Margins & Profit: The Difference to Betting Growth Depends on Where You Take the Money

I've been doing some reading based on NBA head Adam Silver's recent comments about betting, and his partnership with Fantasy sports stalwart Fan Duel. It's of interest for a number of reasons; primarily because from a revenue perspective it provides league's with a number of options.

By partnering with a fantasy site, part of the 800,000 or so users can be promoted to watch games. Since many NBA, or NHL games do not even get 800,000 viewers for one telecast, the potential is obvious. However, what is interesting is the revenue end. Fantasy sports revenue has been estimated at several billion dollars, and they are using teams and players to generate that money. There's some potential meat on the bone for the league's themselves.

Coincidentally, yesterday we saw another CHRB meeting, where we witnessed what we usually end up witnessing at them. A fight over who is betting what, where. According to a few items I read on the twitter, the board was asking ADW's to somehow have location based IP blocking, so when customers are at the track they would not be allowed to bet with the ADW. Of course, the track and purses in California gets about 20% of the action in revenue, for a guy betting on Xpressbet at the track they get about 10%.

Although those two examples highlight the same thing - going after at least a portion of revenue that a league or track think they rightfully "own", there could not be more stark differences.

In the NBA's case (and other sports' leagues as legal gambling or fantasy move along) they would ask for a slice of this revenue (call it monetizing) in a number of ways:

1) A share of gross profits. This is a form of licensing fee.

2) Because states would be taxing legal sports betting or fantasy, the leagues would get their share, or kickback, from stadium deals, rent, and tax breaks.

3) Advertising partnerships, like Silver is doing with Fan Duel - Fan Duel has a lot of eyeballs, and eyeballs are worth money.

When a racetrack or horsemen group wants money or the ubiquitous "fair share", it's done quite differently.

1) They ask to stifle competition, so they get more. This is the CHRB example above. They're asking players to pay 5% more to bet at the track; if for example, the ADW player is getting 5 points back.

2) They ask for an increase in margins. This is a boost in takeout, not an increase of a share of end profit. California did this in 2010, Churchill this year, and hundreds of tracks and commissions have, since the original takeout rate (again, margin) was increased from 5% in 1907 to about 21.5% today.

In case I, the sports leagues would get paid their fair share, as they see it, and as the reseller sees it. It's not based on anything but a profit motive. i.e. when the sports' league takes a share of net profit, they are a partner in Fan Duel growing their net profit numbers, and their revenue numbers. As Fan Duel goes, as the popularity grows, so do revenues.

Fan Duel's average margin (takeout) is about 8%, which is where they need to be to maximize their growth and profit. The NBA would not ask for 4% of margin, because that margin increase would be met with i) decreased top line revenue ii) fewer eyeballs and iii) less long term profit for both the NBA and Fan Duel. This is not hocus pocus, it's just business. Wal-Mart would love 5% margins I am sure, but it would put them out of business, so they can't. Just like any other business, it's in the NBA's best interest not to touch margins, because increasing margins does not mean more money.

Not only that, the state itself won't want that to happen. You don't see the state of Nevada taxing 4 cents of a $1 token on a slot machine, or asking Steve Wynn to add zeros to a roulette wheel. They'd make less tax money. They leave that to the resellers and tax as revenue and profit grow. 

Contrary, in horse racing, this is all that's touched: Margins.

As margins are fought for, at Churchill or with the CHRB, or otherwise, top line revenue falls, racing gets less popular, and in the end, it's detrimental, and everyone makes fewer dollars.

Horse racing was not built to grow, because revenue has never been taken off at the gross profit level, but at the margin level. It's been a fight for a slice, where when the slices get bigger, the pie gets smaller. It's fundamental, entrenched, and racing simply knows no other way.