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States Could Reap a Bonanza From Sports Betting — If They Play Their Cards Right

They blew it on casino gambling. Thanks to the Supreme Court, they have another chance if they work together.

A crowd watch sports while making bets at Caesars Palace in Las Vegas.
The recent U.S. Supreme Court decision to allow sports betting in all 50 states met with excitement in the affected industries. Gambling companies' share prices rose in anticipation of those firms being the logical purveyors of sports betting. Media firms that broadcast sporting events also experienced share price gains, under the assumption that TV and streaming ratings will go up. And many observers suggested that legalization will bolster sports franchise values. There seemed to be plenty of value enhancement to go around. Nonetheless, now is a perilous time for states that want to extract their fair share of the new wealth.

The closest parallel to this infant industry occurred in the 1990s and early 2000s, when states permitted widespread casino gambling. Despite creating, through legislation, protected casino monopolies for commercial interests, the states didn't receive an equitable portion of the value. Most settled for less than 50 percent of net gambling revenue, and few states auctioned off casino licenses to the highest bidders. Legislators conveyed most of the coveted licenses for small amounts, even when shown that single licenses could be sold for hundreds of millions of dollars: In one Illinois auction, the price reached as high as $700 million. Among the states, we estimate the lost revenue from the bargain sale of licenses at $25 billion.

Why did this happen? The negotiating table was uneven. Financially unsophisticated legislators and state executives went up against giant corporations, connected insiders and huge lobbying efforts. To avoid a repeat underachievement with sports betting, we think the states should lock arms and present a united front to commercial gambling concerns. A precedent for state-to-state gambling cooperation already exists: the Multi-State Lottery Association, which operates Powerball, the multi-billion-dollar, multi-jurisdictional lottery game.

The sports-betting stakes are quite high as well. Given the potential size of the market, a logical inference for the U.S. sports-betting industry is a value of $150 billion in a few years. That's equal to the stock-market capitalization of the Coca-Cola Co.'s worldwide operations.

The states should strive to obtain a majority of that equity value, in addition to the revenues from a reasonable betting tax, while reserving the remainder for the private-sector partners that provide capital, technical expertise and marketing savvy -- essentially a public-private partnership (P3). But such an arrangement can be successful only if the states set aside parochial interests and work on a combined basis. Otherwise, the gambling industry and its representatives will implement a divide-and conquer strategy, which will shortchange state governments and lead to an inefficient patchwork of regulation, oversight and taxation.

Of course, there would be upfront costs to the states to get such a P3 in place. The initial capital required would depend on the contemplated business structure -- walk-in betting shops, leased facilities at existing gambling venues, online betting or some mixture. A likely starting point would be between $5 billion and $10 billion. But assuming that the business is set up as a semi-oligopoly, with competition limited as it is with casinos in many states today, the reception from investors, such as British betting companies, U.S. casino firms and private equity funds, should be favorable.

And after a successful startup and consequent profitable operation, the P3 would be a candidate for an initial public offering. The participating states could sell their shares, donate them to their state pension funds or hold them for capital appreciation. Under each scenario, the states would continue to receive the mandated betting tax.

A look at how one state, Pennsylvania, might profit from a sports-betting P3 encompassing all 50 states illustrates the potential bonanza for state revenues. Given that Pennsylvania has 4 percent of the U.S. population and assuming that the states would hold 70 percent of the stock in the P3 (making Pennsylvania's share 3 percent of that estimated $150 billion total valuation), in a few years Pennsylvania's stock could be worth $5 billion.

Those calculations depend on a lot of assumptions, of course, and the actual amount any state might derive from such a P3 would depend on many other factors, such as individual state business and taxation structures. Pennsylvania's eventual sports-betting take could end up being a lot less than $5 billion or a lot more. But any way you look at it, it's more attractive than zero.

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