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California’s sports betting showdown

Insight | Analysis

With two different measures to be placed in front of California voters at the ballot box this November, Cole Rush examines what the future may be for betting in the most populous state of the US.

California voters will have the opportunity to decide the fates of two sports betting initiatives in 2022, whittled down from an initial four. Talk of the Golden State’s path to legalization is reaching a fever pitch, with two very different approaches competing for the public eye and, more importantly, the public vote.

There’s a lot to unpack when looking at California’s potential as a sports betting market. The state’s gambling has historically been dominated by tribes, with racetracks and card rooms gobbling up a small percentage of market share. The state’s tribes have a proposal on the ballot, but it must compete with a rival proposal set forth by major brands such as DraftKings, FanDuel, BetMGM.

The story so far

California is no stranger to legalization efforts. In recent years, numerous proposals have tried to open the gates to sports betting, though they’ve all failed. However, John Wellendorf, Director, Regulatory Affairs at Odds On Compliance, notes that – until recently – referendum was rarely the method of choice for advancing these efforts.

“Prior to 2020, the only attempts to legalize sports wagering in California have come through the state’s legislature, with bills failing in the California Assembly or Senate in each of 2017, 2019, and 2020 sessions,” he says.

The 2020 initiative was set forth by a handful of the state’s tribes, but it failed to garner the signatures required to appear on the ballot.  

Despite California’s reputation as a social and technological innovation hub, the state has made little progress on online betting, until this year. 

“California appears to be down to two initiatives, the tribal initiative that is land-based and has been qualified for some time and the operator-backed initiative that calls for mobile,” says Brendan Bussmann, Managing Partner at B Global. 

Two other initiatives—one led by tribes that included mobile betting and another backed by cardrooms—will not make the ballot. The initial cardroom proposal didn’t gain much traction, while the tribes behind the mobile-betting proposal opted to hold off. 

It looks like California will host a referendum standoff, with two different proposals competing to become a reality, thus bringing sports betting to the state’s nearly 40 million residents.

The showdown: two competing proposals

Matt Davey, Chairman and CEO of Tekkorp Capital, sets the scene for us: “Obviously, California is a huge market,” he says. “But there are a number of different stakeholders with an interest in it. You’ve got the tribes, who have been incredibly impressive over the last 30, 40 years in terms of getting legislation through to allow them to operate casinos in California, but then you also have the card rooms, and you have the racetracks. And those three stakeholders have different views. And then you add the interstate and international sports betting and gaming operators. Obviously, they have their own perspective as well. So I think that’s all driving why you see so many competitive proposals.”

Initially, it appeared all those stakeholders would duke it out, and that was true to an extent. But now, only two proposals—one from the tribes and one from major online sportsbook operators—appear staged to make the ballot come November. While they both aim to bring sports betting to the state, the plans they set forth vary. 

One proposal is dubbed the California Legalize Sports Betting on American Lands Initiative

This bill would allow for retail wagering at tribal casinos and racetracks only, with 10% tax on profits benefiting the CA Department of Health, the Bureau of Gaming Control, and the CA General Fund. In addition, it would prohibit college wagering.

Nothing too out of the ordinary for a sports betting bill, though the college betting prohibition is interesting, considering many states are now seeking legislative ways to back out of similar bans. The elephant in the room here is the lack of mobile wagering, which could have a massive impact on potential revenue. 

The second initiative, backed by major operators, is called the California Solutions to Homelessness And Mental Health Support Act. Notably, the title makes no mention of sports betting, though the proposal outlines a framework that would funnel money to support the eponymous issues. 

In contrast with the tribal ballot, this bill would only allow mobile wagering. Revenues would be taxed at 10%, but there would also be a $100m licensing fee for operators, as well as a $10,000,000 license fee for tribes, which would go towards homelessness and tribal development respectively. If the licence fee didn’t do enough to limit entrants, operators must also offer wagering in 10 or more states – or in five states along with 12+ physical casinos in the United States – to be approved.

Big state, big dreams. The astronomical license fee set forth by the operator-backed proposal is a hurdle even for the most lucrative sportsbook firms. The requirements also aim to strong-arm big names into the market, leaving operators with a presence in one or even a few states in the dust. 

Brendan Bussmann notes that California’s size and diversity present unique challenges: “California is a difficult state to craft policy [for]. With competing interests between the existing gaming stakeholders in the tribes, the card rooms, and the desire for mobile operators to enter the market, there is a vast number of opinions that run the gamut of possibility.”

He goes on to say that getting proposals on the ballot is a surefire way to move forward, though he tempers that with a word of caution: “Even then, it may not be enough on the first round.”

What will be enough? How will the measures fare come November? In other words…

What’s going to happen?

Well, we don’t know. This is the gambling industry, after all, so malleable outcomes won’t be foreign to anyone watching the California market. But…voters gonna vote, and in the time leading up to the November referendum, expect both sides to try every which way to sway voters one way or the other. 

The potential outcomes are many, and the future is murky at best, particularly if both measures pass. 

Davey highlights the uncertainty ahead: “If you look at the operator proposal, it’s looking at funding homeless shelters. And I think that’s quite clever, but it’s not clear to me what California residents will be thinking. I’ve seen multiple polls suggesting different outcomes, and it’s hard to go off what polls are saying.”

California is the crown jewel of the country’s sports wagering expansion,” Wellendorf says. “It is the most populous state by a wide margin and has a GDP greater than all but five countries in the world. The state is complex; with a very diverse political culture, over 60 Native American tribes who already run the majority of legal gaming in the state, a strong horse racing industry, and 10+ professional sports teams.

“In most states, these groups would be represented by a handful of key players; in California, there are hundreds of different interests involved that want a legalized sports wagering solution for their benefit.”

It all boils down to two initiatives, each proposing to legalize sports betting beneath a different framework. Proponents of each proposal will pull out all the stops to make their preferred option look ideal to the California populace. 

John Wellendorf again: “It’s possible that disparaging advertising on both sides could negatively impact California sports wagering this fall. Tribes are expected to spend well over $200 million to defeat the operator-backed initiative. And while dollar figures have not been publicly stated on the other side, large sports wagering operators are known to invest significantly in supporting their legislative agenda.”

He references Florida in 2021 and Colorado in 2019 as prime examples. Wellendorf also notes that it’s unlikely both measures will fail. Though it remains a possibility, the appetite is there, and voters are likely to favor sports betting, whether they opt to approve both measures or spring for one over the other. 

What happens, then, if both measures are approved? 

“If both measures pass,” Wellendorf concludes, “It will be interesting to see which will become law if they are deemed as ‘competing’ under California election law. Since the proposals are likely not compatible, if both pass, it will be up to the courts to decide the nuance of California’s sports betting market.”

Should both measures pass, the political quagmire surrounding California sports betting will thicken, likely resulting in a lengthy judiciary process and a longer wait for an official launch. 

“There is a fundamental difference between the two initiatives from a perspective of who has the rights to gaming in the state today versus who may have influence in the future,” says Bussmann. “It would be a paradigm shift for the tribes not to be in the driver’s seat on gaming should the mobile initiative pass. While it still has to run through them, this would usher in a change of policy.”

No matter what, California should expect sweeping change, marking a shift in the state’s gambling-related history. And while some of the beneficiaries of either proposal are obvious, there are some surprising opportunities entrenched in the proposed legislation on either side. 

Big betting benefits

If we’re on track for a California sports betting launch, someone or many someones will benefit. The question now becomes: Who?

Matt Davey says: “It depends on which one comes through. If the [tribal] proposal gets traction, then they stand to benefit the most as it’s tied to retail locations. They have the locations. I believe they’ve cut out the card rooms, but they’re sharing some of the proceeds with the racetracks.

“But if it’s the online approach,” he continues, “driven by the consortium of Draftkings, FanDuel, BetMGM [and others], they stand to benefit the most. They’ve specifically structured their proposal to exclude operators who aren’t licensed in 10 different states or who don’t own and operate 12 [or more] casinos. It’s quite a hurdle, and definitely favors those kinds of interstate operators.”

Should the operator-led initiative win the day, California’s gambling landscape will fundamentally change. 

Brendan Bussmann says: “The operator-backed proposal, while still benefiting tribes, puts [operators] in more of a control position by taking gaming off-reservation through mobile.”

Meanwhile, the tribes would remain the de facto guardians of California gaming under their proposal. 

That covers the expected parties, of course. Naturally, operators will benefit from their proposal while tribes will benefit most from theirs. But there are more opportunities couched in each proposal that raise interesting questions about the general California populace, the bettors themselves. 

Wellendorf offers a look at the end users and how the proposals will affect them: “In general, the public will benefit from both proposals. The contribution to public spending from both proposals will be one of, if not the most significant, increases in available funds to the state in decades. Legalization of sports wagering in other states has shown that the modest increase in gambling-related issues that comes with a regulated market is largely overshadowed by the benefits of increased tax revenue and decreased crime from underground gaming activities.”

But there are drawbacks, too. 

“Operators believe they will benefit from the mobile-only bill,” Wellendorf continues, “however, the $100m upfront fee to operate is a huge business risk to even the biggest players in the space and could scare away competition leading to worse promotions and odds for California sports bettors. Like most political topics, the winners are usually hidden at first glance: My bet would be on vendors supporting sports wagering winning regardless of which bill passes, and if online wagering is legalized, marketing affiliates will realize a significant benefit.” 

The sheer scope of it all

The numbers are staggering: an operator-proposed $100m licensing fee ($10,000,000 for tribes), 40,000,000 residents—not accounting for tourism and business travel—and at the heart of it all, two competing proposals. 

California’s size cannot be understated, and the vote will undoubtedly reflect the state’s scope.

“The nuance of retail vs. mobile will be considered by serious bettors, and the distribution of funds to interests and the state government will differ, but it’s unlikely the fate of [either] bill will depend on either of those items,” says John Wellendorf. “More likely, a group of the population will be against sports wagering and vote ‘no’ on both measures; and a group will be pro-sports wagering and vote ‘yes’ on both.”

No matter which way the final result pans out, California as a state, as an economy, and as a home to millions upon millions of potential bettors, stands to benefit. But the nature of the proposals, which are at odds with what they aim to provide, doesn’t necessarily represent the hybrid approach that would stand to benefit the state to maximum effect. 

“From the perspective of all of us at Tekkorp Capital who have had the experience of working in and analyzing this industry from all angles, [We’ve learned] that to get the healthiest environment, you need to provide the most amount of consumer choice,” Matt Davey says. “And people forget that the legislative approach is only one aspect, but it’s not the only option that consumers have. There are offshore markets and local bookies, etc. There’s a range of options. To get consumers to move into a well-structured, well-regulated and protected environment you need to have appropriate legislation that gives them the choice and flexibility that they’re looking for.”

Neither proposal truly offers the flexible approach of the most successful sports betting markets such as New Jersey or Pennsylvania. One favors retail; the other favors mobile. Neither accounts for both options, which would indeed give consumers a wealth of choice and likely draw in the most revenue. 

“We are in support of a healthy, strong regulatory framework that provides consumers with the most amount of choice, but also gives them protections you’d expect to see in a country like the US,” Matt Davey continues. “We’re obviously in favor of reducing barriers to operators, provided that they meet the regulatory compliance technology standards expected in today’s market. But arbitrary rules that seem to favor one stakeholder over another don’t generate the best long-term results for consumers, in our opinion.”

Brendan Bussmann offers his perspective, which includes a hope for eventual mobile support, even if a retail-only measure passes: “You are talking about one of the largest economies in the world that has untapped regulated sports betting. While we know the illegal market exists there today, there is an opportunity to create one of the largest regulated sports betting markets in the country and the world. Regardless of which initiative passes, it will be a splash. Obviously, the mobile approach will generate more revenue as we have seen in any other jurisdiction but this will come in time regardless of which passes out of the gate.”

Wellendorf offers a fitting conclusion: a holistic view of the benefits California could see in a best-case scenario. 

“The best outcome: both proposals pass and are allowed to coexist, the public gets the financial benefit of tax revenue from both, and bettors can choose where they place their wagers; however, that might be left to the courts to decide.”

Time will tell. The California sports betting gold rush is only just beginning.