January 18, 2023

  • John K. Moloney, Principal Attorney at the Law Offices of John K. Maloney

What chance for California to emerge as a gambling powerhouse?

Special interest groups and big operators attempted to hijack the sports betting industry in California. John K. Maloney asks what are the lessons learned & the path forward in the USA’s most populous state?

When the voters of California went to the polls in November 2022, they had two opportunities to legalize sports betting and, at a stroke, create the world’s largest market in the gambling vertical. Following an expensive and accrimonious campaign by sponsors of both propositions, the two competing sports betting bills placed were both soundly defeated. Proposition 26, drafted by tribal gaming interests, was rejected by approximately 62% of the voters. Proposition 27, which was drafted by mobile and online gaming interests, was rejected by approximately 82% of the voters. These are both dramatic defeats.

What is the voters’ message? Are they opposed to sports betting? Did they believe that the two sports betting proposals smacked of self-interest? Did they see Proposition 26 as an attempt by the tribal casinos to further control the gambling industry in California and, in effect, create a monopoly? Did the voters understand that the mobile and online sports betting option dramatically increases the handle and thus creates more tax dollars for California? Are the voters demanding a comprehensive sports betting structure that is inclusive rather than exclusive?

In attempting to answer these questions, it is necessary to understand and take into account certain basic facts that are not seriously in dispute.

California has approximately 40 million residents, as well as tens of millions of visitors each year. It is a sports happy state. It has a US$ 3.6 trillion economy, which constitutes the 5th largest economy in the world. In gaming parlance, California has liquidity standing alone without any partnerships. California has a very large gaming footprint composed of tribal brick and mortar casinos, cardrooms, horse racetracks and a state-run lottery system. This is a deeply entrenched multi-billion-dollar industry.

Sports betting comes in a variety of forms. Many bettors enjoy the atmosphere of brick and mortar-based sports books with big screen televisions and food and beverage amenities available at casinos, cardrooms and horse racetracks. March madness in Las Vegas is an excellent example. Many bettors enjoy the privacy and convenience of mobile and online sports betting, as demonstrated by the success of mobile and online sports betting in the states that currently permit such betting.

What is missing from California’s gaming industry is legal sports betting. Notwithstanding the absence of legal sports betting, California residents are active sports bettors. As it stands, billions of dollars are wagered with offshore sports betting sites leaving sports bettors vulnerable to unregulated sports betting. Is the better option to have a well-regulated sports betting industry if there is already unregulated widespread sports betting activity taking place in California? Currently there is no benefit to California’s taxpayers or state and local government entities based on the unregulated sports betting industry. The unregulated industry is not going anywhere, and with the popularity of sports betting in the United States, it will continue to grow.

Neither Proposition addressed these basic facts in a comprehensive fashion that clearly benefited California’s residents, taxpayers, state and local government entities and services or all elements of the California gaming industry in a comprehensive manner. One can argue that the propositions reek of self-interest.

Proposition 26, supported by many of California’s Native American Tribes (the “Tribes”), limited sports betting to in-person on-site betting at tribal casinos and horse racetracks, excluded California’s cardrooms and contained no provision for mobile and online gaming. It also contained provisions allowing the Tribes to attack the operation of California’s cardrooms (viewed by the Tribes as illegal serious competitors to tribal casinos), which are heavily regulated by the California Department of Justice. There are 66 cardrooms located throughout the state which provide substantial important financial support in the communities in which they operate.

Proposition 27, supported by the mobile and online sports book industry, completely excluded in-person on-site sports betting. In addition, it excluded cardrooms and horse racetracks from mobile and online sports betting. It also included a huge one-time fee of US$100 million for a sports bettor operator license, effectively excluding medium and small mobile and online sports betting companies from the California market.

The more options that sport bettors have, the more competitive the industry will be. Competition in the marketplace benefits the consumer. Limiting sports betting to in-person and making it user unfriendly is a disservice to the consumer. On the flip side, so is limiting sports betting to only mobile and online.

The winners and losers

Neither Proposition presented California’s voters with a comprehensive legal sports betting structure that encompassed both all existing California private ownership gaming interests and the well-regulated and operated mobile and online gaming industry. The multiple million-dollar advertising campaigns of Propositions 26 and 27 sent a not-so-subtle message to California voters – the proponents of both Propositions were focused on self-interest, not consumer interest. The attack ads, the negativity and the complete failure to educate voters properly on the way sports betting works doomed both Propositions. It was clear that both Propositions opposed an inclusive broad based sports betting industry structure that benefitted all traditional regulated gaming interests, consumer demands and taxpayer and state and local government interests. There was no comprehensive plan in which all these interests received a substantial benefit. It is submitted that the voters understood this and accordingly turned thumbs down on both Propositions.

The “winners” in this whole process to date are the consumers, taxpayers, voters, cardrooms, and small and medium sports book operators that would have been artificially excluded under Proposition 27 by a US$100 million entry fee included in Proposition 27, as well as state and local government. The “losers” are the proponents of self-interest.

The losers should understand that the sympathetic voter that passed the Tribal Government Gaming and Economic Self Sufficiency Act (Proposition 5) in 1998 may not view the issues presented by the Tribes then in the same way today. The Tribes have exclusivity over casino style gaming in California and have constructed billion-dollar casinos in California. The income generated by the exclusivity of these casinos has enabled the Tribes to become a powerful political force in California.

However, the Tribes do not have an exclusive right to sports betting. Sports betting is an open opportunity for all elements of the legal gaming industry. The opportunities presented by a competitive sports betting marketplace are tremendous for California’s consumers, taxpayers and state and local governments if properly established and implemented by an inclusive, broad based sports betting structure, This is a structure that encourages inclusion of a number of experienced licensed, well-regulated mobile and online gaming companies of various sizes that are able to demonstrate competence in the mobile and online gaming industry and effectively promote healthy competition. Healthy competition is in the best interest of California’s consumers.

California has a unique opportunity to have a highly regulated sports betting industry with the best sports betting operators in the world. The main obstacle standing in the way is the need to bring together all relevant gaming industry interests in a manner that facilitates the development of a sports betting bill that gives California’s consumers the sports betting options and venues that they want. That means a bill that provides for both in person brick and mortar and mobile and online sports betting venues. Why? Because some consumers want the ambiance of brick-and-mortar sports betting, some consumers prefer the convenience of mobile and online sports betting and some consumers live in areas where the only practical legal sports betting is mobile and online sports betting.

In order for sports betting to become legal in California, the competing gaming interests (the tribal casinos, cardrooms, horse racetracks and mobile and online gaming operators) need to agree collectively upon a sports betting structure that encompasses the tribal casinos, cardrooms, horse racetracks and mobile and online gaming operators. That structure must contain a sound regulatory and licensing format that encourages competition and appropriate access to all elements of the regulated gaming industry consistent with gaming consumer demands and interests, including responsible gaming protections. In addition, such a structure must acknowledge, preserve and continue to encourage support of local government costs and services to the extent permitted by applicable law.

Charting a path to a brighter future

The drafters of future sports betting bills should look to jurisdictions that have successfully implemented the various components of broad based sports betting structures. New Jersey has implemented both brick and mortar-based sports betting and mobile and online sports betting. Michigan has successfully implemented sports betting at both its three Detroit casinos and its many tribal casinos, including mobile and online sports betting through the auspices of these casinos, which in turn have partnered with seasoned well-regulated mobile and online sports betting companies.

In the states where sports betting is succeeding, the regulatory structures eliminate artificial barriers to competition and include rational fee and regulatory structures that encourage operators to do business in the state while also protecting consumers with strong age and location verification protection systems and implementation of responsible gaming protections. Moreover, they recognize the variety of ownership structures prevalent in the industry today, including licensing structures that take into account the licensing of gaming businesses, suppliers and individuals on a multi-jurisdictional basis. This includes the use of transactional waivers for sports betting operators and suppliers where appropriate to enhance the competitive environment. Any California sports betting proposals put forth in the future should incorporate these elements in California’s sport betting structure.

In addition, the sports betting industry needs to educate the consumer public that mobile and online sports betting is a successful, highly regulated gaming format in many gaming jurisdictions. Mobile and online sports betting systems are certified by the best gaming technology certification companies in the world, including GLI and BMM. This includes geo location and age verification technology, which is standard in the mobile and online gaming infrastructure. Responsible gaming goes hand in hand with gambling and is a key area of support for the consumer who may have a gambling problem. The sports betting operators in the United States are all well-regulated companies that are very sensitive to the needs of the consumer and the need for investment into responsible gaming programs. In this regard, the operators are required to have very effective compliance programs to detect and deter criminal activity such as money laundering. The gaming regulators in turn oversee and enforce strict compliance with gaming regulations by the operators. These are factual messages that need to be communicated effectively to the consumer.

Sports betting will eventually become legal in California. The timing of it will depend upon the ability of California’s current gaming interests to set aside their total focus on self-interest and agree upon a sports betting bill that addresses consumer, taxpayer and state and local government interests in an inclusive, common-sense manner that clearly benefits California’s consumers. The Tribes will be a huge part of the equation given their political power. But the Tribes do not hold a royal flush hand. If they refuse reasonable compromises, the voters can turn against them. While some Tribes fear that the mobile element of sports betting will cannibalize their casino business, the fact remains that the tribal casinos do not conveniently service all California consumers. It is better for the Tribes to be at the table when drafting sports betting legislation then to be on the sidelines. The inclusion of all interested parties is what will push sports betting over the finish line the fastest.

In summary, the voters in California in November 2022 sent a message to the Tribes and the large sports book operators. The message is loud and clear, please put forth a sports betting bill that creates options for the consumer, benefits the taxpayers, ensures a sports betting market that is well regulated and free from corruption and includes a strong responsible gaming element. In many ways, California is viewed as the holy grail for the sports betting industry. It is not a cheap knock off.

California’s current gaming industries and the mobile and online sports betting operators, as well as California legislators, have a great opportunity to create a sports betting bill that establishes a well-regulated and consumer friendly sports betting structure that can make California the strongest, most successful sports betting system in the country, if not the world.