California dream turns to ballot ashes

Forecasting the outcome of elections is a tricky business but with the battle of the competing sports betting Proposition ballots in California, it was clear long before polling day that this one wasn’t exactly going to the wire. According to polling conducted by the Public Policy Institute of California a few weeks before the vote, both the retail-only Proposition 26 and Proposition 27, which would allow online sports betting, were destined to fail some way out. Support for Proposition 27, backed by the commercial operators, was polling at only 26% in favour and 67% against while Proposition 26, backed by the tribes, fared marginally better at 34% in favour and 57% against. These percentages were mirrored in the early count where the no vote was running at over 80% for Proposition 27 and over 60% for Proposition 26. In ballot terms this is a trouncing and, for Proposition 27 in particular, it is a verdict that will leave its backers, including DraftKings, FanDuel and BetMGM, struggling to find a path forward.

Where did it all go wrong?

‘Success has many fathers and failure is an orphan’ goes the saying, but with both ballot measures this year it seems clear where the failure lies. Having failed to agree on a measure with the tribes, the commercial operators decided to make their case directly to Californian  voters. With an apparently limitless budget – the Yes to Proposition 27 alone raised $169m – Proposition 27 bombarded the airwaves with ads and paid the price in terms of public reaction. Such was the adverse reaction to the sheer amount for ads that a Berkeley Institute of Governmental Studies poll early in October found that exposure to ads is the “key determinant” behind opposition to both Propositions. Voters who had seen ads for each of 26 and 27 said they would be voting no by a wide margin versus those who had professed to seeing no ads. Such is the apparent power of advertising. Proposition 27 also racked up an impressive list of opponents including both major parties, major media outlets and the Governor Gavin Newsom, who appeared to put the nail in Prop 27’s coffin when he said the measure was “bad for California”. Gene Johnson, executive vice-president at Victor Strategies, a gaming sector advisory business with a particular focus on tribal affairs, is scathing in his verdict. “The online sportsbook consortium made a series of bad decisions on a scale only relatively worse than Mr Putin’s recent moves,” he says. Having opposed the original tribal plan – “a plan put forward by people who actually live in California” as Johnson puts it – they then opted to link a major gambling expansion to homelessness which, he argues, was a “patently transparent gimmick”. Moreover, they went up against the tribal-backed ballot measure when, as Johnson says, “anyone in politics can tell you that two competing measures cloud the issue and increase the likelihood that both will fail”.

After the gold rush

“The commercial operators decided to go the Hail Mary route,” says Gideon Bierer, managing partner at Partis Solutions. “They knew it would cost them $100m+ each but decided it was worth a gamble, especially when they considered the alternative, which was potentially a slow path to a sports betting legalisation that may have been on terms unfavourable to non-tribal entities in any case.” By this analysis, the operators knew the tribes are smart enough to never allow a scenario where each of them, plus the racetracks, has a licence, thus handing leverage to the buyer. “We saw that dynamic a little with the California ipoker wave 10 years ago,” Bierer says. Moreover, for the tribes, the whole discussion about allowing sports betting in California wasn’t an optional debate, it is existential. “It is a point of principle,” Bierer says. “Anything that might impact the current tribal casino industry is highly sensitive, and the tribes take a strategic view. They have time on their side. You can argue the point about the extent of the impact of online sports betting on land-based casino businesses, but however you frame the discussion, it is a potential threat. It opens up new political and commercial dynamics.” There is agreement from those spoken to for this article that the commercial operators knew they were facing an uphill task. “I think they always knew this was a difficult proposition to get through,” says Dermot Smurfit, CEO at GAN, which has hopes of being a supplier to the tribes. “They had the same information everyone had; they knew the tribes were always going to try and stop people muscling in.” Still, the feeling persists that despite knowing how hard it would be, Proposition 27’s proponents were still too optimistic in their assumptions about the opposition. “I think what happened was there was this East Coast ‘we’ll just do it like any other state’ attitude,” says Peter Laverick, chief executive of San Francisco-based Incline Bet, a marketing service provider for US online operators. “The population and wealth of California is a unique market opportunity in the US. There is certainly demand for online sports betting, and the recent media blitz has further heightened the general public awareness here,” he adds. “I do think online sports betting reaches an audience the current casino market doesn’t serve, but ultimately the casinos need to be part of the solution, and the recent aggressive media battle may have caused more problems.”

Where to turn?

Such was the assumed certainty of defeat of both measures in this month’s vote that talk in October at G2E had already turned to the potential for another go around in 2024. From the stage, both Amy Howe, CEO of FanDuel, and Jason Robins, her counterpart at DraftKings, indicated they would try again in two years’ time. “We absolutely live to fight another day,” said Howe while Robins added that it was “hard to imagine California not having sports betting”. Asked about what might happen after the defeat at the polls, only FanDuel of the Proposition 27 backers responded, saying that “after the election there might be opportunity to reflect on next steps more deeply”. But the operators will have noted the comments from another session at G2E later the same day that Howe and Robins spoke at. During a panel on the California situation, James Siva, chair of the California Nations Indian Gaming Association, said the operators should “never underestimate” the tribal opposition. “Whoever these operators are, this is the lesson they have to learn,” Siva added. “Have it tattooed on your body: never underestimate California tribes again.” But John Wellendorf, director of regulatory affairs at Odds On Compliance, suggests that for all the positioning on stage at G2E, inside the Venetian Expo, a more realistic attitude will prevail post-vote. “Operators will be hesitant to commit to that spending again unless there is some signal of a better outcome being possible,” he says. “The tribal resistance to mobile wagering will not go away in two years, and the tribes’ power in California is also likely to stay, so the mobile operators would need a strong reason to try again. Now both measures have failed, there is no clear next move, especially for the mobile operators,” Wellendorf notes. “It’s hard to imagine the state legislature overriding the will of the public in the short term after the ballot measures failed,” he adds. “With that said, it’s also hard to imagine that the state of California is not going to have some form of sports wagering longer term.” The most likely solution to have some form of wagering, so Wellendorf believes, is through a renegotiation of the state’s tribal compact for gaming. “It is much easier politically for the government to work with tribes to reach a solution than for the legislature to work with multinational gaming companies,” he suggests.

Come together

One achievement of this ballot battle is that it has united the tribes. “From my conversations at G2E, this is definitely the case,” says Johnson, who suggests this leaves the ball in their court when it comes to what happens next. He points to comments from Mark Macarro, chairman of the Pechanga Band of Indians, in the G2E tribal leadership panel when he said that “if the operators come back, it will be as technology suppliers and not as sportsbook providers”. “This is an important change that, if adopted, would prevent these companies from operating B2C and restrict them to B2B relationships,” Johnson adds. “It would also open greater opportunity for sports betting providers who did not join the consortium and already have valuable relationships with tribal government gaming – so companies like Caesars and IGT.” Both GAN and Kambi acknowledge such a situation leaves them in a good position. Sarah Robertson, senior vice-president of sales at the latter, points to Kambi’s existing tribal relationship in various states, including Michigan and its recent deal in Washington with the Ilani tribe. “It’s important that we work with tribes to understand what their ultimate goal is and how we can best serve them in helping to launch a successful sports betting offering,” she says. Smurfit is similarly optimistic. “I like our position today,” he says, pointing out that GAN also has some tribal relationships in other states. “Once you are in with the tribes, you are known by everyone,” he adds. The supply-only proposition is, of course, hugely problematic for the commercial operators. The thinking behind the tribal proposal would be to try retail sports betting for a period of time before finally opting for online further down the road and one day in the future, potentially, igaming. “The standing tribal assumption is retail sports betting begets online sports, which itself begets online gaming,” says Smurfit. “But it is incredibly hard to predict the timing. Everyone knows where the ball is going to land but no one knows how high it has been kicked up in the sky.” But for the likes of FanDuel, DraftKings, BetMGM et al, the prospect of the biggest prize in US state-by-state online sports betting and igaming being a supply-only arena is, naturally enough, not one that entices operators. “California is of course a very large jurisdiction, even by global, not just domestic, US standards, but if operators can be only suppliers, then it falls down the priority list,” says Bierer from Partis. Over time, he says, the most critical indicator of the value of a state’s online market is whether both igaming and sports betting are available, since “igaming is on average three times larger than online sports betting in states where both are live”. “So, if Illinois legalises igaming, the Illinois online market could be larger than Californian online sports betting, and with igaming, the New York online market would have twice the potential of California’s online sports betting market and could become the second largest legal global online market after the UK.” Given this, the online industry’s attention will soon switch elsewhere, he adds. “Time will tell when and how the sportsbooks return to California.”

Back in the game

Meanwhile, the tribes will be left to get on with designing a ballot measure that suits their purposes and that they can hope will be put before the voters in 2024. “If sports betting is destined to come to California, one has to think the tribes will hold the power to make it happen,” says Wellendorf. In which case, it will be up to the operators to decide what kind of relationship they might be able to have with the tribes once they are no longer on opposite sides. “I think the better strategy for operators is to sit down with the tribes and work out an amicable solution that both sides support to bring sports betting to California,” says Wellendorf. “A joint resolution would be viewed more favourably by the public for a future referendum, and also potentially allow politicians to get over the optics of passing a law through legislative processes that circumvents the outcome of the 2022 elections.” As with much of the state-by-state opportunity in the US, patience is a virtue. If there is one lesson from the Proposition 27 ballot debacle, then it is that attempting to rush through any measure without taking the temperature of the various stakeholders is a strategy that more often than not leads to failure. Meanwhile, for any California resident hoping that 2023 might have been the year for them to place a legal bet in the state, they are left with no other option. “Unfortunately, the biggest winner here is Bovada and the other offshore books,” says Laverick.