alerts & publications
Legalized Sports Gambling: Revenue Opportunities Following MurphyAugust 13, 2018
This alert is the third in a series of alerts discussing updates and potential developments in light of the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association. The first installment outlines the Murphy decision itself, and the second installment focuses on potential state and federal legislation following Murphy. This alert identifies potential revenue opportunities that may emerge following Murphy.
Following the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association (Murphy)—which legalized sports gambling—states, sports leagues, teams, sportsbooks, media companies, and athletes have all expressed unbridled optimism for the potential revenue opportunities. This optimism is well-placed. New Jersey, the second state to legalize sports betting following Murphy1, announced that its bettors wagered $16.4 million over the first 17 days of legalized sports gambling alone.2 Sportsbooks in New Jersey recorded nearly $3.5 million in gross revenue from these wagers.3 Though some analysts caution that the impact may be overstated, many states see a new revenue opportunity and are expected to dip their feet into the sports betting waters. Meanwhile, all of the major participants in the sports industry are trying to determine how to monetize this opportunity while at the same time protecting the integrity of the industry. Here, as part of O’Melveny’s ongoing series of alerts on the Murphy case and its impact, this alert explores the potential avenues of revenue generation.Public Revenue
The public sector is almost certain to profit from the legalization of sports betting. In general this is due to increased corporate revenues leading to increased corporate taxes on gambling companies. Furthermore, winners will have tax obligations. States may seek to impose a special tax regime to address specific needs or due to the nature of the revenue impose heightened “sin” based tax to raise revenues. For example, West Virginia has imposed a 10 percent rate on the adjusted gross receipts from all bets.4 Taxes are paid to the newly created West Virginia Lottery Sports Wagering Fund.5 The net profits from the West Virginia Lottery Sports Wagering Fund are to be distributed into the State Lottery Fund until a total of $15 million is deposited; thereafter, profits will be deposited into the Public Employees Insurance Agency Financial Stability Fund.6 States seeking to legalize sports gambling may seek to create similar revenue-raising structures, whereby profits can be used to address other areas of public concern.Potential Revenue for Teams and Leagues
Shortly after the Murphy decision, Mark Cuban commented that owners of any top-four professional sports team essentially saw the value of their team double.7 That is an exaggeration, but existing team owners may seek to capitalize on this potential increase in returns in a variety of ways, including sponsorship opportunities, potential integrity fees, and in-game betting opportunities. Such a rise in team revenue and valuation could lead owners to seek out potential buyers, ushering in a seller’s market.Sponsorship Opportunities
Leagues and teams are already entering into partnerships directly with sportsbooks as a means of generating revenue as sports wagering stands to rise in popularity following Murphy. The NBA recently announced a partnership with MGM Resorts, which includes access to real-time league data for use in betting.8 Bet365, one of Britain’s largest sportsbooks, entered into a sponsorship agreement with Stoke City, featuring the Bet365 logo on its jerseys and stadiums.9 Similarly, Las Vegas Lights soccer team recently announced an official partnership with sportsbook William Hill.10 Under the terms of the partnership, Lights fans can access matchday odds through William Hill’s mobile betting platform.11 Additionally, Lights fans receive certain perks, such as a free $5 bet upon registering a new William Hill account.12In-Stadium Betting
Leagues and teams may continue to seek to monetize fans’ engagement levels through further opportunities for collaboration, such as in-stadium betting. As part of Chelsea FC’s partnership with William Hill, for example, fans can place bets at the stadium during games.13 Teams and leagues in the US may seek to emulate this British partnership with the legalization of sports betting, opening up betting kiosks within their stadiums. Teams and leagues may also seek to develop their own betting apps, allowing fans to place bets from the comfort of their own seats. The extent to which teams and leagues develop sports betting apps, however, is subject to state legislation.
An increase in-game betting opportunities may also place a premium on access to official league data. The NBA’s partnership with MGM Resorts evidences sportsbooks’ interest in access to official league data for use in betting. Data aggregators such as Genius may also become increasingly valuable as bettors seek access to reliable league data. Apax Partners recently announced its plan to acquire Genius, perhaps perceiving its rising importance in a world of legalized sports gambling.14 While leagues may argue that they have an intellectual property interest in game statistics, existing case law suggests that league statistics do not qualify for copyright protection because they are purely factual and do not demonstrate selectivity and creativity, key components of copyright material.15 However, to the extent leagues decide to produce original compilations of statistics, leagues may be on better footing to argue such information is protected by copyright, and sportsbooks would have to receive permission to utilize these arrangements.Integrity Fees
Another way sports teams and leagues may be able to cash in on the legalized sports betting market is through integrity fees. Integrity fees are essentially state-imposed taxes on sports betting, which are then paid to professional sports leagues that theoretically police the integrity of a given sport. Integrity fees are collected as taxes on “handle,” the total amount wagered by bettors, as opposed to revenues. As a result, integrity fees realize a substantially higher net dollar amount than other taxes on revenue at a similar rate. Leagues like Major League Baseball assert that they are best positioned to police their own sport16 and that they should be compensated for the use of the league’s intellectual property. However, the gambling lobby has opposed integrity fees, and to date no state has introduced any.
Integrity fees may be a lucrative source of revenue for sports teams and leagues. The proceeds from integrity fees may be used for a variety of purposes, such as stadium improvement projects. For example, the Pittsburgh Pirates recently announced that they would want a cut of all bets to fund stadium expenses.17 According to the Pirates, a portion of the revenue collected from sports wagering should be allocated to stadium maintenance and capital upkeep of PNC Park, as well as the other sports-based facilities in Pennsylvania, given their role in sustaining sports wagering in the state.18
Integrity fees could also serve as a potential basis to financially benefit players, depending on the language of the operative CBA. Under the various league CBAs, leagues are required to share game-related “revenues” and “income” with the players through the salary cap. However, of the major North American sports leagues, only the NBA’s CBA explicitly includes gambling revenues in determining how league revenues will be split between owners and players.19 The language in the NBA’s CBA defines gambling revenues as including “all proceeds…less reasonable and customary expenses…from gambling on NBA games or any aspect of NBA games.”20 This could permit the NBA to claim a sizeable portion of the revenue generated from integrity fees for its own “reasonable and customary expenses,” as the league would be devoting resources towards policing the integrity of the NBA. However, Sports Illustrated legal analyst Michael McCann is confident that “the NBA is not expected to engage in such word-parsing. If the NBA receives sports betting rights and integrity fees, those fees will be included [as revenue].”21
The situation for players in the other major sports leagues is far less clear. As their CBAs are silent on whether gambling revenues like integrity fees are included for the purposes of player salary, several outcomes are possible. For one, the leagues and players’ associations could come to an agreement on a shared interpretation of the CBA which includes gambling revenues in some manner.22 In the alternative, no internal resolution may be reached, but the players’ associations may successfully lobby individual states to allocate integrity fees to both players and owners.23 Going forward, one can be sure that the players’ associations will want to include gambling revenues when renegotiating CBAs. Both the NFL24 and MLB25 CBAs expire in 2021, by which time legalized gambling could be more established nationwide. These new CBAs could potentially account for the myriad ways in which gambling revenue has changed professional sports and added revenue to professional sports.Sportsbooks
Sportsbooks themselves may become lucrative investment opportunities. In addition to the influx of money through actual bets themselves, sportsbooks are already beginning to see extensive investment. DraftKings, the daily fantasy sports company already entering the sports betting arena26, recently announced it is looking to raise $200 million in capital, with a $1.5 billion valuation.27 Similarly, Sportsradar obtained two new investors, driving the valuation up to $2.4 billion.28 Investors have similarly flocked to GAN, a UK-based gaming supplier. GAN recently issued new shares, raising £7.5 million to bolster its endeavors in the US.29 Sportsbooks have also become attractive acquisition targets given their potential profitability. The Stars Group recently acquired SkyBet for $4.7 billion, making it the largest online gaming company in the world.30Television and Media Revenue Opportunities
With the legalization of sports betting, fans may have an added incentive in seeing the outcome of a given sporting event, potentially generating significant revenue opportunities in the media sector. According to a Nielsen Sports study, sports bettors made up just a quarter of the NFL’s television audience in 2015, but represented 47% of the total minutes viewed.31 The same study found that adults who bet on the NFL watched 19 more games in the 2015 regular season than adults who didn’t bet at all.32 A report from the National Research Group reached a similar conclusion, noting that 79% of current and potential gamblers said they would watch more live TV sports, with 63% saying they would watch a greater variety of sports and 60% saying they would watch sports they didn’t watch before.33 Television networks carrying live sporting events therefore stand to increase viewership tremendously. The rise in viewership may also lead to a battle for streaming rights between networks, driving up valuations of the teams themselves and increasing salaries for players. If tech giants like Facebook or Amazon enter the bidding war for exclusive rights to air professional sports, the valuations may leap even higher, paving the way for innovative streaming apps with in-game betting features.34
A rise in viewership may also attract the attention of advertisers hoping to capitalize on an expanded audience. One estimate from a Morgan Stanley media analyst predicts that paid media could attract about $1 billion in sports betting advertising by 2025, increasing revenue for broadcast networks and the pool of funds that could potentially be available to teams and leagues in media rights negotiations.35
Media networks and streaming platforms may also benefit from developing sports betting content. Connor Schell, ESPN’s Executive Vice President for Content, has already suggested that ESPN+ is interested in developing sports betting programming.36 The Vegas Stats and Information Network already streams 12 hours of betting-focused video per day.37 This content is also simulcast on Sirius Radio.38 Fox Sports is also developing a sports-gambling-driven show, making it the first major sports betting show to air on paid cable TV.39 Other media networks may look to develop their own betting-related content, perhaps partnering with leagues and teams to deliver in-game betting opportunities, in order to attract viewers and engage with their audience.Athletes’ Publicity Rights
Murphy re-invigorated the debate as to whether enterprises such as sportsbooks must compensate athletes for using their names and likenesses. With the potential revenue boon from sports gambling, players’ unions may have an added incentive to pursue these publicity rights or the right to protect players’ names and likenesses. In fact, just before the Supreme Court issued its decision in Murphy, the NFL, NBA, MLB, and NHL issued a joint statement, noting that the players’ unions “have been discussing the potential impact of legalized gambling on players’ privacy and publicity rights.”40 While not settled law, courts have typically ruled that using players’ identities in the context of fantasy sports does not require licensing and is protected by the First Amendment.41 A case currently before the Indiana Supreme Court may provide additional clarity; the Seventh Circuit has asked the Indiana Supreme Court to weigh in on whether the state’s right of publicity law permits NCAA athletes to challenge FanDuel and DraftKings for using their likeness and statistics in their contests.42 The District Court sided with FanDuel and DraftKings, finding that the use of fictitious salaries and commentary pertaining to the performance of athletes did not require the sites to compensate the athletes for the use of their names and likenesses.43 A decision from the Indiana Supreme Court could help clarify athletes’ publicity rights, as their value could potentially skyrocket with the legalization of sports betting.Conclusion
Market participants such as states, leagues, teams, sportsbooks, media networks, and athletes stand to profit significantly from the legalization of sports gambling. The opportunities outlined in this alert represent just a sampling of the potential avenues for revenue generation and may push states to develop their own sports gambling legislation more rapidly so that market participants within state lines can access these new sources of funds.
1 Dustin Racioppi, New Jersey Sports Betting Now Legal as Gov. Phil Murphy Signs Bill into Law, NORTHJERSEY.COM (June 11, 2018), https://www.northjersey.com/story/news/new-jersey/governor/2018/06/11/gov-phil-murphy-signs-sports-betting-into-law/691613002/.
2 Press Release from Gubir S. Grewal, N. J. Office of Attorney General (July 12, 2018), https://www.nj.gov/oag/ge/docs/Financials/PressRel2018/June2018.pdf.
4 W. Va. Code Ann. § 29-22D-3 (2018).
7 Berkeley Lovelace, Jr., Mark Cuban: Top Sports Team Just Saw Their Value Double on Supreme Court Betting Decision, CNBC (May 14, 2018), https://www.cnbc.com/2018/05/14/mark-cuban-sports-team-saw-their-value-double-on-betting-decision.html.
8 Eric Fisher, NBA Announces Landmark Gaming Deal with MGM Resorts, SPORTS BUS. DAILY (July 31, 2018), https://www.sportsbusinessdaily.com/Daily/Closing-Bell/2018/07/31/NBA-MGM.aspx.
9 Kevin Draper, How Betting Will Change the Sports Media Business, N.Y. TIMES (May 15, 2018), https://www.nytimes.com/2018/05/15/sports/sports-betting.html.
10 Alan Snell, LV Lights FC Soccer Team Partners with William Hill on Sports Betting Deal, LV SPORTS BIZ (June 13, 2018), https://lvsportsbiz.com/2018/06/13/lv-lights-fc-soccer-team-partners-with-william-hill-on-sports-betting-deal/.
12 Marc Meltzer, Lights On: Vegas Soccer Club Partnering with Sportsbook is the Future, THE LINES (June 15, 2018), https://www.thelines.com/las-vegas-lights-william-hill/.
13 William Hill Sign Three-Year Betting Partnership with Chelsea Football Club, PR NEWSWIRE (Aug. 5, 2016), https://www.prnewswire.com/news-releases/william-hill-sign-three-year-betting-partnership-with-chelsea-football-club-589269051.html.
14 See Scott Soshnick, Sports Data Company Genius Sold to Private Equity Apax Partners, BLOOMBERG (July 30, 2018). https://www.bloomberg.com/news/articles/2018-07-30/sports-data-company-genius-sold-to-private-equity-apax-partners.
15 See Nat’l Basketball Assoc. v. Motorola, Inc., 105 F.3d 841, 846 (2d Cir. 1997); Kregos v. Assoc. Press, 937 F.3d 700, 704-05 (2d Cir. 1991).
16 Maria Koklanaris, MLB Wants Cut of Gambling Revenue, League Official Says, LAW360 (July 31, 2018), https://www.law360.com/sports/articles/1068782/mlb-wants-cut-of-gambling-revenue-league-official-says?nl_pk=60b15561-8650-459d-ad9b-b3815e783c2f&utm_source=newsletter&utm_medium=email&utm_campaign=sports&read_more=1.
17 Jacob Klinger, Pittsburgh Pirates Want Cut of Gambling Cash for Stadium Upkeep, PENN LIVE (June 25, 2018), https://www.pennlive.com/sports/index.ssf/2018/06/pirates_stadium_gambling.html.
19 Michael McCann, How the Supreme Court’s Sports Betting Ruling Affects Leagues, Players and Fans, SPORTS ILLUSTRATED (May 14, 2018), https://www.si.com/more-sports/2018/05/14/supreme-court-sports-betting-ban-ruling-impact.
24 Adam Stites, NFLPA is Warning Players to Start Saving Money Now for a 2021 Lockout, SBNATION (May 30, 2017), https://www.sbnation.com/2017/5/30/15712404/nflpa-cba-nfl-lockout-2021-leverage-negotiations.
25 Maury Brown, Breaking Down MLB’s New 2017-21 Collective Bargaining Agreement, FORBES (Nov. 30, 2016), https://www.forbes.com/sites/maurybrown/2016/11/30/breaking-down-mlbs-new-2017-21-collective-bargaining-agreement/.
26 Eric Ramsay, DraftKings Sportsbook App Goes Live for NJ Online Sports Betting Statewide, LEGAL SPORTS REPORT (Aug. 6, 2018), https://www.legalsportsreport.com/22598/draftkings-sportsbook-launch-nj-sports-betting/.
27 Eric Ramsay, The Week in Sports Betting: Solid Start for New Jersey, DraftKings Looking for Big Bucks, LEGAL SPORTS REPORT (July 13, 2018), https://www.legalsportsreport.com/21999/the-week-in-sports-betting-july-13/.
31 Draper, supra note 9.
32 Legal Sports Betting: What it Would Mean for NFL TV Partners & Advertisers, AM. GAMING ASS’N (Sept. 2016), https://www.americangaming.org/sites/default/files/Nielsen_NFL_Betting.pdf.
33 Jon Lafayette, Legal Gambling Could Spur Bettors to Watch More TV, BROADCASTING CABLE (June 8, 2018), https://www.broadcastingcable.com/news/legal-gambling-could-spur-bettors-to-watch-more-sports.
34 Todd Spangler, Big Media, Silicon Valley Battle for Multibillion-Dollar Sports TV Rights, VARIETY (2018), https://variety.com/2018/digital/features/olympics-rights-streaming-nbc-winter-games-1202680323/.
35 Mike Farrell, Odds Favor Bettor Ad Gains for Networks, MULTICHANNEL NEWS (July 9, 2018), https://www.multichannel.com/news/odds-favor-bettor-ad-gains-for-networks.
36 Draper, supra note 9.
39 Michael McCarthy, SN Exclusive: Fox Planning Sports Betting Show Featuring Charissa Thompson, Brent Musberger, Clay Travis, SportingNews (July 19, 2018), http://www.sportingnews.com/us/other-sports/news/fox-sports-betting-gambling-fs1-charissa-thompson-brent-musburger-clay-travis-todd-fuhrman/f5me5ojvipp51cabalm10i1gb.
40 Chris Crouse, NFL, MLB, NBA and NHL Players Unions Join Legal Sports Gambling Debate, CNBC (Apr. 13, 2018), https://www.cnbc.com/2018/04/12/nfl-mlb-nba-nhl-players-unions-join-legal-sports-gambling.html.
41 See, e.g., CBC Distribution & Marketing, Inc. v. Maj. League Baseball Adv. Media, L.P., 505 F.3d 818, 823 (8th Cir. 2007) (holding that a fantasy baseball game producer’s First Amendment right to use players’ names and statistical information outweighs the players’ publicity rights).
42 See Daniels v. FanDuel, Inc., 94 N.E.3d 696, 697 (Ind. 2018).
43 Daniels v. FanDuel, Inc., Case No. 1:16-cv-01230-TWP-DKL, 2017 WL 4340329, at *5-*6 (S.D. Ind. Sept. 29, 2017).
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Irwin Raij, an O'Melveny partner licensed to practice law in the District of Columbia, Florida, and New York, Jared F. Bartie, an O'Melveny partner licensed to practice law in the District of Columbia, Massachusetts, and New York, Alexander Chester an O'Melveny counsel licensed to practice law in New York, and Marjorie B. Truwit, an O'Melveny associate licensed to practice law in the New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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