How did we get here and where are we going?
Gambling is widespread in the U.S. Only two states – Hawaii and Utah - completely prohibit gambling, and the rest allow some form of wagering, though the types of bets allowed, and the businesses that offer betting vary wildly from state to state.
The Indian Gaming Regulatory Act of 1988, allowing Native Americans to run casino operations on tribal land, led to a proliferation of small regional casinos and there are now more than 400 Indian gaming operations in 29 U.S. states.
Until recently however, gambling on sports was off-limits in the vast majority of the country.
In May of 2018, The United States Supreme Court issued a ruling that allows individual states to decide whether and how to allow gambling on sports. The decision overturned a 1992 federal law – the Professional and Amateur Sports Protection Act (PASPA) – which made it illegal to gamble on sports in most states.
PASPA had granted “grandfather” exemptions to limited sports gambling pools in Oregon, Delaware and Montana, and allowed basically all sports gambling in Nevada – where it had been legal for over 60 years. All other states were prohibited from allowing, regulating or taxing sports wagering. The Act also excluded Pari-mutuel horse and dog racing and – in a somewhat bizarre twist – the sport of Jai Alai.
The legislation had the strong support of several professional sports leagues as well as the NCAA. These established entities were already making money hand over fist on their respective offerings. Although they had to know that a significant portion of their fans were tuning in specifically because they were betting on the games, they could ignore it as long as the activity happened only in the illicit market.
They were making too much money on ticket sales, broadcast rights and merchandise to allow their images to be tarnished by the specter of an activity that many Americans consider immoral. Besides, they weren’t going to directly reap the benefits of legal wagering anyway, so it was in their best interests to keep gambling in the shadows.
For the next 20 years, even as a plethora of opportunities to gamble swept across the nation – bingo, poker, lotteries, riverboat casinos, Indian casinos – sports wagering remained illegal in most of the country.
That changed in 2012, when New Jersey – eager to find revenues to fill holes in the state budget – approved the Sports Wagering Act, which allowed existing casinos and racetracks to take wagers on other sports.
Continued . . .
Legalized Sport Gambling Could Be Even Bigger than Marijuana
Americans wager $150 billion on sporting events every year – more than twice as much as they spend on marijuana.
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The Big Leagues were just as opposed to legal sports wagering in 2012 as they had been in 1992, and a coalition of the National Basketball league (NBA), The National Hockey League (NHL), Major League Baseball (MLB), the National Football League (NFL), and the National Collegiate Athletic Association (NCAA), filed a lawsuit in federal court against the state of New Jersey, seeking to enjoin them from allowing gambling.
The suit named the (then) Governor of New Jersey, Chris Christie, as well as the State’s Assistant Attorney General and the Director of the New Jersey Racing Commission. Christie took over the defense and argued that although New Jersey was potentially in violation of PASPA, the law itself was unconstitutional on tenth amendment (state’s rights) grounds. The District Court judge ruled in favor of the sports leagues; New Jersey appealed the decision, and it was upheld by a 3rd district appellate court as well.
Christie vowed to take it all the way to the top – the U.S. Supreme Court.
By the time Christie’s petition to the Supreme Court was accepted, The case had actually become “Murphy (rather than Christie) vs. National Collegiate Athletic Association,” as Phil Murphy had been elected Governor when Christie left the office to run for President.
In May of 2018, the court ruled 6-3 that PASPA was in fact a violation of the 10th amendment because it violated the principle that “any powers not expressly granted to the federal government by the constitution nor prohibited by it to the states would be reserved to each state respectively.”
It only took Gov. Murphy and the New Jersey state assembly one month to pass legislation allowing casinos and racetracks to take sports wagers. They also allow online wagers, though because the SCOTUS decision does not supersede the Federal Wire Act of 1961 – which outlaws wagers being placed over state lines – sports gaming operations must run all online operations from inside the state as well as verify that all wagers received are from bettors who are physically located in New Jersey.
What’s Next and Where is the Opportunity?
As of this writing, there are 11 states in which sports gambling has been legalized, 4 states (plus the District of Columbia) where legislation has been passed that will approve sports wagering in the near future, 26 states with some sort of legislation pending and only 9 states have yet to address the issue at all.
By now, you can probably see that there are going to be a lot of opportunities for profits in the industry.
The transition from illegal black markets to legal, regulated and taxed structures doesn’t happen overnight, and growing pains are common. (We’re also seeing the same sort of inconsistent progress in the marijuana industry.)
It’s estimated that $150 billion is wagered annually on sports in illegal markets. Because of the sometimes-glacial pace of regulatory change as well as the amount of time it takes for public opinion to change, that black market is definitely not going to disappear overnight.
As legal alternatives proliferate however, it’s hard not to see the black market for sports wagering slowly disappearing. Who wouldn’t prefer betting from the comfort of the couch with a credit card to meeting a bookie in a parking lot to exchange cash?
(In an analogous situation, during the prohibition of alcohol in the 1920s, black markets for homemade booze thrived, but dried up after prohibition was repealed. In 2019, can you imagine anyone drinking moonshine or bathtub gin when a wide variety of high quality and safe alcoholic beverages are available at the corner store?)
The winners are going to be the companies with the vision to plan their sports gambling operations for the next decades as the practice spreads across the country. They’ll probably include some forward-thinking casinos, as well as providers of gambling technology and – in an interesting turn of events – some of the professional sports teams and leagues that used to be staunchly opposed. Stay tuned.
How to Invest Today
The legalization of marijuana – and the investment opportunities that have arisen as a result – has been one of the biggest stories in in financial news, and for good reason.
But legalized sports gambling has the potential to be even bigger than marijuana. Americans are already betting more money than they’re spending on cannabis products (legally or illegally).
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David Borun is Zacks' Cannabis Stock Strategist. He applies 20 years of trading experience and several months of concentrated industry study to the direction of our unique portfolio service Zacks Marijuana Innovators.