If state lotteries are permitted to move into the sports betting vertical, there could be significant consequences for the land-based casino sector, writes Spectrum Gaming’s Michael Pollock.
A basic law of physics holds that two objects cannot occupy the same space at the same time. That law is not exactly a head-scratcher. Even an English major like me can grasp the fundamental logic of that rule.
But neither Einstein nor Mendel ever worked in the halls of state government, where lobbyists can hold more sway than physicists. In such hallowed halls, the law of gravity itself might not garner a majority vote, especially if that vote takes place when a budget deficit must be filled.
The economics of legal gaming in the United States have evolved quietly over recent decades, in which two major forces – lotteries and brick-and-mortar casinos – grew at their own respective paces, occupying clearly different niches as consumer-facing industries.
The specter of competition between these two distinct industries has always hovered in the background.
For example, it’s no coincidence that Nevada, a state that is most dependent on a healthy gaming industry for its revenue, has no state lottery. Similarly, certain lotteries have viewed casinos as competitors, or at least as alternative repositories for discretionary dollars.
Spectrum has studied this issue in many states over many years, and we have concluded in general that traditional lotteries and traditional brick-and-mortar casinos do not directly compete, as they offer different consumer experiences, meet different needs and have developed significantly different business models.
Moreover, our studies have also shown that, when casinos become lottery retailers and sell lottery products to their customers, they can rise to the top ranks of retailers. That has certainly been the case in New Jersey, for example, when casinos offer lottery sales in their parking garages to departing customers.
Now, as the prospect of sports betting has ignited a firestorm in state capitals across the land, the old rules and findings are becoming far less relevant. This observation is not focused on the emerging challenges of addressing the parallel evolution of igaming and ilotteries. That, in itself, is a complex issue deserving of its own analysis.
Rather, the issue requiring immediate focus is how lotteries and casinos will address the immediate issue of sports betting.
Spectrum Gaming Group is absolutely agnostic as to whether sports betting should be limited to one channel or another, or should be the province of one industry or another. Indeed, we recognize that sports betting offers an opportunity for all such channels to tap new revenue stream and attract more discretionary dollars from more adults. Rather, this analysis addresses a very specific aspect of this joint evolution: the role of regulation.
For the past 40-plus years, the casino industry has evolved under a fundamental precept: A gaming license is a privilege granted to those who have affirmatively demonstrated their good character, honesty and integrity, as well as their business ability and financial stability. State and tribal regulators universally adhere to principles that operators must disclose their ownership, their financial sources, suppliers and other essential building blocks of integrity.
Such operators must submit their detailed internal control procedures, which include everything from their anti-money laundering controls to their responsible gaming processes, right down to the specifics of their camera coverage and their exclusion practices.
A result of those strict controls has given licensed casino operators a distinct market advantage: Their licenses serve as assets, distinct barriers to entry that competitors would be hard pressed to match.
The barriers to entry can range from a limited number of licenses in a given market to deep public trust. Companies such as Penn National, MGM Resorts, IGT, Scientific Games and others have demonstrable proof that they operate to the highest standards of integrity.
Many lotteries recognize the soundness of this licensure process, particularly lotteries in states such as Rhode Island, West Virginia, Delaware and Maryland, in which the lotteries regulate both traditional lotteries and casino operations.
That fraternity should expand in coming years as more lotteries look to sports betting as a means of growing their revenue base and attracting a new demographic.
Whether or not sports betting is offered on retail platforms, mobile platforms or both, entities that have never accepted a legal wager will seek to play in this new arena. As we have predicted previously, sports bars and taverns will seek to leverage their physical assets – including an array of high-resolution TV screens visible from all seats – will seek to become purveyors of sports bets.
While we are absolutely agnostic as to the benefits of this evolution, we acknowledge that it is moving forward, and will likely pick up speed.
Like it or not, restaurants that become licensed lottery retailers will evolve into a form of a brick-and-mortar casino.
The culture of most lotteries is as a means of maximizing revenue, in recognition that many states are dependent on lotteries to promote specific funding needs – such as aiding senior citizens, funding education or providing scholarships.
The culture of most gaming regulatory agencies is different in that such agencies focus on maintaining the rules and regulations of gaming licensure, while recognizing that adherence to such rules will have a significantly positive impact on encouraging investment in casinos, and of generating tax revenue for the state through different channels.
My question to the latter-day Einsteins and Mendels of the 21st century is quite simple: Can two different regulatory cultures, with different rules and requirements, occupy the same economic space without creating an unfair economic advantage to one side or another?
Alternatively, will the rules that govern one industry be diluted to match the rules of another industry? Or will the rules for one group of operators be tightened and lifted to create a level playing field?
The simple absence of a level playing field creates its own issues. If a licensed casino operator competes against a licensed lottery retailer while functioning under different rules, that could negatively impact both the revenues and the ultimate value of casino license.
That, in turn, could result in less capital being invested in casinos, which would have an impact on employment, as well as on non-gaming revenue, which could depress sales taxes and other revenue streams.
This issue is not particularly relevant to states or territories that have lotteries but no casinos – or few casinos. However, states that have both lotteries and commercial or tribal casinos must address this issue.
The solution cannot be left to Einstein, but must be solved by elected and appointed officials in state capitals, and we must issue an advance warning: There is no single solution that will work in all states, but solutions must be found. Like it or not, the basic law of physics demands it.