The Daily - How Sports Betting Hit the Mainstream in America

Episode Date: February 10, 2023

This weekend, one of the most watched sporting events of the year, the Super Bowl, will draw an estimated $16 billion in bets from Americans, more than double last year’s total.The booming trade is a sign of how gambling has gone from illegal to legal very quickly in many states — and hints at the enormous risks posed by the change.Guest: Kenneth P. Vogel, an investigative correspondent for The New York Times.Background reading: Cigars, booze, money: A lobbying blitz helped to make sports betting ubiquitous.Government oversight of gambling in the United States offers scant consumer protections and looks to the industry to police itself, The Times found.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Sabrina Tavernisi, and this is The Daily. This weekend, one of the most watched sporting events of the year will draw an estimated $16 billion in bets from Americans, an astounding amount of money that is more than double last year's total. Today, my colleague Ken Vogel on a Times investigation into how gambling on sports went from illegal to legal so quickly in a majority of states, and on the enormous risks that the industry poses. the industry poses. It's Friday, February 10th.

So Ken, it's the end of the football season and the Super Bowl's on Sunday, and you've been reporting this really big change that's been happening in the sports world. Tell me about it. Tell me about that change. Well, as a huge sports fan, Philadelphia sports fan, go Eagles. I see your Eagle sweatshirt there. Oh, yeah. I'm all geared up and ready to go to the Super Bowl, actually, myself. Nice. But I noticed that you really could not consume sports content. If you're just getting into betting, maybe you want to bet on the coin toss.

Without being totally bombarded. Place bets on FanDuel Sportsbook in just a few simple taps. By this nonstop blitz of sports betting ads. You just choose your bet, lock it in, there you go. If only everything were this simple. DraftKings. Now I know Super Bowl and all, but everyone gets a free bet? Dallas just covered the spread! Ha ha ha! We got the money, baby! You see celebrities like Jamie Foxx.

Oh, okay, you're getting that bet in before the boom, huh? Oh yeah, LA all the way. What? You see former athletes. With every tap, a new legend is born. Wayne Gretzky, Jalen Rose. What's up, my man? What up, Barry? Got time to chat bets? Yeah. Barry Sanders, really big names.

Hawk. Tony Hawk? Like the bird? But it's more than that. You can actually watch these games and see, for instance, on ESPN the other night. Okay, everybody, it's time for DraftKings Sportsbook predictions. Here he is. The analysts who are calling the game actually at the arena tossed to the studio crew.

Not only are the Grizzlies going to make the next bucket, it's going to be in the paint for two. Giving analysis about what viewers might bet on this team or the other team to score the next basket. I don't know. But boy, has gambling changed or how we view gambling now in sports. It's such a change, right? It's such a change.

Yeah, it's really stark. It's really sudden. Now you see people sitting in their living rooms on their phone place a bet without even putting on their pants. And what's so surprising about this saturation of sports betting coverage and advertising is that not too long ago, betting on major sports like baseball and football was mostly illegal under federal law. There were a few states where some of this kind of sports betting was allowed, but the only state where it was really widespread was Nevada. But what was the origin of it being illegal, Ken? Like, what was the government worried about with sports betting in particular? Yeah, it was sort of widely agreed upon that there was a public interest in regulating and

restricting sports betting, making it almost entirely illegal. And that was both because of the addictive nature of gambling and because the sports leagues themselves were against it. And they thought that gambling would compromise the integrity of their games. Compromise the integrity of their games. What do you mean exactly? Well, there's this specter of gambling-related cheating that hangs over American sports and particularly Major League Baseball, which was nearly brought to its knees by the Black Sox scandal in 1919 when eight members of the Chicago White Sox were accused of throwing the World Series that year in exchange for money from a gambling syndicate. Wow. That they were throwing it to achieve a result for someone who had bet on the games illegally. And then, you know, all the way up more recently.

By now, Nick, most everybody knows about the fate of Pete Rose, the hammer coming down today. And it came down hard. With Pete Rose, who was caught betting on his team's games. After six months of denials by him, delving by baseball, and delays through the courts, Pete Rose was banished from the game for life. I mean, the idea being that you would be influencing

some sort of outcome by betting on the side. Exactly. And whether fans could sort of trust that the games were being played with integrity and sort of independent of any effort to influence the results. So when did that start to change? Well, it really started to change about 10 years ago. And one of the main causes was the appearance of these two technology startups, DraftKings and FanDuel. And their business was what's known as fantasy sports. This is something that was probably familiar to a lot of people even before the digital age, where friends would get together

in one another's basements and pick these imaginary teams composed of real professional athletes. And then based upon how the real athletes performed in games, the imaginary teams would earn points and win or lose based on that. So DraftKings and Fandle took this game and made it digital. You could do it online and play against not just your friends, but a much wider pool of people. And DraftKings and Fandle adapted one more aspect of fantasy sports, putting money on the results of the performances of these imaginary teams and brought that into the digital age as well. So now you could sit on your phone and pick your team and then stake money on whether your team won or lost and potentially make a lot more

money doing that than you could have done just playing fantasy sports against your friends after your draft in their basement. But that's starting to sound a lot like betting on sports, which is illegal, right? Yeah, and that was the rub for these companies. They emerged really quickly. And like a lot of these disruptive tech companies, they found a sort of like legal gray area where there was a lot of demand and not a lot of specificity in the legal landscape. and not a lot of specificity in the legal landscape. And they waltzed right into it and suddenly had a big business going, but had a lot of uncertainty

about whether they were violating the federal ban, but also state laws that restricted who could offer gambling and what types of gambling could be offered. So it's sort of like Uber and Lyft in a way, right? Like startups that didn't wait to figure out the law, they just went for it and hoped that the law would follow. Yeah, that's a good analogy.

And these companies were already starting to see that they were going to face some legal challenges in states that seemed to be inclined to rule that this was illegal gambling, which would put them in some serious trouble, really jeopardizing their whole business model. But as the threat of these legal challenges was starting to build, there was a lawyer who had begun taking an interest in these companies from afar, and he thought he could help them. Who was he? Who's this lawyer? He's a guy by the name of Jeremy Kudan, and his specialty was helping these young and

disruptive industries navigate regulatory and legislative challenges in state capitals. And he was looking for a new challenge. And it's actually interesting, he had pitched Uber on potentially working for them because they were sort of on the rise at this same point. So it's a great analogy that you make, Sabrina. But he's also a big sports fan. He's a huge backer of the Yankees, the New York Rangers, also Alabama football, the New York Knicks. And he was sort of turned on to fantasy sports when he heard an ad on the radio in 2014, in which one of these companies was telling listeners that they could win a boatload of money through fantasy sports. And that was a little bit of a light bulb moment

for him that led to him pitching FanDuel and ultimately signing both FanDuel and DraftKings. Okay, so he's working for these companies now. What does he do? He basically told them that they needed to develop a national strategy to go into states to try to pass legislation that would affirm the legality of this suddenly booming fantasy sports business. And basically what he needs to do is convince these state lawmakers and state officials that fantasy sports is not gambling and therefore does not violate state's laws on gambling, nor the federal ban on sports betting. And a lot of these states predicate the definition of gambling on whether something is a game of chance, which is gambling, or a game of skill, which is not gambling.

And so the argument is that in order to be successful at fantasy sports, you need to have skill. And the players with the most skill will win. And they produced a bunch of studies and they produced a bunch of legal analysis making that case. So does it work? What happens? It does work. I mean, there was some skepticism. You could just, as a lay person, listen to that and be like, well, wait a minute. The athletes are the ones who have the skill, not the people who are picking teams of athletes, but it was sufficient. And by the end of 2017, 19 states had passed bills legalizing fantasy sports, and most, if not all of those, were written with help from Jeremy Kudan

and his team of lobbyists. But that's all just fantasy sports, right? Not sports gambling more broadly. Well, it is just fantasy sports, but while this legal campaign is happening, DraftKings and FanDuel are doing pretty well. They're attracting lots of users. And so their success showed that there was real potential for them to move into sports betting and to use fantasy sports as a stepping stone to that. But they have two obstacles there. One is getting the leagues on board. And the second, of course, is this federal ban. Right. OK, so step one, get the leagues on board. How do they do that? Well, the leagues in some ways were a receptive audience. They were struggling themselves with dwindling viewership and fan engagement. So viewership for professional sports games had gone down?

fan engagement. So viewership for professional sports games had gone down? Yeah, and particularly baseball, where the games were increasingly long, stretching into the three hours, which were seen as driving away fans, you know, the idea that these games are long and boring. And some baseball executives started to think that maybe sports betting could turn the length of the games, which is seen as a real weakness, into a strength if there were opportunities for in-game betting or other ways for fans and viewers to engage with the games as they were ongoing. You know, if you have like three hours worth of potential in-game bets, hey, maybe that's not such a bad thing. Right, right. And it's also kind of plugging into the way Americans live their lives these days, right? We're all on our was definitely a reversal. But they basically saw that this was something that was coming. And they figured that they might as well use it to try to

increase fan engagement and also to make some money. Okay, so the leagues are starting to come around. Obstacle number one, they're starting to overcome that. What about obstacle number two, the federal ban? Yeah, at the same time as fantasy sports was growing as an industry and winning approval in state houses, there was this whole other parallel track dealing with the federal ban, and it emanated from New Jersey, where in 2012, gambling is now legal in New Jersey. Governor Chris Christie signed the measure into law yesterday. The governor at the time, Chris Christie, had signed into law a bill that would

have legalized sports betting. The idea is to boost state coffers and help Atlantic City casinos, which will offer their own online games. His goal was much less ambitious than online sports betting that we see today. It was to revitalize Atlantic City, where the casinos on the boardwalk were struggling mightily. The idea was if you brought sports betting in, it would bring more people in interest. There was just one little itty-bitty, teeny-tiny problem with the governor's idea. It's illegal. But that effort to legalize sports betting was an open defiance of the federal ban. Interesting. So this resulted in a court case that, after many appeals and rulings against New Jersey, made its way up to

the Supreme Court, which in 2018, the court struck down a federal law that banned gambling on sports games in most of the country. Ruled in New Jersey's favor, striking down the ban is unconstitutional. Paving the way for the legalization of sports betting in all 50 states. And sending the issue back to the states to decide whether they wanted to legalize sports betting. The future of sports gambling in America is about to change in a big way. So federal ban is gone. That's, of course, obstacle number two, presumably opening up the floodgates, right? Like, isn't this the moment that Jeremy Kudan

and all the lobbyists and the industry are waiting for? A hundred percent. They had the relationships with the lawmakers that they had built through the fantasy sports fights. They had the leagues basically on board with them. And now they had the green light from the Supreme Court overturning this law and throwing the decision on whether to legalize sports betting back to the states. We'll be right back. Okay, so the floodgates are now open.

The states now have the power to decide whether sports betting should be legal. And the sports betting companies and Jeremy Kudan and other lobbyists are ready to go. What do they do first? The lobbyists leap into action targeting some of these states where they think they have a real shot at getting sports gambling legalized and where they have relationships with the lawmakers. The industry and its lobbyists went to great lengths to wine and dine these lawmakers. Take Kansas, for example. My colleague Eric Lipton got into a cigars, cars, and bars party. Oh, boy. In the shadow of the state capitol, which lobbyists for the industry literally wind and dine these lawmakers.

The invitation advertises premium prime rib and seafood buffet, huge dessert sampling station, wine tasting, craft beer tasting, fine cigars, single malt scotch. tasting craft beer, tasting fine cigars, single malt scotch. And my colleague, Eric Lipton, was able to observe some of the lawmakers who were working on the legislation, smoking those cigars and drinking that scotch and talking to the lobbyists who were pushing the bills. So literally smoke-filled rooms that we think of in our minds when we hear the word lobbyists in state capitals. Yeah, it's really out of central casting. And I think it underscores this idea that it's a lot easier to mount an effective lobbying or political campaign in a state capital than it

is in Congress. There's fewer reporters watching, it costs less money. And in a lot of cases, you get more access to these lawmakers who don't have huge professional full-time staffs like we see in Congress. Right. Lobbying dollars go a lot further in state capitals than they do at the federal level. That's right. And the lobbies for the sports gambling industry are making one big argument to lawmakers that seems to resonate pretty well. And it's a pretty common argument that you hear a lot when it comes to legalizing some previously illegal activity. The argument that the lobbyists make is that, hey, sports betting is already happening. It's just happening illegally. The idea is that this is happening through offshore sites that are doing it illegally,

through offshore sites that are doing it illegally or from your local bookie in your corner bar. And there are not any safeguards here for the people who are gambling. They could have their money taken from them and not get paid out for their wins. They could develop gambling problems and not have anyone watching to see if they're betting irresponsibly. And that wouldn't it make sense for you to legalize it and regulate it and therefore make it safer for your citizens and residents who are betting and also make some money off of it by taxing it. And the lobbyists are telling these lawmakers

who are quite receptive to this argument that there is $400 billion each year that is bet illegally on sports. $400 billion each year that is bet illegally on sports. $400 billion. So they're basically making the case that this is already a huge phenomenon. Yeah, and it's a powerful argument, not just because they're suggesting,

hey, this is already happening, but because of the potential for states to get in on some of this $400 billion and make it work for them. So this number starts to get a lot of traction among lawmakers. And we started to wonder, where did this number come from? And it wasn't easy to figure it out. But basically, it appears as if it was cited by a commission created by Congress in the 90s to study gambling and its effects. And they cited a guesstimate of between $80 and $380 billion of illegal sports betting each year. And somehow it went from a guesstimate to an article of faith among supporters of legalizing sports betting.

So essentially, the number that was really at the core of the lobbyist's argument was essentially plucked out of thin air. Yeah, that's basically right. The industry was relying on questionable data to push the argument to legalize sports betting, and it was successful. So at the end of all of this, how many states are we looking at? I mean, how many have actually approved this legislation? Well, over the course of the nearly five years since the Supreme Court overturned the federal ban, we've seen these states one by one pass laws. Big news, DraftKings Sportsbook is coming to Ohio. Within the last few minutes, Iowans placed their first bets under the state's new sports betting law. And just like that, the first legal sportsbook in Kansas was opened.

We're now up to 36 states that have legalized sports betting. Texas lawmakers want to legalize sports betting, and the push is getting bipartisan support. There are bills pending in a number of the other states that have yet to do so. The state hopes legalized sports betting will bring in tens of millions of dollars in revenue. That the industry is pushing really hard to try to pass. And once they were able to legalize in each of these states, they launched into these very aggressive marketing campaigns where the ads blanket the airwaves and are emblazoned on the walls of some of the most iconic sports venues in the country.

And this is all in the service of trying to attract customers because this is a new industry and they're competing with other companies in this space. And one of the things that they offer now on FanDuel, get up to a thousand dollars back in free bets if you don't win, is these promotions where they offer bettors free bets. You stuck in an awkward family dinner. You waiting for your groceries to be back. And these are promotions that are intended to lure new customers who might not otherwise be inclined to open an account and start betting with the idea that, like, this is a starter bet for you.

Now get up to $1,000 back in free bets if you don't win. And bettors can use these credits to make wagers without putting their own money on the line. So you can see why this might be appealing to someone who is a sports fan and sees all the promotions, but not necessarily a seasoned bettor. Fan duel. Make every moment more. So it's like for people who may not be used to risking money, like kind of ease into it.

That's exactly right. Get your first taste of the action. And there are many examples of people who win based on these promotions and are hooked, or if not hooked, at least enticed and become regular sports bettors. That's a different phenomenon from moving betting that's already happening illegally into the newly legal and regulated market. In this case, it sounds like they were creating a new audience. Yeah, that's right. So sports betting is really taking off. There's all this advertising all over the place. Lots of states have legalized it. And the theory was that once this thing really gets off

the ground, states would start raking in the tax revenue, right? Like all this tax money would just start flooding into state coffers. Does that happen? In a lot of states, we found that it didn't happen, that the tax revenues were substantially less than what the industry had predicted. And there are a couple reasons for that. Number one, the initial tax rate was set quite low in a number of these states. Ken, what's an example? A really good example would be Kansas, the state that we talked about earlier with the cigars, cars, and bars party. The initial proposal to legalize sports betting called for a 20%

tax rate. But the lobbyists for the industry said that would depress interest from the sports betting companies and would stifle the market. So the legislators slashed the tax rate to 10%. And on top of that, they also included some deductions for these promotional bets that we discussed. Oh, wow. Right. All those promo bets. Yeah. And so in a lot of these states, the legislation that legalized sports betting for these promotional bets that we discussed. Oh, wow. Right, all those promo bets. Yeah, and so in a lot of these states, the legislation that legalized sports betting allowed for the gambling companies to deduct from the amount that they would pay in taxes

the free bets and promotional bets that we had talked about before. So essentially, states subsidizing this promotion. Yeah, that's exactly right. And what did that all add up to? Well, in the months after Kansas legalized sports betting, there were $350 million worth of bets that were placed by Kansans. And we found that the state collected less than $271,000 on those $350 million worth of bets. Oh, wow. A tiny fraction of the tax rate they were going for. Yeah. Not only is it less than the 10 percent tax rate that was

enshrined in the Kansas legislation, it's less than 0.1 percent of the total sports betting handle. So Kansans really got a raw deal, it sounds like. And it was mostly thanks to lobbying from the betting industry. Yeah, there was certainly an element of that. The industry says, though, that it's too soon to tell how much will be bet as the market matures and how much these individual states will collect. Essentially, they're saying, give it time. Has any state made out well by legalizing sports betting? saying, give it time. Has any state made out well by legalizing sports betting? Yeah, a few states have collected a lot more money in tax revenue than the industry projected. And the common theme there is that all those states had rejected the industry's advice to tax the

gambling company's revenue at 10% and came in with much higher rates. The biggest example is New York, which set a tax rate of as high as 51%, and that has really paid off for the state. In the first year of betting alone, the state collected more than $700 million in taxes on over $16 billion worth of bets. So it shows that while the industry had warned that setting the tax rates that high would scare off the sports betting companies and potentially reduce the market, obviously, that didn't happen here. Okay, so in other words, New York is a model, you know, tax companies heavily and reap the rewards. Well, it certainly seems like it could be a model for other states, but many people in the industry and their allies

in state legislatures argue that New York's tax rate is too high. They say tax rates like that make it hard for the industry to do business in states. And there are only a few states with tax rates in that range so far. So can I get a step back for a second here? Americans are placing millions of dollars of bets. Doesn't that mean fundamentally that it is something that they want to do? I mean, you know, on the one hand, this is a familiar story of money influencing politics. But on the other, if people want to do it and it's legal, who are we to tell them that they shouldn't? Yeah, and we heard that time and again from the lawmakers who were pushing the legislation.

They said, our constituents want this. And clearly the numbers bear that out. That said, there is a potential public health cost here that problem gambling specialists say is not being adequately addressed. And tell me about that public health cost. Well, we don't have a ton of data on it yet because widespread legal sports betting in the United States is so new. But we do have some information that suggests that sports betting is leading to an increase in problem gambling concerns. For instance, the volume of calls to the national hotline for people who have gambling problems rose by 43% in 2021, according to the National Council on

Problem Gambling. And this was after a number of states had legalized, right? Yeah, it was when we were starting to see sort of a critical mass of legal gambling. And people who have gambling problems typically are not eager to discuss them because of the stigma, let alone to talk to reporters about them. But my colleague, Rebecca Ruiz, and I spoke with more than 20 people who said that they had developed gambling problems betting on sports since this wave of legalization had occurred. In other words, this wasn't a result of some sort of illegal betting that they were doing before legalization. And a lot of them said that they were drawn in by offers of the risk-free bets, those promos that we talked about.

And they described feelings of exhilaration as they won, particularly during the pandemic when people didn't have a lot to do as far as entertainment and were sitting at home. And they had their phones offering this ability to place bets on sports. And it was quite entertaining. Sometimes, however, those victories were followed by losses that left them thousands of dollars in debt. Yet they continued to be motivated by this idea that just a few good wagers might reverse their fortunes. We also talked to people who tried to stop and describe getting hit up with these promotional offers. So in other words to people who tried to stop and describe getting hit up with these promotional offers. So in other words, they're trying to stop and they're sort of being lured

back in by these offers of free bets. And some of the people who we talked to who had these gambling problems said that they didn't know where to turn for help and that even when they did, the tools were not particularly effective that were on offer to address their gambling addiction. So this kind of brings us back to the original pitch, which was legalize gambling so you can regulate it and make it safer. So what did states actually do on that front? They have passed regulations, but in a lot of cases, there are relatively few protections for consumers. And the states have often turned to the gambling industry to help shape those regulations and actually police their compliance with them. And so,

for example, there are states that require self-exclusion lists, in other databases, of people who have asked to be blocked from gambling. But in a lot of the cases, the states leave it up to the betting companies themselves to download and abide by the self-exclusion lists. It's a kind of fox guarding the henhouse type thing. Yeah. And we found examples of these companies not abiding by these lists. For instance, in Indiana, the state created a website that allowed people to block themselves, but 117 people who had enrolled in that self-exclusion list were allowed to create accounts with DraftKings, one of the big companies. And at least 28 of those people ended up wagering a total of more than $731,000. Wow. So these are people who had asked to be banned from betting and were not

only allowed to bet, but actually ended up betting a good amount of money. In that case, the company was fined, but the punishments are often pretty light. And some of the state regulators who we talked to told us that while they want to enforce their state's rules, they also want to work together with the gambling companies because it's in their state's interest for the industry to succeed. Interesting. And how are the gambling companies themselves making out here? I mean, I'm assuming they're doing pretty well from all of this? No, they're actually not, surprisingly. A lot of them are in the red. In the red? Yeah, most of the big sports books have yet to turn a profit. Take DraftKings, for example. The

company reported late last year that in the first nine months of 2022, it had an adjusted loss of nearly $700 million. What? And it recently cut a bunch of jobs. Huh. So explain that. Well, they spent a ton of money on promotions and trying to recruit and acquire new customers. And they say that sports betting just overall is not that profitable of a business model. In fact, they see it more as a stepping stone to a potentially much more profitable line of business. And that is so-called iGaming, which is essentially full online casino gambling that would allow Americans to place bets on poker or blackjack or even slots

from their phones or their computers anywhere with an internet connection, that's really the holy grail for these gambling companies. So it sounds like in the same way that the industry used fantasy sports betting as a kind of on-ramp to this broader pool of bettors, the industry is now using sports betting as an on-ramp to this much larger pool of betting. That's exactly right. And they pretty much acknowledge it. My colleague Eric Lipton and I went to a conference of state legislators in gambling states. And Jeremy Kudan, the lobbyist, was there. And the keynote address

was by the chief executive of DraftKings, and he thanked them for legalizing sports betting, but told them, it's time for your state to add iGaming, not in the future, but now. So if more states follow that recommendation, you could see a much larger group of potential gamblers being interested in placing bets on blackjack or slots or poker on their phones. And that could also lead to additional challenges for the regulators and the public health apparatus, which, as we've discussed, is not even necessarily up to handling the surge in gambling and gambling-related risks from sports betting.

Well, if you introduce a lot more gamblers, you're going to potentially have a lot more problems. Ken, thank you. Thank you. I enjoyed it. We'll be right back. Here's what else you should know today. On Thursday, the death toll from the earthquake in Turkey and Syria surpassed 20,000 people, a grim marker of the sheer devastation and loss it has wrought.

Turkish officials said the number of deaths in Turkey has surpassed the toll from the country's massive 1999 earthquake. At the epicenter, authorities were struggling to handle the scale of the destruction. In Hatay province, a hospital parking lot had turned into an open-air morgue, as the staff was unable to process hundreds of bodies. Across the border in northwest Syria, where millions have been displaced by a decade of civil war, power outages are creating fuel shortages in hospitals, and snowfall has hampered rescue efforts. The United Nations sent its first aid convoy into

the area, but it was a tiny fraction of the aid starting to trickle to the broader disaster zone. Nearly 11 million people in Syria have been affected by the earthquake, and 4 million of them rely on the United Nations for basic needs like food and clean water. Today's episode was produced by Will Reed, Nina Feldman, Rob Zipko, and Eric Krupke. It was edited by Liz O'Balin, fact-checked by Susan Lee, contains original music by Brad Fisher, Marian Lozano, and Dan Powell, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly.

That's it for The Daily. I'm Sabrina Tavernisi. See you on Monday.