As team lead of Duane Morris’ Gaming Industry Group, Frank A. DiGiacomo brings a wealth of experience to the areas of gaming, sports betting, igaming, lottery, fantasy sports, entertainment, and regulatory law.
Not surprisingly, he has represented public and privately held casino operators, sports wagering operators, gaming/sports wagering technology providers engaged in interactive, skills-based gaming, social gaming, financial services companies, and lottery companies.
Specifically, his clients are a veritable who’s who in the industry, including Penn National Gaming, FanDuel, Comcast Corporation, NBCUniversal Media, ESPN, The Walt Disney Company, Fortress Investments, SuperBook, theScore Bet, Wynn Resorts Limited, WynnBet, American Racing and Entertainment, Tioga Downs Racetrack & Casino, the New Meadowlands Racetrack, Genius Sports, Skillz, Inc., and FMR Corp.
We wanted DiGiacomo’s take on industry trends, and he graciously agreed to the following interview.
Question: Is your background more in the area of the sports industry or the gaming industry?
Answer: My experience is mostly in the gaming industry. Here at Duane Morris, we have a number of lawyers in our gaming industry practice group who focus on regulatory matters and transactions. But with the rollout of sports betting, after the Supreme Court decision in 2018, there’s been more of a convergence with the sports industry.
Q: What are the challenges for the sportsbooks as they grow in the United States?
A: As we know, the expansion of sports betting is a state specific issue. Although there are federal laws that play a significant role in how that happens, whether or not sports betting or any gambling is legal, is still an issue of state law. In the wake of the Supreme Court decision invalidating the PASPA law, there was a real push by a number of states to legalize sports betting. That momentum has somewhat slowed.
The pace of sports betting expansion has slowed down for a couple reasons. First, as we discussed, it is a state specific issue and there’s state politics that are always involved when it comes to the expansion of gaming. Election years pose another problem. Some of these states are also politically conservative and may be a little more reluctant to adopt sports betting, particularly in an election year.
What we are also seeing is that many states are taking a different approach. Tax policy in many states is playing a larger role and we’re seeing kind of a creep up in tax rates. This is resulting in pushback from the industry, which initially in the early adopter states embraced an aggressive advertising campaign, or promotional campaign, offering free bets and incentives to players as these sportsbooks tried to acquire customers. So, we are seeing some pushback in the amount and type of advertising in the states that have legalized sports betting. We’ve seen this just recently among regulators from the state of New Jersey, which was the first state to roll out online and mobile sports betting. We’re seeing regulators now publicly comment on some of the advertising campaigns and “responsible gambling” aspects of it. In fact, the Massachusetts legislation talks about limiting what they call a whistle-to-whistle prohibition on advertising by sports books shown during the sporting event. So once a game starts, no sportsbook advertising can be broadcast during that game.
We’re also seeing pushback on the promotions, which state regulators also play a role in regulating. Among these promotions being scrutinized are the free bet or risk-free bet promotions. An example of those would be if you were allowed to deposit up to $500, and you get a matching dollar free bet. So, if the person loses that bet, the sports book doesn’t take the money. That entices people to deposit more and to bet more initially.
From a consumer protection standpoint, with a responsible gambling overlay on that analysis, we’re seeing additional states not giving operators the ability to take a credit on those promotions for state tax purposes. Many states require the operators to pay not only income tax, but a tax on sports betting revenue. Many of the early adopter states would allow operators to take a credit for those promotional expenditures, then an offset on the amount that was taxed. Where you’re seeing less of that is in these more recent sports betting states, which are not allowing operators to take promotional play credits to the same degree. This is leading to a more competitive market, generally.
Q: What are some of the novel ways that these sports books are traversing or navigating this?
A: Good question because we are seeing a significant increase in player acquisition costs, which impacts some public companies. This is particularly true for the companies that only do sports betting. The market is now saying, “Hey, you have this growth, new states are coming online, you’re expanding your player base, but we’re seeing this cost per customer acquisition go up. And this is not necessarily translating into profits to the bottom line.” Therefore, with some operators that reality is now being reflected in their stock price. So, in many ways, some of this pullback has resulted in operators being more cost conscious on their player acquisition and related promotional costs. I don’t want to say they’re happy that the regulators in some of these states are reigning them in, but that regulatory control may be a benefit to the operators.
Q: I know you are a pretty big believer in how the marriage of professional sports and gaming is going to occur. Can you talk about that a little bit and what kind of trends you’re seeing, and subsequent opportunities?
A: Yes, but let me back up a bit first. There was an initial wave of sports betting states provided market access, or the right to operate an online or mobile sports book that was usually gated through their licensed casino industry. So, you had states that already had licensed casinos and the opportunity to operate a sports book went through those licensed casinos. That was lucrative to the casino industry because they could sell that market access rights to the DraftKings and FanDuels of the world. The casinos would receive not only an upfront fee but also a revenue share. But what you’re seeing now in some states, Ohio and Arizona being great examples, is that market access is not only through casinos or, in Arizona’s case tribal casinos, but also through existing professional sports franchises in those states.
So, the sports teams in those states were able to lobby successfully to now be a market access partner with a licensed sports book. That’s going to be a growing trend. You will also see in the Massachusetts legislation, there’s a provision that the sports leagues, to the extent that they receive fees from agreements with sports betting operators, will not be required to be licensed by the regulatory agency. That’s a big deal in my world because usually any party, any entity that benefits and receives revenues from sports betting has to be licensed or regulated to some degree. Whether that’s a tech provider or an advertising company, or a marketing company that refers players to the sports book, they all have to be registered or licensed to some degree because it’s regulated gaming. In Massachusetts, that law has carved out and eliminated that licensing obligation for the sports leagues.
We are now seeing the sports leagues take a larger role in sports betting then we did with the initial wave of legal sports betting states. Of course, they own their intellectual property, which is why they were influential with operators when sports betting first rolled out. A sports book would enter into a deal with the NBA or NFL and receive the right to use team and the league’s intellectual property, such as through access to official league data. This is financially beneficial to the states. But now, the leagues have greater influence and, with this most recent wave of states that have legalized sports betting, the teams on those states have market access rights, which is proven to be even more financially lucrative to teams in those states.
Q: If you were to look at a crystal ball, what do you see down the road for the sports books in the next few years?
A: I see a couple of things. You will see the leaders in market share continue to dominate. The second and third tier operators, in terms of market share, will have to differentiate themselves. Inevitably, you’re going to see some consolidation in the middle market. So, you’ll have the market leaders, but you’ll also have niche players who can create a unique offering. They will be successful. As I said before, we will see the leagues and particular teams playing a more prominent role in the rollout in those states.
There are also still the three big states – California, Texas, and Florida – and potential legalization that we will need to keep an eye on.