By Dan Linehan
Special to Delaware Business Times
Though Dover Downs Hotel & Casino was among the first movers into sports betting outside of Nevada, they may not have the last word.
The same regional competition that’s bedeviled this 500-room hotel, casino and racetrack in recent years will test Delaware’s three casinos’ early lead in sports betting.
While sports wagering is off to a fast start and projected to create a $20 million market in Delaware by 2020, its revenue is split several ways and unlikely to reverse the pressures on Dover Downs.
“We don’t look at it as a huge revenue driver,” said John Hensley, general manager and senior director of racing and sports betting at Dover Downs. “We look at it as a way to get people in.”
Meanwhile, the company is barely treading water. Dover Downs, Kent County’s largest private employer with 1,375 jobs, lost $1 million in 2017 and continued to lose money in early 2018.
Worse, it was having trouble paying off its creditors. As of early August, the company was seeking to refinance or extend the payback of the remaining $18 million of its debt.
“These factors raise substantial doubt about our ability to continue as a going concern,” the company disclosed in an August filing with the Securities and Exchange Commission. Dover Downs was able to refinance that debt, Dover Downs President and CEO Ed Sutor said.
Since then, the company has been tossed a life preserver. In July, it announced a merger with a much larger and more profitable Rhode Island casino operator named Twin River that, if approved by regulators, is expected to take effect in early 2019. Shareholders of Dover Downs will exchange their stock for a combined 7.2 percent of the new combined company.
Both companies operate in states where the lottery is heavily regulated by the state government.
“We know their business, they know our business,” Sutor said. “It just made sense to merge and we’ll have a stronger company.”
Given the millions of dollars of sports betting revenues that will be up for grabs, Twin River is sure to tap Dover Downs’ experience in colonizing the new market.
Ready for action
On May 14, the Supreme Court struck down a 1992 federal law that had prevented states from legalizing sports betting. The law had grandfathered in the few states with pre-existing sports wagering, including Nevada and Delaware, which briefly experimented with sports betting in the ’70s.
In 2009, Delaware used that exemption to begin offering a wager on multiple NFL games, called a “parlay” bet. That move — along with extra preparation over the previous winter and spring — gave the state a head start into sports betting, and it became the second state to legalize the practice.
“It was an incredible team effort,” Secretary of Finance Richard Geisenberger said. On June 5, Gov. John Carney placed the state’s first bet, for $10 on the Phillies to beat the Cubs. The Phillies were underdogs, and he won $20 when they came through.
Sutor, the Dover Downs president, said he’s “happy that the state of Delaware was aggressive in going
after sports betting 10 years ago,” with the introduction of parlay betting.
Mobile, retail to drive sports betting
The availability of sports betting to consumers — especially the number of places betting can happen and options for mobile devices — is seen as a key driver of its success in a given state, according to an August Credit Suisse report.
As of now, all Delaware sports betting, aside from NFL and college football parlay cards, is limited to
the state’s three casinos.
“The casinos are better suited for everything that goes with betting,” Lottery Director Vernon Kirk said, including having enough cash on hand to pay off winnings.
In New Jersey, there are a number of options to bet from mobile phones, which isn’t allowed in Delaware. Kirk said an expansion to mobile betting here is possible, but would need further investigation.
Sutor said the state is having trouble finding a mobile lottery vendor willing to charge a reasonable fee.
Sports betting no lifeline
Casinos don’t expect to reap windfall profits from sports betting. In Nevada, only 1.1 percent of total net revenues come from sports betting, though they only have one pro “home” team, the NHL’s Vegas Golden Knights.
The recent Credit Suisse report estimates Delaware gamblers will provide casinos with the country’s lowest per-capita spending, of about $23. This is partly because of the state’s relatively high 50 percent tax rate; globally, most markets have rates between 5 percent and 20 percent. The state’s high rates have for years been a source of contention with its three casinos, but their criticism has been muted with the package of a $17 million tax relief bill approved by the Legislature this summer.
While Delaware’s Constitution sets up the lottery “under State control for the purpose of raising funds,” in New Jersey casinos operate independently and taxes are much lower. Even so, in New Jersey the operators have to pay other costs — such as risk management, central software systems and terminals — that are paid for in Delaware through a tax.
Sutor said he’d prefer to see tax rates lower, as the state’s system reduces profits and the incentive to spend money on marketing, but that’s the system his company is operating under.
In single-game sports betting, profits tend to be relatively slim, around 5 percent, Kirk, the lottery director, said.
So far, though, it’s been much higher in Delaware. Profits for all Delaware sports betting — including parlay bets — stand at a sky-high 23.5 percent through Oct. 14. This is in part because that figure includes the higher-margin parlay bets, and perhaps because less experienced bettors are placing riskier bets.
“We’ve had an amazing run to start the season, with a lot of underdogs winning and teams covering [the spread],” meaning the favored team won by more than was expected, Kirk says.
Geisenberger says the law of averages will eventually win out, and profits will decline.
Those slim revenues get slimmer after they’re split four ways in Delaware: First, one-eighth is taken off the top by the state’s lottery vendor, Scientific Games. Of the remaining amount, after winners are paid, half goes to the state, 40 percent to the casinos and 10 percent to horse-racing payouts.
(The lottery’s connection to horse racing started years ago, when video terminals were added to casinos. It was believed that fatter purses would attract more bettors.)
Profits — or the “hold” in gambling terms — from Delaware’s multiple football game parlay bets tend to be higher and more variable because it’s harder to predict the outcome of multiple games. In fiscal year 2017, the hold in Delaware’s parlay betting was 12 percent, compared to 37 percent in fiscal year 2018. Total sales were about $46 million each year.There has been some concern that the expansion into lower-margin sports betting would replace higher-margin parlay bets, but that hasn’t happened in these first few months. College football and NFL parlay bets can be made in any of the state’s 102 Sports Lottery Retailers.
“I think we’ve been pleasantly surprised at how many Delawareans are continuing to make parlay bets,” Kirk says.
Even if sports betting is a minor part of the casino’s profits, it is eyed as a growth opportunity.
In its press release announcing its merger with Dover Downs, Twin River cited the company’s expertise in sports betting, “which we think will be helpful as we introduce that amenity at our properties, and in the online gaming sector which continues to evolve nationwide.”
Addiction funding sought
The state’s expansion into sports betting did not include any more revenue to help treat people who’ve developed addictions to gambling. Arlene Simon, executive director of the Delaware Council on Gambling Problems, says she hasn’t yet heard of many new problems yet, but people tend not to seek treatment until they’ve suffered for months or years.
She says some other states have devoted about 1 percent of their sports betting revenue for addiction services. Delaware doesn’t, but its lottery contributes about $1.5 million a year to address problem gambling.
“Everyone who profits from sports betting bears the responsibility for gamblers’ problems,” Simon said.
Geisenberger noted that sports gambling has long happened under the table, and he isn’t sure legalization will substantially contribute to addiction. Still, he said he’s asked Simon’s group to monitor whether or not they’re seeing more demand for their services as a result of the changes
People who need help for a gambling in Delaware can call the Delaware Gambling Helpline at (888) 850-8888.
Fierce competition expected
While only five states, including New Jersey, have legalized sports betting, more are close behind.
“The complicating factor is the competition, and with New Jersey getting in full swing we expect Pennsylvania to be right around the corner with Maryland maybe a little longer,” Geisenberger said. “I can predict with near certainty they’ll all be in it within the next five years.”
It’s part of a long-term trend for Delaware’s casinos amid the growth of competition in the mid-Atlantic region. At its peak in 2008, gaming was an $8.5 billion industry in Delaware; now it’s closer to $4.5 billion, he says.
“That gives you a sense of what competition meant,” Geisenberger said. “Realistically, we would like to grow the lottery, but if you look at the long-term trends, we should not expect a windfall from this.”
At Dover Downs, about 59 percent of winnings among its Capital Club members come from out-of-state customers, according to its SEC filing. This competition has resulted in a “significant adverse effect” on visitors, revenues and profitability for Dover Downs.
Sutor agreed that Delaware will see a decline in sports betting once Pennsylvania’s system comes online, expected by early 2019, and by Maryland’s entry, which may wait until 2020. Until the big fish move
in, though, the little ones can have their fill.