While there are many sportsbooks available in states with legal sports betting industries, there are few betting exchanges. Given the customer-centric features available at a betting exchange, that seems surprising. Betting exchanges allow bettors to profit more easily than at traditional sportsbooks. (However, profit is never guaranteed.) Bettors have more control over their bets because they can buy and sell shares of any outcome they want whenever they want. Betting exchanges also don’t have to impose betting limits, because they take commissions on winning bets. So, they don’t have to rely on bettors’ losses to remain profitable.
But the regulatory environment discourages the type of disruptive innovation that betting exchanges, like Sporttrade, represent. State laws and casino lobbying have come together to make it more difficult for innovative startups to disrupt the gambling industry. However, gambling is an important political issue, which poses unique challenges for startups like Sporttrade. We spoke with Sporttrade CEO, Alex Kane, to get his thoughts on how the industry is not only stacked against startups with original ideas but actively discourages innovation.
Gambling Industry Criticisms
It’s hard for a startup to make it in any industry. Coming up with a good idea is hard enough. A disruptive business idea must identify an unmet customer need in the market and fill it in a way that no one else has. The challenges of funding and executing that idea can fill libraries.
And that’s in a fair market.
The gambling industry is heavily regulated. It has a seedy reputation that has carried over from Depression-era mobsters. At their best, strict gambling regulations protect bettors from those criminal elements that gave gambling its bad reputation. They prevent money laundering at sportsbooks and enforce transparency from casinos. In many ways, these regulations legitimize gambling in a way that would’ve been unheard of in the 1920s.
However, the trade-off for strict policies is reduced competition and less innovation. Even in states where gambling is allowed, there are strict rules about where casinos can be built and how many sportsbooks can operate in-state. Those are major barriers to entry that make it difficult for startups to launch.
There are two ways for states to discourage startups from bringing disruptive ideas to market. First, states can impose restrictions that only large companies like DraftKings and FanDuel can overcome. Or, states can impose anti-competitive gambling regulations resulting from lobbying by land-based casinos.
Although Kane shared frustrations about traditional sportsbooks, he held nothing against the way they operated. Instead, his ire was directed at state governments and the ways their laws discouraged the type of disruptive innovation that Sporttrade is bringing to the sports betting industry.
State Government Policy
Gambling regulations are often written with the best intentions. Protecting bettors from scams, incompetent bookies, and criminal syndicates is critical for a healthy gambling industry. However, some states have imposed policies that are so restrictive that few startups could afford to launch. Kane singled out two states he believes have made policy mistakes: New York and California.
There were a few reasons that New York legalized online sports betting. It was losing sports betting revenue to New Jersey. It had no way to track and treat problem gamblers who traveled to New Jersey to place mobile sports bets. But New York also needed new revenue in the wake of the pandemic. So, it’s no surprise that one of New York’s criteria for mobile sportsbooks was a revenue-sharing component. However, that criteria had a major drawback.
“You look at New York’s [license requirement of] 50% stock or revenue share,” said Kane. “What did New York do by passing that? They absolutely screwed their own customer. They said, ‘We’re going to create the barriers to entry so high, make the cost so exorbitant, and make the revenue share so insane, that any logical company in order to enter this market has to be totally ready to have both knives out and absolutely ready to decimate anyone that comes through the door.’”
Kane is sensitive to the impact that reduced competition will have on each state’s customer base. If only a few companies can penetrate the market, then:
- Only a few business models will be viable.
- A handful of companies will be able to meet the license requirements.
- The options bettors do have will be similar to one another.
- Customers will miss out on better prices and betting platforms because of the limits imposed by lawmakers.
Those are major drawbacks in exchange for strict regulations. They’re sources of frustration for Sporttrade, which hopes to expand to markets beyond New Jersey.
High revenue sharing requirements aren’t the only way to limit startups from disrupting a highly regulated industry. There are other ways to erect barriers to entry that keep small companies from gaining even small footholds.
“Look at what’s happening in California,” said Kane. “They’re arguing that you need to be operational in 12 states, and you need to pay $100 million up front. What are they doing? They’re blocking others out. So, it’s not a meritocracy at all. It’s one where the incumbents all recognize that they have varying amounts of capacity to actually deliver a great online product and they’ve opted to just block others out instead.”
Here, Kane’s criticisms go beyond restrictive licensing requirements. California’s high license requirements not only restrict startups from entering the market. They would also allow mediocre sportsbooks to gain more traction than they would’ve in an accessible market.
Even in competitive states like Colorado, there are sports betting apps that don’t measure up to the market standard. For example, BetWildwood still doesn’t list futures odds in order of ascending odds. Its vig is so high that it’s clear that Wildwood Casino is more focused on generating revenue than competing seriously with other sportsbooks. In contrast, apps like DraftKings, FanDuel, and BetMGM are polished and lower their vigs enough to offer bettors competitive odds.
Strict regulations like California’s would allow room for mediocre sportsbooks to thrive more than they deserve to. Bettors would be deprived of the best odds and betting platforms that could’ve been available. That trade-off is a major frustration for a startup like Sporttrade.
Although large casinos lobbying to keep competitors out of the market sounds illegal, it happens anyway. Kane has his own suspicions about land-based casinos’ motivations to keep online gaming companies out of their markets.
“There were two ways to play this,” said Kane. “Door one is the capitalism way. And that is, ‘This [sports betting] is coming. We’ve been historically a land-based business [with] limited online offers. We are going to reimagine our company.’”
That is not the door that land-based casinos opted for. It’s difficult to change an established business’ entire foundation. Startups are nimble enough to pivot when their ideas aren’t working or when market demands change. But large corporations have systems in place that can’t be altered without negatively disrupting their businesses. Swift and significant change is not a viable option for companies as large as Las Vegas Sands.
“Door two was, ‘This stuff’s coming and we already have these close relationships with all these legislators. Let’s just get in front of the game and block everybody else out.’”
There’s some incentive for land-based casinos to keep online gambling out of the market. Casinos rely on foot traffic to maximize revenue. When a gambler walks through the casino floor, they won’t just hit the blackjack table. They may also hit the retail sportsbook, the slots, or maybe the craps table. But they’re unlikely to try only one game. If gamblers don’t visit the casino’s sportsbook, then they don’t try their luck at the roulette wheel on the way out, either.
So, online gambling of any kind was a threat to land-based casinos. However, lobbying efforts don’t need an explicit business incentive to ice online competitors out. Legitimate concerns about online gambling can have the same effect.
Sheldon Adelson’s Moral Opposition To Online Gambling
When he was alive, Sheldon Adelson was the CEO of Las Vegas Sands. He ran a casino empire that ran from Las Vegas to Macau to Singapore. Adelson was also a vehement opponent to online gambling. He didn’t believe that an app could be secure enough to keep young people from gambling illegally. To the end of his life, he never allowed Las Vegas Sands to invest in online gambling. He never took advantage of the opportunity posed by online gambling, and he never wavered in his opposition to its expansion.
His opposition to online gambling proves a critical point. No matter why a major casino company opposes online gambling, the effect of that opposition is the same as anti-competitive lobbying. Companies like Sporttrade still lack the same opportunities to compete that land-based casinos and their partnered sportsbook operators do.
Casinos’ Natural Protections
Unlike online sportsbooks, land-based casinos are protected by politics. However, that protection is a patchwork of local attitudes toward gambling, usually at the state and city levels.
“I can’t just go start a casino in St. Louis, Missouri,” said Kane. He described the RFPs that he’d have to file and the political climates he’d have to navigate. Then he contrasted starting a casino with starting a business in a different industry. “If I want to start a telephone company or I want to start a beverage company, I don’t have to go and ask anyone. I can just do it.”
States and local governments limit the number of casinos that can be open at once. For example, in 1990, Colorado voted to limit its state’s casinos to three towns: Central City, Cripple Creek, and Black Hawk. Each of those cities further limits the number of casinos that can be built and where they can be zoned. Even Colorado’s marijuana industry doesn’t face such strict limitations. Local jurisdictions can impose restrictions on locations and zoning. But there’s no law capping the number of dispensaries allowed to open in Colorado.
In contrast, Colorado will only issue up to 33 sports betting licenses. Those are the kinds of regulations that protect existing land-based casinos and block market access to companies like Sporttrade.
Government Profit From Traditional Sports Betting
Sporttrade faces barriers that few startups can overcome. It faces the traditional barriers of finding investors, securing funding, and competing in a volatile and unpredictable world.
But as a gambling startup, it faces additional challenges. The barriers to entry are higher in the gambling industry than they are even in the marijuana industry. State regulations can create insurmountable costs to starting a business, which insulates mediocre companies from robust competition. Land-based casinos have also—in some cases—influenced online sports betting policy to make it more difficult to siphon foot traffic away from casinos. Casinos also have natural protections since new casinos are so hard, or in some cases impossible, to build.
But fundamentally, Kane finds the relationship between traditional sportsbooks and the government odd.
“I’m a bookmaker, let’s say,” said Kane. “And I’m taxed on the revenue that I bring in. Well, what is the revenue of a bookmaker? It’s the losses of the customer. So in effect, the government is sharing in the losses of the customer. Does that not create an inherent—at least from optics—a conflict of interest?”
Although the optics may be bad, collecting taxes from sports betting doesn’t represent a conflict of interest. Even in thriving sports betting markets like New Jersey, tax revenue from sports betting is a sliver of the state’s $46.4 billion budget. State governments are hardly dependent on sports betting losses for revenue. Most tax revenue comes from sales taxes and income taxes. The gambling industry doesn’t have enough leverage over state budgets to constitute a conflict of interest. Despite bad optics, taxation is just the cost of doing business in a stable market economy.
A major standoff is coming to the gambling industry like a heart attack. It’ll pit startups against corporate giants with state governments stuck in the middle.
Sporttrade’s profit margins are lower than traditional sportsbooks. A traditional sportsbook can set odds so that the book comes out ahead by a certain amount. For example, oddsmakers can ensure that their sportsbooks come out of a day of betting with a 6% profit margin. Conversely, Sporttrade takes a small commission from a massive pool of bettors. Sporttrade’s margins are lower because Kane wants his customers to pay as little as possible to place bets.
Currently, state government regulations favor traditional sportsbooks. That’s understandable. Traditional sportsbooks offer the most familiar form of sports betting. However, the government is also inadvertently favoring business models that are more profitable for the State to tax. If state laws continue to favor these business models, credible accusations of a conflict of interest could one day emerge.
“We have not run into this yet,” said Kane. “But there are times at which it’s going to come to a head. Well, this [traditional sports betting] is better for the government.”
This is a troubling prediction in an industry that prides itself on fair regulation. Sporttrade is just one startup that’s simmering in a boiling conflict, too. As the conflict between startups and corporations in the gambling industry continues to build, confronting the structure of the gambling industry will become an increasingly urgent matter.