Legal Sports Betting Will Overtake Illegal Sports Betting … Eventually

Legendary Major League Baseball umpire Joe West said he fears that legalized sports betting will result in goons breaking the legs of non-compliant players. What he doesn’t realize is that illegal sportsbooks have been operating across the country to the tune of billions of dollars a year and no player has yet to get an iron pipe to the legs for stealing second when he should’ve stayed at first. In theory, any possibility of a mob shakedown of players or umpires should decrease over time as regulated, legal sports betting replaces illegal markets. How long that process of pushing out the dirty water with the clean water, though, is up for debate.

Illegal betting will decline but not disappear

Estimates of the size of the illegal sports betting market put it, most often, around $150 billion, although there’s no way to know for certain what that number is. This past year, the Las Vegas Review-Journal published that Nevada sportsbooks took a total handle of $4.8 billion in bets. Right now, those back-alley bookies have a serious advantage over Nevada, whose handle is about 3% of the illegal market. However, that disparity will start to change over the next few years. Gaming consultant and former casino exec Bob Ambrose said that he sees a significant shift taking place over the next three years.

“Is the illegal sports betting market totally going to disappear in 12 months? I don’t think so. It’s going to take time. There’s no way to officially track it in terms of money spent in illegal betting operations. If you were able to track it from today to three years from now you’re going to see a marked difference”

Exactly how long it takes for legal betting to garner a bigger handle than illegal betting has a lot to do with how quickly states adopt sports betting, Ambrose pointed out. But, even then, it’s no guarantee that states with legal sports betting will choke out illegal betting, said Greg Gemignani, an attorney with Dickinson Wright who specializes in casino law. Legal sports betting’s success as it relates to illegal sports betting will most likely be based on fees, options, friction and guaranteed payouts.

Taxation: Illegal books have the advantage

States who choose to levy heavy taxes on sports betting may not get the influx of sportsbooks they’d hoped because high tax rates may de-incentivize business owners. Margins for sportsbooks are thin — Las Vegas sits at about 4.52% — and big taxes like the 36 percent Pennsylvania has imposed cut into those already fragile margins. “It’s going to depend on the cost. What’s the price difference for betting legally and betting illegally? If you overtax it you are going to limit the ability for an operator to operate in your state,” he said. Illegal bookies operate outside the law so there are no taxes; this significantly reduces overhead costs and could make them the smarter financial choice.

Betting variety: Illegal books have the advantage

As for choices, gamblers who are already involved in illegal sports betting may not switch over to legal simply because their bookie may provide them a wide variety of betting options whereas the state they’re in may limit their play to mobile devices or certain types of bets. “Will states offer the same kinds of things as offshore or illegal products? Some people are talking about parlay, then single parlay and some just mobile. In those states, illegal operators will offer everything,” Gemignani said.

Onboarding: Illegal books have the advantage

As for friction, a state could lose bettors to illegal books if they make it too difficult to place a bet. In Las Vegas, sports bettors have to fill out an application and provide identification in order to place a bet. Should other states adopt a more stringent onboarding process, this could keep certain gamblers away from casinos.

Guaranteed payouts: Legal books have the advantage

While illegal books have some very clear advantages that may keep them around long after sports betting is legalized in their state, there’s one advantage that legal books have that may very well be the crucial competitive edge: guaranteed payouts. Gemignani said he often gets inquiries from people who can’t get their money from offshore books. And, if a local bookie overextends himself or herself and can’t cover your win, you’re out of luck. “I get calls every month that people can’t get the amount of money out of their offshore they want. The bank won’t accept the transfer or the account is locked,” he said. “You won’t face any of that with a legal operator. The money is fluid. If you want to cash out, you can.”