Edition 41: The AGA Letter from a Gen-Z Perspective

It’s not as simple as you think!

Apr 18, 2022

For those who haven’t been following the industry too closely, the American Gaming Industry (AGA) recently sent a letter to Merrick Garland asking him to crack down on offshore betting. The letter is available here. We wanted to explore that and its ramifications in today’s piece.

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Let’s dive in.

The Letter and the Context

Now that gaming has been legalized in a bunch of states, it makes sense that the legal operators would start to get a bit frustrated by offshore operators. The AGA represents the gambling industry as a whole, but we’re going to be zooming in on the sports betting side as that’s where we think we may have something to add to the conversation. The overall premise is simple, legal operators believe that they are entitled to 100% of the pie that originates from regulated American states.

Starting off, the AGA makes some fair points about difference in compliance costs and tax requirements. Long story short, not following U.S. laws and not paying U.S. taxes does indeed have its perks in terms of lowering overhead costs. Surprisingly, the AGA calls out Betonline, Bovada and myBookie by name. This certainly isn’t the type of buzz those operators were hoping for. These operators don’t use the PPH structure that we frequently refer to, but rather operate on a similar structure to regulated books with deposit requirements to bet. They do get away with offering some fun bets that would never be approved by U.S. regulators including a litany of fun political bets that we like to take a glance at or maybe bet on if we’re bored.

Again, we’d like to emphasize we’re not taking a normative stance on these offshore operators. With the three mentioned above, we haven’t heard of anyone who has had a bad experience. Granted, we aren’t directly familiar with people who are trying to move thousands of dollars in and out of these books on a regular basis. On balance though, we know plenty of satisfied customers who trust these operators and have had positive experiences.

Next, the AGA cites some statistics from a consumer survey where they show that American consumers apparently really care about using regulated operators. We’d take this with a bit of a grain of salt. For example, 74% of respondents said it was important to only bet with legal operators. I’m sure if I asked people whether it was important to only buy marijuana from legal dispensaries, I’d also get a resounding majority in agreement with that statement. In reality, if people are happy with the service they are receiving from their current provider, they’re probably not in a huge rush to make a big change. Additionally, American consumers are not in legal jeopardy for gambling on sites like Bovada or BetOnline (as long as they follow all applicable laws related to things like income). This is a bit of a conundrum for the phrasing of questions like this. Yes, the bookmakers themselves would be in legal jeopardy if they were to find themselves in the United States, but the American bettors? Certainly not unless there were to be a radical change in the way laws are currently understood. That’s why using the “legal” phrasing can be a bit hazy from the perspective of a consumer.

Of course, there’s some context in the letter on vague societal harms from unregulated sports betting and advertising. We think this is a bit of a fine line to walk for the AGA. The AGA hypes up a problem gaming emphasis for regulated books in comparison to offshore books. We gritted our teeth a bit when reading that. Yes, there are self-exclusion lists and it’s possible to impose self-selected limits on the regulated sites. In reality, it still takes action from the consumer to actually partake in this. Of course, something is better than nothing, but we’re not sure that’s the hill the AGA wants to die on. Inherently, promoting gambling is going to be associated with more problem gaming. If more people start gambling, there will be more gambling addicts and we’re not sure there’s a way to convince us otherwise.

Finally, there’s some concern about the viability and reliability of offshore books mentioned. There are a few examples of offshore books disappearing with money as well as a long history of DDoS attacks that have taken the aforementioned operators offline for a few hours or days. Granted, the examples of the former are incredibly far and few between and would not happen with the above mentioned operators. Additionally, the DDoS attacks have resulted in frustration more than lost money. If anything, they are good for regulated operators in the sense that they demonstrate the importance of using a reliable site.

We’re also a bit skeptical of the existence of an FDIC-level guarantee on people’s deposits in regulated books in the United States. We understand that operators are required to have the liquidity in separate, reserved accounts to make consumers whole in the event of a company failure. We just don’t really believe if push came to shove that state money would be used to bail out the money that people had in their sports gambling accounts if the company itself could not cover it. Yes, that’s not how it works in practice. BUT, we casually asked a few of our friends who are casual bettors what they thought and they thought it was an FDIC-style guarantee so thought it worth a mention.

Where we really come down on this is that the DOJ should have more important priorities than dealing with the offshore books that have relatively pristine reputations. If they happen to be swept up during the course of a separate investigation, by all means DOJ should take care of it. But regualted operators have signficant enough advantages that they should be able to sweep out the unregulated books. Who do we really think has a higher cost of capital? Draftkings or a site that’s domiciled in Curacao? Regulated books have enough money to spend to advertise during NFL games, offshore books don’t! Let’s not forget about the built in advantages that come with being regulated. Also, there’s clear prosecutorial discretion in the United States. This means that the executive branch has the power to decide what crimes to prosecute and not prosecute. This just doesn’t feel like it necessarily needs to be at the top of the list.

Finally, we think another point that should be made about the PPH market (which we’ve never actually seen anyone try to size, if you have, please email us!) is that it is generally accessible to people who are 18 or even younger. Obviously, gambling shouldn’t be available to people under the age of 18. But if we’re letting people buy lottery tickets at 18, that has a far lower expected value than most sports bets do. Additionally, a lot of people start gambling right around the age of 18. Maybe they join a workplace where a bunch of people bet on sports together, or join a fraternity in college where some of the older kids bet. There’s nothing wrong with this, but if the only option these people have is offshore books, there’s a chance they choose to stick with those unregulated books even after they turn 21. After all, if you wanted to kill the fake ID industry, the easiest way to do it would be lowering the drinking age to 18, not trying to eliminate everyone who sells a fake ID into the United States.

We’ll be keeping tabs on this, but think it’s more likely to just make noise than make a big impact. Regulated operators should and are able to outcompete offshore operators. Long article this week! Hopefully you all stuck around and learned something.

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