Could the NBA's integrity fee ever make it into law?

The NBA has long been considered an ally of the sports betting industry by virtue of David Silver’s oft-quoted op-ed in The New York Times supporting regulated betting. However, in an interesting turn of events, the Association made itself public enemy number one in late January with its proposals for a “50-state solution” to sports betting legislation, based on five key points.

The most interesting of these was the demand for a 1% cut of all bets placed on a sport to go to that league. For instance, if someone bets $100 on a NBA game, the NBA would receive $1 whether the bet wins or loses. The NBA said the ‘integrity fee’ was needed to compensate leagues for the “risk and expense” created by betting and the “commercial value our product creates for betting operators.”

NBA spokesman Dan Spillane explains: “Legislation should recognize that sports leagues provide the foundation for sports betting while bearing the risks that sports betting imposes, even when regulated. Without our games and fans, there could be no sports betting. And if sports betting becomes legal in New York and other states, sports leagues will need to invest more in compliance and enforcement, including bet monitoring, investigations, and education.”

Unsurprisingly, the request sparked outrage, with the American Gaming Association (AGA) saying the leagues needed to “get real about addressing the illegal market,” which wouldn’t be achieved by “transferring money from bettors to multi-billion dollar sports leagues.” It’s worth noting here this isn’t just the NBA’s proposal – Major League Baseball (MLB) has also come out in public support of the proposal – with the NFL and NHL lurking behind the scenes. So just how unreasonable is the fee, and what chance does it stand of making it into various state laws?

Dollars and sense

Let’s start with the math, using Nevada’s 2016 figures. The state’s sportsbook generated a $4.5bn handle, good for profit of $219m. With the leagues taking their 1% cut from that handle, the profit drops by $45m, or about 20%. Widening that out to the national market, with an estimated annual handle of $200bn, the integrity fee would be worth around $480m to MLB, $440m to the NFL, and $300m to the NBA. Not a bad cut considering the leagues would actually have to change very little to preserve integrity as they suggest.

The NBA, for instance, already has a partnership in place with data provider Sportradar, which sees the firm distribute NBA data and audio-visual game feeds to gaming operators outside of the United States. The league also incorporates Sportradar’s Integrity Services to monitor global betting activity across over 550 operators around the world. Forbes speculated the six-year deal, signed in 2016, was worth $250m to the NBA.

The key point here is that the NBA does not have to worry about protecting integrity because the data providers and bookmakers are already doing it. After all, who takes the hit in the pocket when the games are fixed? The bookmakers. The integrity fee proposal also suggests the leagues could be doing more to protect their games from fixers, itself an odd idea.

As ESPN’s Mike Golic put it to NFL commissioner Roger Goodell in a recent interview: “If people wanted to get to players, they’d be doing it already since most of the gambling is illegal. If it was more above board I’m trying to understand how that would hurt the integrity of the game, as opposed to illegal bettors trying to influence the game now?” Goodell did not have a good answer.

Play ball

In mid-February Major League Baseball joined the party for the first time, with a legal representative appearing at a sports betting hearing in West Virginia to fight the leagues’ corner.

Attorney Scott Ward, a partner at a law firm hired by MLB to lobby on its behalf, was asked why the leagues needed such an extortionate cut. He stuck the NBA line, arguing: “You cannot have sports betting if we don’t spend billions to put these games on,” adding the fee was “to compensate for investment and that risk.”

“When legislation is enacted, that 1% number is going to be significantly whittled down or it is not going to be intact” – Daniel Wallach, gaming attorney

Of course the argument ignores the fact the leagues aren’t putting the games on as some sort of non-profit public service. As gaming journalist Dustin Gouker put it in an op-ed: “Complaining that it’s expensive to put on games is about as disingenuous as it gets.
“The leagues put games on because it helps them make astronomical amounts of money already from television rights, ticket sales, merchandise, etc. If putting out a low-quality product was a better route to making more money – it’s obviously not – rest assured the leagues would be cutting costs in putting on the games.”

When further pressed on why the leagues needed the cut of turnover rather than revenue, Ward said it was because they didn’t want to be in the “untenable position” of rooting against the fans. “We don’t want to be in the business of making money when people lose bets,” he added. Those in attendance at the hearing reported “incredulous faces” among legislators at that point.

Trickle-down effect

But as the leagues attempt to line their pockets, the cost will likely be passed on to the unsuspecting players, since multiple bookmakers said they’d be unable to make any kind of real profit under the suggested conditions. “The sportsbook is an amenity to the casino,” Wynn Las Vegas sportsbook director Johnny Avello told the Las Vegas Review Journal. “In sports betting in general, there’s not a lot of money to go around. For some reason, they [the NBA] think the sportsbook is a money-making cash cow. That’s just not the way it is. It’s the lowest hold of any of the casino games.”

There would be two ways forward for a sportsbook forced to absorb these fees. The first and more unlikely scenario, if all 50 states were to adopt sports betting as envisaged by the NBA, is that sportsbooks change their business model completely. For example, they might establish one small outpost in each state, where customers could sign up for an account, and then all betting would be done via an app. That would allow books to limit their costs, while scaling up revenues dramatically.

“If we had zero overheads, maybe it could work,” says Westgate sportsbook director John Murray. “But if you think we’re building fancy sportsbooks with fabulous TV screens and big staffs, and then giving away 1% of handle, that’s not going to work.”

The far more likely scenario would be sportsbooks passing on the fee to customers in the form of bigger margins. Think both sides of an NFL handicap at -120 for instance, which brings its own set of problems, namely the lack of channelization.

“If you’re going to charge $12 to make $10 or $13 to make $10, consumers are not going to pay that if they can pay $11 to make $10 with their bookies back home or in the islands,” Vic Salerno, CEO of USFantasy, says.

The NBA said at the New York hearing where it first revealed its proposals that the system could work because other countries like France have made similar returns to sport work. No-one comparing the French sports betting market to the UK for instance would call it a success, but the more pertinent example here could be Portugal. The country launched its re-regulated online gaming market in May 2016, imposing an 8% tax on sports betting turnover. The effect is similar to the integrity fee, with operators forced to impose hefty margins on their customers.

Two years on, just seven licenses have been issued, with 68% of Portuguese players gambling online using non-licensed operators, according to the Remote Gambling Association (RGA).  Respondents to an RGA survey said the primary reason for this was the better odds offered by offshore operators.

Compromise

But this is the bad news. The good news is that the 1% integrity fee may never see the light of day in enacted legislation. Gaming attorney Daniel Wallach says the proposal was met by New York politicians with “cynicism” and “none of the senators were having it.”
“When legislation is enacted, that 1% number is going to be significantly whittled down or it is not going to be intact,” Wallach adds. “The leagues don’t need billions to safeguard the game.”

In the West Virginia sports betting hearing, State Senator Doug Faceire told MLB representatives: “I don’t see why we should give you 1% for anything.

“Why should we pay you to protect your own interests? Especially 1% off the top… It’s like we’re paying the insurance premium” on your game.

Betting news outlet Sports Handle noted from the hearing: “It doesn’t sound like any WV senators are at all interested in ceding money or control to MLB.”

The 1% integrity fee was also seen in a sports betting bill in Iowa, but removed from a later version following the public outcry. Robert Walker, a bookmaker at USFantasy, sees the fee being lowered in future bills. “There is a middle ground,” says Walker. “Leagues and books will share revenue. The leagues will get approximately 5 to 10% of revenue which equates to .25 to .5% of handle.” He adds wryly: “The leagues of course would share revenue from their increased TV and advertising windfalls.”

Another compromise could be the tennis model. Data provider IMG is the exclusive partner of top-level tennis, and bookmakers pay a hefty sum for its data, with much of that cash going directly to tennis governing bodies. A similar deal is gradually being established between major bookmakers in the UK and the English football leagues, which created Football Data Co to manage and license out their data.

But even without this direct compensation, the US leagues seem to be missing the point. Seemingly every single study shows that gambling increases engagement in sport, which boosts bottom lines regardless. Premier League clubs can attest to the windfall of cash that betting partnerships and sponsorships can bring. This makes it all the more surprising that lobbyists employed by the NBA and MLB were actively opposed to a sports betting bill in Iowa that did not contain its integrity fee. It appears the leagues would rather not have betting at all than have a market in which they were not directly and heavily compensated.

But it’s also worth remembering here that the leagues essentially have very little negotiating power. If PASPA is repealed and states start legislating, then Nevada is arguably the model, and no fees are currently being paid to the leagues. It’s a balance of power then that means the 1% integrity fee is likely to be a bargaining chip, or part of a ‘sequential request.’ The next offer may be in the .25% or .5% region and that’s going to look a lot more reasonable to sportsbooks and state politicians alike. After all, even a quarter of a percent of a $200bn pie is plenty big enough.