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District of Columbia Council members have sharply criticized the performance of the city’s lottery-led sports betting program and called for a pivot to a model that would permit private operators to offer mobile wagering.
The DC Lottery’s sports-betting offering has significantly underperformed compared with initial expectations when the DC Council approved legislation in late 2018.
Projections from the district’s chief financial officer had indicated that if the city granted the lottery a monopoly on online sports betting and awarded a sole-source contract to technology vendor Intralot, the result would be a projected $92m in transfers to the district.
Instead, the program has produced only about $2.5m in transfers to date, $2.2m of which has come in this fiscal year.
DC’s legislation allows the lottery to operate a district-wide mobile sportsbook product, as well as a network of betting kiosks that are available at 50 retailers to date.
Private companies can operate retail sportsbooks at the city’s major sports stadiums and arenas, along with a two-block exclusive radius around those facilities where mobile betting can also be operated. On-site sports betting can also be offered by private operators in bars and restaurants.
Last week, the council’s committee on business and economic development held a hearing to discuss the sports-betting market, and council members were unanimous in their criticism of the performance to date.
“From the council’s perspective, this can’t continue,” said Kenyan McDuffie, the committee’s chairman. “We cannot continue to scapegoat the pandemic, [geofenced exclusion areas in] the federal enclave, and say because we get a greater rate of return on revenue, we should stay the course.
“Getting a greater share of zero is still zero.”
McDuffie voted in 2019 in support of the lottery’s sports-betting contract with Intralot, but councilmembers Mary Cheh and Elissa Silverman were opposed on grounds that the sole-source model was flawed.
“I hate to say I told you so, but I'm going to: I told you so,” Cheh said. “We were told we needed a sole-source contract to hurry up and beat the other jurisdictions and all this other stuff. It was all nonsense.
“We could have gone in the other direction and allowed for competition in this area, and then tax the profits made by competing bidding at vendors,” Cheh added.
“But the council was taken in by this idea that this was a special case where a sole-source contract had to be made. It’s time to admit that that was wrong, and to revisit the entire system.”
Silverman added that the initial projections were “irrationally exuberant” and called the program “embarrassing.”
“I think it speaks volumes that even in a pandemic, a very contagious pandemic, that people would rather gamble in-person at a crowded sports venue than be in the comfort of their own home on [the DC Lottery’s] Gambet app,” Silverman said.
DC Lottery director Frank Suarez defended the app’s recent performance, arguing that Gambet had turned the corner after a rocky start, with a 31 percent year-on-year increase in betting handle and a 49 percent increase in the number of wagers.
Suarez also said that the program’s year-to-date transfer of $2.2m was more than twice the amount of tax revenue collected from private retail sportsbook operators such as Caesars and BetMGM, which pay a 10 percent tax on gross revenue.
“I want to make sure everyone really has heard that the ship is righting already,” Suarez said. “Everything points to the right direction that the model is working as it should now.
“It may not have been working before like we thought, Gambet may have required more investment or a bigger brand building effort than we anticipated back when we were enacting the law, but now all the numbers show that what we’re doing is the right thing.”
When pressed by councilmembers of the effects of a switch to a private operator based model for mobile wagering, Suarez repeatedly said that even with an increased 20 percent tax rate for private operators that the existing law allows for in the event of the pivot, private operators would have to increase handle by 300 percent to match Gambet’s transfer to the district.
Comparably, he said, the existing agreement guarantees the district 10 percent of handle from the lottery before expenses.
Using the district’s existing year-to-year statistics, the Gambet product and private operators have combined to produce $174.5m in handle during the current fiscal year.
If operators of retail sportsbooks at stadiums were permitted to offer mobile betting city-wide, they saw the exact same amount of play and operators held 7.5 percent, then sports betting would have produced $13m in gross revenue and $2.6m in tax revenue with a 20 percent tax rate.
Suarez also added that the existing licensing fees from private operators are not sufficient for the lottery to cover the current cost of regulating them, and that this year the lottery has spent all but about $200,000 of the $3.4m in sports-betting tax revenue on regulatory costs.
He added that Intralot’s contract runs through July 2024, and that in the event that the district terminated its agreement with the company, some reimbursement for investments in the district would be required.
Although no decisions were made during the hearing, even as the meeting drew to a close, council members did not appear to be swayed by Suarez’s defense.
“I think for most council members who favor sports wagering, the goal is to maximize revenue, and we’re not really seeing it,” McDuffie said.
“You’re saying things are going up, but when the bar is so low, it’s something that we should expect frankly, and we’d like to see a more precipitous increase.”
Of the 13-person council, ten members remain from the 2018 and 2019 votes on sports betting. Of those ten, five were in favor of the Intralot contract in 2019, with four voting against and one member absent.
Jon Mandel, a lobbyist for Orrick representing FanDuel, DraftKings and BetMGM, testified in support of a privately-operated mobile model.
But two local business owners were in favor of keeping the status quo, saying that the lottery’s retail betting product helped boost their businesses coming out of the pandemic.
