Tuesday, November 25, 2008

Montana Sports Action: Pie In The Sky From The Big Sky

Montana Sports Action (MSA), the fantasy sports wagering game instituted by the Montana Lottery, has been in operation for three months. There is enough data to perform some analysis.

MSA allegedly is an attempt to implement a fantasy sports wagering game in accordance with Montana HB 616, which authorized pari-mutuel wagers on fantasy sports. A previous post discussed the potential regulatory issues with MSA.

This new wagering game was predicted to deliver big revenue. During the legislative process in 2007, the Governor's Office of Budget and Program Planning estimated annual wagers of approximately $12 million ($11,985,600 according to the documents). More recently, an article by Online Casino Advisory.com quoted the Montana Lottery Director as expecting "the game to produce between three and five million dollars annually." That may not be the case as published results from the MSA website show.

At the top of the post is a chart showing the amount of wagers per week so far this NFL season for MSA. You are reading it correctly. After 12 weeks, the game that was supposed to generate millions in wagers has barely topped $65 thousand dollars total, with the highest weekly handle a paltry $6,800. You would think that the Montana Lottery and its vendor could figure out how to make a popular GAMBLING game. Obviously not. Don't think that new sports like NASCAR and golf will help these folks either. Fantasy football is the largest of the fantasy sports by a good margin. These other sports are very likely to make LESS than this. Montana Sports Action needs to be renamed More Suckers Anyone.

So, how is this "plethora" of cash broken out? By law, any game that is operated under the authority of HB 616 needs the following revenue split:
  • 74% - Winning Bettors
  • 16% - Montana Board of Horse Racing
  • 6% - Network Operator (Montana Lottery)
  • 4% - Retail Outlets
So, after 12 weeks, $48,753 has gone to the winning bettors, $10,541 to the Montana Board of Horse Racing, $3,953 to the Montana Lottery and $2,635 to the retail outlets. Who is making money? Let's start with the retailers and work our way up.

There are about 150 of the retailers, who had to pay $75 for a license fee to offer Montana Sports Action. In return, they get 4% of the fantasy sports wagers as a commission. To break even on that investment, the retailers will need to sell $1,875 worth of fantasy sports wagers. Assuming each of the retailers sold an equal amount (unlikely), after 2/3 of the NFL season, each one on average has sold only $440. Remember, fantasy football is the most popular of the fantasy sports. Other sports should generate far LESS revenue.

It gets better (if you have a warped sense of humor). Assuming that the betting terminal consumes 150 watts of power, is on for 12 hours a day, and electricity costs 10 cents per kilowatt hour, the terminal will cost the retailer $5.40 per month in electricity. The average retailer earns a whopping $5.84 in MSA commissions. So, each retailer earns enough to cover the electricity costs plus turn a monthly profit of 44 cents. Wow. But remember, that is only if the retailer is performing at the retailer average. Those that are underperforming likely aren't generating enough in MSA betting to even cover the cost of electricity for the betting terminal.

Retailers? NOT making money on Montana Sports Action.

The Montana Lottery is acting as the network operator for the game. So far, they have pulled in just under $4,000 in MSA revenue. To put on the game, they need marketing labor to push the terminals on the retailers, put up the website, etc. But, let's assume all that costs zero. They still need a statistics feed to run the game. Based on the typical rates for these kind of statistics feeds for fantasy sports games, a ballpark assumption is that the cost for fantasy stats for the NFL season would be around $20,000.

Montana Lottery? NOT making money on Montana Sports Action.
Stats Supplier? MAKING money on Montana Sports Action.

The Montana Board of Horse Racing was hoping for this big revenue to keep the horse racing industry alive in the state. To date, they've pulled in approximately $11,250 in retailer license fees and $10,500 in MSA wager revenue, totaling $21,750. Unless jockey insurance drops dramatically and horsemen like race purses around $100, I don't think they are going to get the money they need.

Montana Board of Horse Racing? NOT making money on Montana Sports Action.

So, of all the entities involved in a GAMBLING game, only the stats supplier seems to have a valid profit on Montana Sports Action.

But what if the Montana Lottery's motivation was not really to push the fantasy sports game but really to push lottery ticket sales? We'll examine that possibility in an upcoming post.

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Thursday, November 20, 2008

With Implementation of UIGEA Regulations, the Government Upholds the Law of Unintended Consequences

The Kansas City Star queries on their gambling blog if the government actually made internet gambling more likely with the implementation of the Unlawful Internet Gambling and Enforcement Act (UIGEA).

I think that the trend to liberalizing online gambling laws is well in place and that just implementing some regulations won't do much to speed or slow the process. With the economy the way it is, politicians are going to "get religion" and figure anything that can generate more revenue without raising taxes is a good thing. However, I do think that the poorly drafted nature of the legislation coupled with the sleazy way it was passed did help cement the ultimate path of liberalization rather than prohibition.

The Global Gaming Expo trade show was in Las Vegas this week. I attended and saw a smaller show than last year. I definitely noticed a smaller crowd and noticed more than a few empty booth spaces, where exhibitors were scheduled to show, but didn't. A much more somber show than last year's. The press said attendance was down 7%, but to me it seemed a much larger decrease. Last year, lines were long and it was difficult to move from booth to booth. This year, you could move quite easily and not stand in very long lines for anything, if you had to stand in line at all.

At the show, the head of the American Gaming Association opined that legalization of internet gambling will be a hot topic in the next Congress (which will be controlled by Democrats). With a Democrat in the White House, legalization may come sooner rather than later.

If you remember, in the past year or so, several online gambling companies cut deals with the US Department of Justice and paid fines to cover activities before the passing of UIGEA. These companies had departed the US market with that bill becoming law. You know why? Because they want in when the US legalizes online gambling and don't want to be shut out. Those online gambling operators that still service US customers? I think they made a bad bet.

The table is set for the big brick and mortar US gambling firms to move with a passion if internet gambling is legalized, followed quickly by the publicly traded internet gambling firms overseas. A good thing for gamblers as you will be able to work with legit, above board operators. No need worrying about putting money in or getting your money out.

Sports gambling on the internet? Don't count on that portion being legalized soon, but who knows?

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Saturday, November 8, 2008

Montana Lottery Fantasy Sports Betting In Trouble?

In 2007, the State of Montana passed House Bill 616 (HB 616) which authorized pari-mutuel wagering on fantasy sports. On August 31, 2008, the Montana Lottery began operating a fantasy sports wagering game (Montana Sports Action) under an inter-agency agreeement with the Montana Board of Horse Racing. If you're thinking that it is a little strange that a lottery would be running a pari-mutuel game for an agency well entwined with pari-mutuel wagering, you're not alone.

On September 12th, the Economic Affairs Interim Committee of the Montana Legislature discussed the implementation of HB 616. As a result of that discussion, they requested a formal audit of the Board of Horse Racing. The key excerpt from that request is below:

The Economic Affairs Interim Committee respectfully requests an audit of the Board of Horseracing and its implementation in 2008 of statutes related to fantasy sports gambling in Title 23, chapter 4. Specifically, the Committee is concerned that the approach taken by the Board of Horseracing in its rules and the use of an intra-agency agreement with the Montana Lottery Commission may run counter to the intent of House Bill 616, which authorized fantasy sports gambling in Montana to be conducted by a “pari-mutuel facility licensed by the Board of Horseracing.”

There has been some back and forth between the Lottery and the Legislature on this, with the request for an audit being the latest salvo. This is interesting enough but the game, Montana Sports Action, isn't generating the level of wagering as was predicted during the deliberation of HB 616. In addition, there is the underlying issue of whether the Montana Lottery has the statutory authority to offer this kind of game at all.

Montana Code 23-7-102 states:


  • (1) The purpose of this chapter is to allow lottery games in which the player purchases from the state, through the administrators of the state lottery, a chance to win a prize. This chapter does not allow and may not be construed to allow any game in which a player competes against or plays with any other person, including a person employed by an establishment in which a lottery game may be played.
  • (2) The administration and construction of this chapter must comply with Article III, section 9, of the Montana constitution, which mandates that all forms of gambling are prohibited unless authorized by acts of the legislature or by the people through initiative or referendum. Therefore, this chapter must be strictly construed to allow only those games that are within the scope of this section and within the definition of "lottery game".
  • (3) The state lottery may not: (a) operate a slot machine or carry on any form of gambling prohibited by the laws of this state; or (b) carry on any form of gambling permitted by the laws of this state but which is not a lottery game within the scope of this section and within the definition of "lottery game".

Montana Code 23-7-103 (4)(a) states:

  • A "Lottery game" means any procedure, including any online or other procedure using a machine or electronic device, by which one or more prizes are distributed among persons who have paid for a chance to win a prize and includes but is not limited to weekly (or other, longer time period) winner games, instant winner games, daily numbers games, and sports pool games.

The key here is the meaning of chance. Generally, chance is viewed with regard to lottery and other numbers games in the spirit of pure chance, randomness and equal probability, such as the odds of a coin flip, roll of a die or lottery numbers. In a game conducive to pari-mutuel wagering, although each contestant in the field has a non-zero probability of prevailing, it cannot be said that each contestant has an equal chance of prevailing.

This difference is important and tends to question the ability of a fantasy sports game to be viewed as a lottery game, where the wagering public has the ability to place bets on players with unequal chances of winning. For example, it is not realistic to assert that a quarterback that is on injured reserve or on a bye week would have an equal chance of having the best statistics for the week compared with quarterbacks taking the field. The case of chance would be stronger if the only option of betting was a random "quick pick," where the wagering system randomly selected the wager.

According to 23-7-102 (2), the chapter must be strictly construed to allow only those games that are within the scope of this section and within the definition of "lottery game".

Assuming the meaning of chance is what likely was intended when the Montana Lottery was authorized in 1985 (pure chance), if the Montana Lottery is claiming that Montana Sports Action is a pari-mutuel game, how does that align with the statutory restriction of the Montana Lottery to only offer certain games of chance (pure chance)? As any horse handicapper can tell you, horse racing (pari-mutuel wagering in the USA) isn't a game of pure chance.

Neither is fantasy sports.

When the Lottery came to the Board of Horse Racing in May 2008 and offered to implement a pari-mutuel fantasy sports wagering game, you would think they had to be aware of the restrictions they were under with regard to games eligible to be offered?

Montana Code Section 23-4-301 8(a) states that it is unlawful to conduct pool selling or bookmaking or to wager on a fantasy sports league other than by the parimutuel system and by being physically present at the licensed parimutuel facility.

By observing the evolution of the documents from the Montana Lottery regarding this game, the phrase "pari-mutuel" is dropping out of sight. The June 2008 Montana Sports Action "How To Play" document had 3 mentions of the term "pari-mutuel." The July 2008 Montana Sports Action "How To Play" document had no mentions of the term. Also, an August Wall Street Journal article reporting on Montana Sports Action referred to the game as a "fantasy football lottery game." That article was also mentioned in the same terminology on the Montana Sports Action website.

If the Montana Lottery is claiming that Montana Sports Action is a lottery game, how does that align with the prohibition of 23-4-301 8(a)? Why the change? Hard to say with certainty. Could it have something to do with the Legislature questioning the authority of the Lottery to operate a pari-mutuel fantasy sports wagering game?

It seems that the Montana Lottery might be blowing hot and cold on the same set of facts. That may work temporarily, or with audiences with short memories, but possibly not with audiences that are focused on the issue and have a strong bias toward proper implementation of statutes, like the Legislature.

What if the audit finds that the Montana Lottery is not allowed by statute to offer fantasy sports wagering? Would that mean that any fantasy sports wagers made with the Montana Lottery were illegal and void, and that all wagers need to be refunded? Not sure how any finding of this kind, if ever pursued, would turn out, but it would indeed be interesting to watch.

In a future post, we'll examine the financial performance of the game compared to estimates and attempt to determine who (if anyone) is making money with Montana Sports Action.

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