that lesson, while Wharton grads running tracks and state boards never seemed to take the same course.
Further, we see a reliance on new bets of a low-churn variety in horse racing. While Vegas succeeds on 4.54% takeout football games, racing looks for a 60% jackpot bet as a savior instead. In my view, this is not the right approach.
From a racing perspective, the rapid increase in sports betting handle (with little sign of slowing) can either get you down, or get you excited. Frankly, I'm in the latter camp. I think the evidence shows that the skill game gambling market in the U.S. is large, and growing and this market is exactly the market for horse racing gambling –which to me is still the best, most interesting, and potentially lucrative betting game ever invented. If the glass truly is half full, I think the sports wagering experience provides racing with a road map to potential increased handle, and better revenues.
Dean Towers is a board member of the Horseplayers Association of North America, has presented at several gambling conferences across the continent, and authored a white paper on horse racing Exchange Wagering.
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