TheChek News Flow

Bookmakers have always been busy on Super Bowl Sunday, but this year will be a bonanza like never before. Bettors are on track to wager $7.6 billion on the game, up 78% from last year, and it’s not because the office pool is getting bigger.

Legal sports gambling has now spread to 30 states and Washington, D.C.—home to more than 130 million. In the four years that it has been legal, both the amount of money bet on sports and the amount counted as revenue by gambling companies have risen nearly 1,000%, to $57 billion and $4.3 billion, respectively, according to the American Gaming Association, or AGA.

In New Jersey, which led the way in allowing sports betting, $10.9 billion was wagered in 2021. That’s $1,200 for every man, woman, and child in the state.

Yet the business is still in its infancy in the U.S., as a handful of companies fight for position, flooding newly opened states with ads to grab customers.

DraftKings DKNG+2.41% , MGM Resorts International MGM-3.42% , Flutter Entertainment ’s FLTR+2.46% FanDuel, and Caesars Entertainment CZR-3.18% have collectively grabbed 80% market share, according to MoffettNathanson, though others like Penn National Gaming PENN-2.83% and Bally ’s BALY-0.77% are also in the mix.

MoffettNathanson analyst Robert Fishman likens the opportunity to the early days of movie streaming, with one crucial difference: Each state has become its own extremely competitive market.

“We are still in the very early stages of this war,” he writes.

Gambling companies spent $725 million on television ads in 2021, three times as much as on cereal ads, according to Nielsen. Such levels of spending, in addition to giveaways to bettors, mean that these companies could report losses for years, until consolidation winnows the field and a few winners emerge. DraftKings has said that online sports betting could be a $22 billion to $36 billion market when it matures, up from around $4 billion today.

In the near term, bettors can look forward to a bonanza of opportunities, but one that could also come with a steep societal price tag.

Gambling is taking off at a moment when speculation of all sorts has boomed, fueled by pandemic boredom and the growth of easy-access apps. Options trading, one of the riskiest ways to bet on stocks, has soared to record highs, and millions of people bet on cryptocurrencies promoted by celebrities.

Researchers have found that these various forms of speculation are connected behaviorally—and that some kinds of financial trading could even be classified under criteria that characterize gambling disorders.

While betting might seem to be everywhere, it is also largely hidden, because bettors can seamlessly connect the apps to their bank accounts and wager quietly at home on their phones. Even as banks track the industry’s growth and gambling companies gather reams of data on the financial behavior of their customers, it is difficult to find statistics on how many people are betting, and who might be getting into trouble doing it.

“My fear is that we will never know,” says University of Massachusetts professor Rachel Volberg, who has been leading research on gambling for more than 30 years. “There literally is almost no funding for conducting research on those impacts as they play out in real time.”

Companies say they are paying for more research, with DraftKings announcing “multiple financial commitments” last year, including a study on military veterans and gambling and a three-year prevalence study.

The few statistics that have emerged are worrisome. A survey taken last year on behalf of the National Council on Problem Gambling, which hasn’t yet been released publicly, found that the percentage of people needing to borrow money to pay bills or debts because of gambling has tripled since 2018.

Sports bettors, the council found, are at least twice as likely to develop problems as the average gambler.

Calls to the national gambling hotline soared 45% in 2021 to 257,000. In New Jersey, calls to the state’s gambling hotline about sports-betting concerns more than doubled in the past two years.

In the United Kingdom, a government report said that problem gambling has been lucrative for the industry, finding that “60% of its profits come from the 5% who are already problem gamblers, or are at risk of becoming so.”

The AGA says that companies have spent hundreds of millions of dollars on responsible-gaming initiatives. These include public-service campaigns, employee training to spot problem gambling, and money for studies.

Companies give people options to stay out of trouble, allowing them to set limits on what they can spend and how long they can gamble. Employees look for red flags like players spending beyond their means.

Casey Clark, senior vice president of strategic communications at the AGA, says the industry has no intention of targeting vulnerable people, noting “that’s not the way you build a sustainable market.”

Sports betting launched first in Nevada, but the modern era really began in New Jersey.

The U.S. had been slow to adopt online gambling. Australia passed rules regulating it in 2001, and the U.K. followed in 2005. Online casino games were considered illegal in the U.S. until 2011, when the Department of Justice gave it the OK, though federal law still prohibited sports wagering.

That changed in 2018, when New Jersey won a Supreme Court case that allowed states to decide whether they wanted sports betting or not. Three weeks after the ruling, a bill to authorize sports betting was passed by the New Jersey legislature.

Casinos were at the center of the action when the state launched sports betting in June 2018. Initially, people could bet only at physical locations. When online gambling started in August, any company that wanted to operate had to team up with a physical casino or racetrack. Atlantic City’s Resorts Casino, one of three initial operators, teamed up with DraftKings. That first month, the physical sports-betting market was three times the size of online. Now, in-person sports betting is dwarfed by the virtual variety—in 2021, people wagered $9.9 billion online in New Jersey and $987 million in person.

New Jersey was the test case for sports betting, and companies say it has clearly passed. DraftKings CEO Jason Robins had told investors that it would take two to three years for a state to become profitable. Last year, the company said that its “contribution profit” in New Jersey was $8 million in 2020, projected to be $65 million in 2021. “Every state that we’ve launched since is on a very similar, if not better, trajectory” than New Jersey, DraftKings’ chief financial officer, Jason Park, said in December.

On a per capita basis, New Jersey is becoming a cash cow. Gross gaming revenue per adult came to roughly $100 in 2021. In the U.K., a long-established and profitable market, it was $64, at least as of 2020, according to MoffettNathanson.

That’s no guarantee that every company will succeed. Today, competition in the Garden State is fierce—10 casinos and racetracks offer online betting under 23 brand names. But the top players have grown much faster than the also-rans. Big players have the technology and marketing to overwhelm the market, and some had head starts—FanDuel and DraftKings have been offering fantasy-sports betting for years.

“Though there is a lot negative written about the levels of marketing and promotional spending, this has driven a very concentrated market that only players of scale can really compete in,” wrote Morgan Stanley analyst Thomas Allen. In every state that releases data, the top five operators have at least 82% market share, he calculated.

In an interview, Allen notes another trend that benefits operators. When sports betting takes off, online casino gambling generally does, too. New Jersey offers a case in point. Online gambling has been legal there since 2013, and was a $246 million market in 2017. “So, then they legalized sports betting, and online gambling in New Jersey in 2020 was a billion dollars,” he says. “And it looks to have grown about 40% in 2021.”

That’s great news for the companies. The apps offer crossover products, making it easy for someone who likes baseball to also dabble in blackjack. And online casino gambling tends to have better margins and be more predictable for the companies. With sports betting, the house has an advantage, but strange outcomes in games can be very costly and lead to disappointing results.

Online casino gambling is legal in only seven states now, but analysts see it accelerating as public perceptions of gambling continue to change.

The tax dollars from gambling in New Jersey largely go to programs for seniors, and lawmakers are clearly happy for the revenue. Some aspects of the boom, however, have made supporters of sports betting in New Jersey uncomfortable.

“I’m not a prude when it comes to gambling,” says Assemblyman Ralph Caputo, an Essex County Democrat and a former casino executive who voted for the 2018 legalization. But he says he is concerned about the social costs and the marketing.

“We tried to take it out of the illegal arena,” he tells Barron’s, “and now we’re behaving worse than they did.”

Caputo introduced a bill in June to divert people with gambling problems who are accused of crimes to alternative kinds of prosecution.

States where gambling has been legalized usually hail the tax dollars the business brings in. New Jersey, with a tax rate of 14.25% for online sports wagers, appears to have opened its market on the cheap, compared with neighboring New York, which recently introduced a 51% rate and still drew enormous interest from companies and gamblers.

“We’ve got to look at that,” Caputo says. “We’ve got to make sure the state is getting enough out of it.”

In its first month, sports betting brought in $58 million in taxes to New York, more than half of New Jersey’s annual haul.

As they followed in New Jersey’s wake, states have taken different approaches to authorizing sports betting and online gambling. Regulations and tax rates diverge wildly.

In Illinois, for instance, bettors had to be physically present at a casino or racetrack to sign up, forcing Chicagoans to travel 160 miles to East Peoria to log in to their FanDuel accounts. States now compete over bettors, in the same way they woo businesses across state lines with tax breaks. Gambling companies use GPS to track customers and make sure they’re playing in a legal state.

Until betting became legal in New York last month, people drove across the George Washington Bridge to New Jersey and sat in parking lots to place wagers.

More states are expected to open their markets this year. California could legalize sports gambling in 2022, and Texas might not be far behind. MoffettNathanson projects that the opportunity from states where betting wasn’t legal yet as of last year is larger than it is from ones that already legalized it.

Yet states don’t always take into account the potential harm from gambling, says Daniel Umfleet, the CEO of Kindbridge, a telehealth company that offers counseling for gambling addiction in several states. Massachusetts has done the most to prepare, undertaking a major study before approving gambling and preparing to dedicate significant money to treatment, Umfleet says. New Jersey is training gambling counselors throughout the state. “In other states, they’re just not there,” he says.

While the states have taken into account the casino industry’s concerns about market share, researchers say there has been much less attention paid to social costs.

“What has been evident to me is the lack of due diligence,” says Robert Williams, a professor at the University of Lethbridge in Canada who has studied U.S. gambling for decades and is currently doing research for Massachusetts. He thinks most of the U.S. has been a “wasteland for gambling research” even as betting expands faster than it ever has before. In the past, new initiatives like expanded lotteries resulted in wide calls for independent research, he says.

This time, research is proceeding slowly, often after gambling has spread widely. The last national prevalence survey to examine how many people are gambling, and how many may be getting into trouble, was taken in 2018 when online sports betting had barely begun.

U.K. gambling company Entain ENT+1.10% is paying for a national prevalence survey through the National Council on Problem Gambling that is expected to come out next month. The council says the company had no input into the study design.

Countries that were early to online gambling, meanwhile, are considering rewriting their laws to try to combat its negative societal effects. The U.K.’s public health agency found more than one suicide a day was linked to gambling.

U.S. policy makers, in contrast, have so far been content to leave regulation and supervision to the states. The federal government does little more than collect a 0.25% excise tax.

That’s a big problem, says Brian Hatch, a 39-year-old from Connecticut who sought help in several states as he struggled through gambling addiction and personal bankruptcy. He now has a podcast about gambling addiction where he speaks to everyone from counselors to gambling executives.

“Until the federal government steps in, I don’t think anything’s going to change,” he says. “I would pray that the federal government comes in soon, because there’s just a lot of harm that will happen over the next few years until that happens.”

Industry executives, however, argue that the federal government doesn’t have a good record on the issue. “The federal government tried to oversee sports betting for a long time by prohibiting it,” says the AGA’s Clark. “All it did was enable a large, pervasive, and predatory illegal market to grow and thrive.”

Legalization, he says, brought sports betting out of the dark and gave Americans a “safer alternative.”

The face of problem gambling is changing as betting moves online.

The public’s image of it was once shaped by Off-Track Betting parlors—“cigarette-stained floors and very sad-looking people throwing their tickets in the air and screaming at TVs,” says Hugh Tallents, a consultant at cg42 who has worked with U.K. and U.S. gambling companies.

That no longer applies.

“Now it’s people with the newest iPhone sitting in their living room, placing bets with their friends,” says Tallents. “It becomes almost like a collegial experience.”

Indeed, the people who are gambling on sports, and sometimes getting into trouble, are more likely to be younger men, researchers said. And that sets up more problems later.

“We know that the younger people start gambling, the more likely they are to develop a problem down the road,” says Lia Nower, director of the Center for Gambling Studies at Rutgers University.

A U.K. government study published in 2020 classified 55,000 children ages 11 to 16 as problem gamblers. There hasn’t been a large study of adolescent gambling in the U.S. since 2010, researchers say.

Nower says it’s too early to tell if young people in the U.S. are getting in similar trouble, but her work in the court system and anecdotal evidence from clinical work raise red flags.

“A lot of kids as young as seventh and eighth grade are reporting that their parents are allowing them to place sports bets on their accounts,” she says.

Further legitimizing sports betting have been the professional sports leagues that once lobbied and even filed lawsuits to stop its spread. Now, National Football League icons like Peyton Manning appear in gambling ads, betting logos are digitally emblazoned on pitcher’s mounds, and betting kiosks have been set up at stadiums of teams like the National Basketball Association’s Phoenix Suns and Major League Baseball’s Washington Nationals.

Research shows that children are internalizing the gambling ads. “Very young children can remember the gambling terms from these ads, can sort of replicate the excitement in the ads, and indicate as soon as they can, they want to begin placing bets,” Nower says.

Among the biggest potential growth areas for U.S. gambling is in-game betting, which accounts for about three-quarters of revenue at U.K. sports books but is well below that in the U.S.

People don’t just bet on the outcome of games anymore, but on events within each game or competition, including something as immediate as the next team to kick a field goal. That kind of betting plays into some problematic gambling tendencies, Nower says.

“That really plays toward people’s impulsivity,” she says. “And there’s a lot of research to show that what you do when you’re in a hot emotional state is very different from what you would choose to do in a cold emotional state.”

The always-on nature of sports-betting apps means that people sometimes end up gambling on events they know nothing about, just for the thrill of the action.

Jeffrey Wasserman, the judicial outreach and development director for the Delaware Council on Gambling Problems, runs a gambling support group for about 90 people that meets on Zoom.

“I’ve spoken to people who bet on tennis matches in Romania at two o’clock in the morning our time because they needed the action,” says Wasserman. “It was nothing about the game itself. They just needed to have money on the line.”

When Wasserman himself was gambling obsessively a decade ago, he would have to plot out a series of lies to get out of the house and to the casino. Now, the people he helps can bet the same sums without those elaborate deceptions.

“You can sit next to the person that you’re hiding it from,” he says. “If they’re not looking at your screen, you could be gambling away, and nobody would think twice.”