Tennessee emerged in the spring as a dark horse “legal sports betting state” through the passage of SB 16, which legalized sports wagering in the Volunteer State for mobile/online applications only, becoming the first piece of legislation of its kind in the U.S. As the deadline nears for the submission of public comments on the draft regulations released in late November, there are growing concerns among stakeholders and sports bettors that plans for the future of the legal market in the state may fall into a cloak of darkness — ultimately creating a fundamentally flawed market with few options and little reason for celebration.
The chief concerns are threefold. First, tucked on page 42 of the 47-page draft regulations is 15.1.11, “Rule Governing Capped Payout,” which says “Sports Gaming Operator’s aggregate annual payout shall not exceed 85%.”
Those nine words and one number appear to require that a state-licensed operator keep at least 15 percent of total wagers made at a sportsbook annually. In existing U.S. markets, no such requirement exists, and a typical sportsbook annual hold is about 5-7 percent (or payout is roughly 93-95 percent). The inescapable conclusion is that imposing such a requirement would ultimately damage patrons as well as licensed operators who would have to manage a requirement antithetical to the industry standard. Whether through grossly inferior pricing, the slashing of promotions or other creative ways of keeping more cash away from consumers, this likely would threaten the long-term viability or at least ceiling of the Tennessee legal sports betting market itself.
Dovetailing with that 85 percent requirement, there is a clause (15.1.12) stating that if there is a tie in one leg of a parlay wager (a bet where multiple picks are combined, and none may lose for the bettor to cash on his wager), the bet would be deemed a loss. The industry standard goes that if one part of a multi-leg parlay ties or “pushes,” whether there are two games or 10 in the parlay, that leg gets cancelled and the remainder of the wager gets adjusted, but survives.
While this rule may seem innocuous, parlays are wildly popular as they let bettors, often recreational players, wager a little to win a whole lot, and the “House” overall banks a higher proportion of these bets for the promise of such upside. The rule would change the fundamental nature of the parlay for bettors and sportsbooks alike.
The third key concern addressed herein, from a broader institutional level, is trepidation within the industry that the Tennessee Education Lottery Corporation (TELC), tasked with regulatory oversight over sports betting and crafting the regulations, may be headed toward a limited market or perhaps even a single sportsbook model (“sole-source”), which would be contrary to what the legislature apparently tried to accomplish in its historic legislation that became effective on July 1 (codified in Public Chapter 507).
It’s important to note that the 47-page draft regulations were released on Nov. 22, before the announced hiring of Jennifer Roberts as Director of Sports Gaming Regulation. Roberts is a well-regarded gaming law attorney who spent more than a decade practicing in Nevada, while also serving as an adjunct professor UNLV’s William S. Boyd School of Law as well as at S.J. Quinney College of Law at the University of Utah in her home state.
“The state is creating its own brand of sports betting,” Roberts, who started at her new post in early December, told CDC Gaming. “I see this as a great opportunity. I love working with regulators, and this is an opportunity to be involved in the process from the beginning.”
“We are excited to have Jennifer join the Tennessee Lottery team,” said TELC President and CEO Rebecca Hargrove when Roberts’ hiring was announced. “Her experience and knowledge in sports gaming will be extremely helpful as the Tennessee Education Lottery Corporation develops the foundational components and regulatory management for the first of its kind, online only, sports gaming product.”
The presumption is that Roberts was hired for her acumen and experience in the Silver State and Las Vegas, the longstanding mecca of U.S. sports betting. But she’s new on the job and some agencies are more fixed in their ways, and more comfortable in their existing business arrangements, than others.
Impact of 85% capped payout on sports betting in Tennessee
In states such as Nevada and New Jersey with flourishing markets, there is no such cap on payouts. Sports, and sports betting, are unpredictable and and the results of both variable. That goes for payout percentages — day-to-day and month-to-month. Of course the House does maintain some edge — the lights need to stay on, after all — on balance for the year, and the “hold” percentage or the total amount the sportsbook keeps is usually around 5-7 percent of all the bets it takes.
Tennessee’s regulations would more than double that, at a minimum. Never mind the challenge operators would face trying to adhere to the requirement, the rule would force practices contrary to industry standards at the expense of patrons, and severely compromise the growth and long-term viability of the state’s market as a whole.
As a practical matter, industry analyst and founder of Sharp Alpha Advisors, Lloyd Danzig, told TNBets:
“If the calculation is completed at year-end, and the annual payout exceeds 85%, is the operator expected to reach out to customers and request that they forfeit winnings? If so, according to what formula will each customer’s liability be calculated and how will the operator be expected to treat “delinquent” accounts? Is the state planning to be the collector of such ‘debts?’ What if a person does not have the financial means to make such a payment and how will this designation be determined?”
Said one industry source, more broadly, “I don’t understand why the commission would force a licensee to award patrons an amount that falls well short of the norm, less than what’s traditional in other states like nearby Mississippi. How does a licensee even go about engineering its book to ensure that bettors as a whole get paid less to meet that?”
The main goal in Tennessee, as everywhere, is to offer a legal market that’s safe and fair for patrons, that makes sports gambling open and transparent, while also bringing some pecuniary benefit to the state through taxes and employment. How many patrons will want to deposit funds into a sportsbook stacked so heavily against them? Ultimately, the framework presented would incentivize patrons to remain in, return to, or perhaps even enter for the first time the illegal black market.
“Operators are already motivated to maximize their bottom line, particularly in terms of GGR,” said Danzig. “Not only is this provision completely impractical, it wouldn’t even serve a valuable business purpose in its most ideal form. If anything, it will have an inhibitive effect on both investment and innovation, ultimately acting counter to the state’s presumed attempt to maximize tax revenue.”
In response to various questions for this story, concerning the 85-percent clause, the parlay clause and about the number of licensees the TELC might allow into the market, Roberts responded:
“We are still working through the process and we’ll certainly keep you in the loop as the process continues. Right now, we are collecting feedback on the draft rules through our public-comment portal. This includes any questions or items for clarification.”
The impact of altering parlay wagers
Parlay wagering. Not a great bet, yet still a fan favorite.
— Sports Handle (@sports_handle) September 10, 2019
How popular and important are parlay wagers? In short, very. See above about their popularity and look here at the November 2019 New Jersey sports wagering figures, indicating revenue and total dollars wagered.
As you can see, parlays (including those made across all sports and events) checks in at a 12.5% win for the House, more than triple baseball, a betting sport dominated by “sharps,” or more informed bettors.
To make a “tie” or push a loss, by rule, would risk kneecapping the entire operation. Winning a multi-leg parlay is already an uphill battle; how interested will patrons be in parlay betting if perfection is the standard in Tennessee?
In addition, one of the up-front expenses prospective licensees will be putting up in the first place for the cost of doing business in Tennessee, a state with nearly 7 million residents: a $50,000 non-refundable application fee to become a “Level I” licensee, plus a $750,000 annual license fee. That’s a lot to pay to be able to offer a menu without a key ingredient.
Nashville-based gaming law attorney Alex Hall of the law firm Shuttleworth PLLC told TNBets: “The only discernible incentive for a state to require its sportsbooks to enforce a parlay clause such as the one proposed in Tennessee is to further skew the already significant House edge over bettors and maximize sports gambling revenue. The incentive is to maximize a bettor’s chances of losing.”
What this clause comes back to is that tax-paying legal sportsbooks would be put on unequal footing with those operating illegally. It would create a system where the same parlay wager that would be a win at an illegal book would be a loss at a legal one.
“One of the unifying goals on all sides of the sports betting landscape is to drive betting activity above ground and into a regulated, transparent market,” said Hall. “Achieving that goal requires that the legal alternative be comparable — if not better — than the illegal alternative. While the number of legal betting markets in America continues to grow, illegal channels are as accessible as ever. Ultimately, consumers will bet where they feel they have the best chance of winning. They will not bet where the odds are stacked against them.”
Concerns over a limited or sole-source deal
Taking these 85-percent and parlay clauses together, and the draft regulations as a whole, it’s not clear what kind of business model they are designed to create.
Of course, the 85-percent clause is a clue. It points to the notion that outcomes as a whole are predetermined, like lottery ball drawings or scratch-off tickets, which use fixed prize structures. The House win percentage in those games is decided and known before tickets are sold or balls drawn. There is not a month or a Sunday where the Lottery gets crushed by the patrons, as sportsbooks do from time to time. Remember, these draft regulations originated with a lottery entity.
Did the Lottery have itself as a sole-source and its longstanding, existing vendor, IGT, in mind when establishing such a premise?
Hargrove, the TEL president and CEO, is on record as early as May 22, 2018, one week after the federal ban on sports wagering fell, identifying the lottery as an ideal candidate to run the show for sports betting.
Per Nashville-based WKRN, Hargrove said at the time that sports betting in places worldwide often come under the control of their individual lotteries “because you have all the checks in place, all of the integrity. In fact, 50 percent of the world’s lotteries also offer sports betting.”
It makes sense that Hargrove, previously a chief executive of lotteries in Illinois, Florida, Georgia and now in Tennessee, would want sports betting under her agency’s watch. There’s nothing inherently wrong with that, and certainly the TELC is capable of setting up the state for success in sports betting. The hiring of Roberts, given her experience and reputation, was received by many as a very good sign.
However industry sources speaking on the condition of anonymity told TNBets that Hargrove has proven challenging to work with over the years, and has shunned some applicants or prospective licensees and vendors seeking meetings with the TELC to discuss the sports wagering opportunity. More concerning, an industry source indicated that Hargrove may have already picked winners and losers, if not a single winner: IGT, which has serviced the TEL’s lottery products since 2004 and in 2018 re-upped through June 2025.
It’s speculation at this point if Hargrove and the TELC might go in the same direction of the lotteries in Delaware, Montana, Oregon, Washington D.C. (extremely controversially) and most recently New Hampshire.
New Hampshire is the best comparison as a state where sports wagering was just legalized in 2019, and by statute the Lottery, granted regulatory oversight, was permitted to license up to five operators for mobile/online wagering. It ran an RFP process and ultimately chose just one: DraftKings, which promised the highest percentage of revenue to the state. Kudos to DraftKings for winning exclusivity, but the net effect is zero competition in New Hampshire’s marketplace, plus it seems to undermine the legislature’s intent, just as it would in Tennessee.
There is not a cap on the number of operators established in Tennessee’s law. Here’s some language from the the law itself:
That’s licensees, plural, twice.
Odds and ends and what’s next
The TELC is likely to receive a healthy number of comments on the aforementioned clauses from a variety of in-state stakeholders, suppliers, sports leagues, national operators, bettors wanting access to a fair, legal market, and others.
Other provisions generating some consternation concern requirements about advertising restrictions (“Sports Gaming Operators shall provide all advertising and marketing materials to the TEL for review/approval, no less than thirty (30) days prior to publishing materials”), maintenance of licenses and the sharing of user data, membership in a “Global Lottery Monitoring System,” and other issues.
But no provisions or potential political dynamics as a whole are more threatening to the consumer and the industry than the three items discussed above.
Who has a say? Well, anyone reading this. Roberts on social media has encouraged people to submit comments, adding that they will be carefully reviewed and considered.
I would strongly encourage comments on the proposed regulations be submitted through the public comment portal. These comments are being reviewed and considered. https://t.co/s73MitGVsN
— Jennifer Roberts (@JRoVegas) December 11, 2019
Who also has some say? A nine-member sports wagering advisory council was appointed, including former FBI agent Brian Fazenbaker, Business Operations & External Affairs for the Memphis Grizzlies, Kandace Stewart, and Samuel Lee, chief deputy in the Knox County District Attorney’s Office, among others. But it’s unclear just how much influence these political appointees will have on the final regulations.
The next meeting for council is set Jan. 14, 2020 at the Tennessee Education Lottery Corporation Board Room. The period to submit comments on the draft regulations ends on Dec. 23, 2019 at 11:59 pm C.T.
The dates are circled, and there’s a lot at stake.
Update, Friday Dec. 20:
According to the TN Lottery website, the comment period has been extended and will now close at 11:59 p.m., CT on January 6, 2020.