California Sports Betting Initiative Backed by Gambling Giants Would Block Startups – Times of San Diego

Horse racing. Photo via Pixabay

One of the measures Californians will likely get to vote on this fall does more than just allow betting on sports: Critics are concerned it will effectively block smaller gaming companies and startups from operating in the state.

Those arehigh stakesfor an industry that could rake in over $3.5 billion each year from California bettors and for a state that prefers to see itself as the startup capital of the world.

Of the four sports betting initiatives competing to make Novembers ballot, one,paid forby online sports betting giants FanDuel, DraftKings and BetMGM,would allowgaming companies and Native American tribes to provide sports betting online across the state.

But embedded in the initiative are requirements that would be very difficult if not impossible for the companies smaller competitors to meet, experts say.

If the initiative passes, gaming companies would have to pay a $100 million licensing fee to do business in the state, as well as already be licensed in 10 states, or be operating in five states and running 12 casinos.

I think its absolute nonsense, said John Holden, a professor at Oklahoma State University who studies sports gambling policy. I think whats effectively happening is, basically, the 5 to 10 frontrunners in the market have decided Alright, lets ensure that theres no one else who can compete by agreeing to pay these exorbitant license fees.

The $100 million fee, Holden said, essentially ensures no startups will be able to operate in California.

The fee is one way the measure generates significant revenue to fund homelessness housing and mental health treatment and provide financial support for California Tribal nations, Nathan Click, a spokesperson for the initiatives campaign, wrote in a statement.

California is best served by creating a safe and tightly regulated sports betting market, one where customers can know they are working with experienced platforms with a proven track record of safe and responsible operation in other markets, Click wrote.

FanDuel and BetMGM did not respond to CalMatters request for an interview. DraftKings directed CalMatters interview request to Click, the campaign spokesperson.

Theinitiativebacked by sports betting companies would:

The states Legislative Analysts Office wrote in itsassessment of the measurethat its uncertain how much money the new taxes and fees would generate for the state, but it could reach the mid-hundreds of millions per year.

The measure hasnt qualified for the ballot yet its still gathering signatures. But Click, the spokesperson for the campaign, said the measure is well ahead of where it needs to be to qualify.

Other measures that legalize sports betting could make the ballot or are already eligible. One, backed by a coalition of tribes, wouldallow sports betting at tribal casinosand four horse race tracks only, while another, backed by a separate coalition of tribes,would allow tribes to offer online and in-personsports betting exclusively. Native American tribes have long had the exclusive right to offercertain forms of gamblingin California. Many tribesare campaigningagainst the gaming companies initiativearguing, among other things, that it would threaten tribes sovereignty and self-reliance.

If one of the initiatives passes, California would become one ofover 30 statesto legalize betting on sports. The industry could generate $3.57 billion per year in net revenue for entities offering sports betting to people in California if online and in-person betting is legalized and many companies are able to operate, according to projections from Eilers & Krejcik Gaming LLC, a research firm. Thats larger than the firms projections for Texas, New York, or Florida.

The $100 million licensing fee is much higher than what any other state has on the books, said Becca Giden, director of policy for Eilers & Krejcik. Now, New Yorks $25 million licensing fee is the highest, she said. Most states that have legalized sports betting have licensing fees in the low single-digit millions or hundreds of thousands and no other state requires companies to already be licensed in other states, according to Giden.

The requirement that a company already be licensed in 10 states would cut off smaller companies and startups that are only licensed in a few states, Giden said. That, combined with the fee, would meaningfully limit the ability of small companies and startups to participate in the market, she said.

Early-stage startups that get money from venture capitalists generally raise around $5 million to $20 million in their first round,said Olav Sorenson, a sociologist at UCLAs Anderson School of Management who studies entrepreneurship. But only about 1 out of every 100 startups get any venture capital money, Sorenson said. When you include startups that rely on credit card loans and other sources of funds, the amount of money new companies have at their disposal shrinks.

Very, very few startups would be able to afford that kind of fee, Sorenson said. I think its going to dramatically limit competition.

A few companies already dominate online sports betting. FanDuel commands 31% of the U.S. market, followed by DraftKings with 26%, BetMGM with 16% and Caesars with 12%, according to research from Eilers & Krejcik.

The goal of this seems to be to create an oligopoly market for sports betting, said Marc Edelman, a law professor at Baruch College who specializes in sports, gaming, and antitrust law. It would, he said, benefit a limited number of companies to the detriment of smaller companies and consumers.

MaximBet, a sports betting company launched in 2021, is so far licensed in one state: Colorado. The company tries to set itself apart by offering bettors in-person experiences glitzy masquerade parties, meet-and-greets with pro players, or the opportunity to drive a Ferrari around a race track, said Doug Terfher, vice president of marketing for the company.

MaximBet is working on getting licensed in 10 states and in Ontario, Canada, but the process is slow. If the company is able to get licensed in five states this year, itll be an amazing year, said Terfher.

Most states are restricting the number of companies that can offer sports betting, said Daniel Wallach, a Florida-based gaming lawyer who has testified in front of state legislatures considering legalization. States do this with other forms of gambling too. Its commonplace, he said, for gaming not to be a free for all, where any company can participate. There have to be some baseline standards, he said, that ensure that a companys integrity, experience, and track record are closely scrutinized.

Historically, organized crime groups have been involved in the gambling industry, Wallach said, so state legislatures and gaming agencies are very careful to limit who can operate in this heavily regulated industry.

If smaller companies cant do business in California, that means fewer options for would-be bettors and potentially less innovation.

Youd basically end up with a lot less choice, said Holden.

One up-and-coming product Holden cited is exchange-based wagering, where bettors can trade wagers with each other throughout a game, similar to how day traders buy and sell stocks.

Sporttrade, a Philadelphia-based startup that offers stock-market-like sports betting, is working on getting licensed in New Jersey, Colorado, Indiana, and Louisiana. Could it cough up $100 million and get licensed in 10 states in order to come to California?

No chance, said Alex Kane, the companys CEO. Hes all for regulations that protect consumers, he said, but thinks a $100 million licensing fee doesnt have anything to do with that. Instead, Kane said he thinks the bigger companies writing the initiative dont want to face competition. Theyre looking at What would we be willing to pay to get rid of competition altogether? Kane said. You can see that its worth a lot of money to them.

And if its difficult for new companies to reach customers in California, that could wind up shaping not just what services are offered, but who offers them. Such a high financial barrier to entry makes it nearly impossible for minority-owned businesses or new businesses or entrepreneurial ventures to even attempt to compete, said Edelman, the law professor at Baruch College. If theres not a lot of competition between sports betting vendors, that might also lead to worse prices for customers, he said.

If the initiative backed by the gaming companies passes, California wouldnt be the most restrictive state not even close. Delaware has essentially limited sports betting to three casinos. Washington D.C. enabled one app, run by the DC Lottery, to offer online sports betting city-wide, while other companies are limited to the geographic areas surrounding sports arenas theyve cut deals with. Somes states have set limits on the number of licenses theyll offer. Washington state made sports betting theexclusive domain of Native American tribes, and Maine seemspoised to make a similar decision.

Regulators can make rules that protect consumers and ensure gaming companies act responsibly without limiting the number of companies that can operate. The fact that many states have limited the number of licenses theyll give out isnt necessarily because thats the optimal set up for consumers. Its because theyve been lobbied by casinos, racetracks, and other groups that already have a stake in gambling, said Giden.

If the goal is to ensure that companies operate ethically, then regulators should be reviewing companies past business practices across all lines of business, said Edelman, the gaming and antitrust law professor.

To presume that a company that could spend a lot of money is ethical and a company that could spend a small amount of money is not ethical is very dubious logic, he said.

CalMattersis a public interest journalism venture committed to explaining how Californias state Capitol works and why it matters.

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California Sports Betting Initiative Backed by Gambling Giants Would Block Startups - Times of San Diego