Legal sports betting is an imminent possibility in California.
Voters will face a pair of questions on the issue when they turn up at the ballot box this fall. Both ballot initiatives garnered more than a million signatures and more than $100 million in preliminary support.
The retail proposal, known as Proposition 26, would allow California’s Native American tribes and horse racing tracks to offer sports betting at their brick-and-mortar gambling facilities. Proposition 27, meanwhile, would bring commercial online betting to all non-tribal lands across the state.
Should the people of California approve the digital option, their market would be poised to dominate the US sports betting landscape. According to PlayCA forecasting, the state could collect upwards of $200 million in taxes on some $3 billion in gross revenue during its first full year of online operation. Reaching those heights would require bettors to wager more than $40 billion.
Expectations for the tribal measure are substantially smaller because of the geographical limitations of retail betting.
Starting point for California sports betting projections
Our outlook for Prop 27 is rooted in the presumption that per-capita betting volume in California will begin in the range of $1,000 to $1,200 annually, which is already a bold start.
For the sake of reference, only Nevada ($2,624) and New Jersey ($1,176) managed to reach four figures of per-capita handle in 2021. Both of those markets are relatively mature, and both are subject to unique circumstances. Nevada primarily relies on gambling tourism to power its industry. New Jersey’s totals were similarly skewed by visiting bettors from New York before its expansion in early 2022.
We think the specifics of the California market — namely its existing sports and gambling industries and its US-leading population and tourism — will set it apart from the pack. Given the average operator hold across the country, a competitive online betting industry should yield around $75 of revenue per capita.
A retail CA sports betting implementation would still be the largest of its kind in the country, but per-capita revenue would struggle to reach $25. That would put the ceiling for annual proceeds to the state below $100 million, presuming a 10% share from tribal operators. It’s also reasonable to expect that a retail betting operation will take two or three years to ramp up to an initial state of maturity.
If both measures somehow manage to pass, online sports betting in California would swallow a substantial share of the prospective retail revenue, but, perhaps, not as large of a share as we’d expect in other jurisdictions. Online platforms generate more than 90% of the total sports betting proceeds in most modernized markets.
Other assumptions baked into the numbers
Our forecast for Prop 26 presumes that brick-and-mortar sportsbooks will pop up at most of the 66 tribal casinos and the state’s four selected horse racing tracks.
Most of the tribal properties are not especially convenient to the population centers of Los Angeles, San Diego and San Francisco. They’re not inaccessible, though, with facilities scattered throughout the northern mountains, the central valley and the inland empire of Southern California.
The tracks, perhaps, are poised for an outsized role in the industry thanks to their proximity and the prominence of courses such as Santa Anita Park and Del Mar in sport of horse racing.
In-person betting is frankly not a significant factor in the overall outlook, however, presuming Prop 27 passes to make online betting available throughout the majority of the state.
As for online betting, PlayCA presumes that the implementation in California ultimately will consist of the 10 largest brands in the US. The top half of those brands will account for 80%-90% of the total volume in the state, with the bottom half carving their small share out of the remainder. FanDuel and DraftKings almost certainly will seize early control in California, as has been the case in nearly every US market to date.
There is no number of online operators that would substantially increase PlayCA’s forecast, though the exact roster of brands conceivably could move the needle. It’s reasonable to think a market the size of California might attract interest from some of the world’s largest bookmakers, perhaps a company like bet365 or another international heavyweight looking to move itself to the front of the North American betting conversation.
The terms of the referendum, however, create a strong priority for the brands that are already the most prevalent across the broader US.
State-specific factors for sports betting in California
There are other demographic factors to consider in the forecast for California sports betting, too, not the least of which are the state’s 40 million residents and top-15 median household income.
California also leads the league in domestic and international tourism across all four seasons. The state welcomes around 250 million annual visitors, some of whom undoubtedly will dabble in sports betting during their time there. Nevada is the only other US market in which tourism plays such a key role in the overall financial outlook.
There’s also the sports landscape to consider.
California is rich with assets in this regard, boasting 21 major professional teams and 25 college programs that compete in NCAA athletics at the Division I level — also the most in the country. Prop 26 would prohibit betting on those in-state college teams, creating a modest reduction in the total output. Prop 27 does not contain any restrictions on college betting.
It’s also worth mentioning that online sports betting will mostly not be permitted on tribal lands regardless of which referendums pass. These reservations cover well under 1% of the land within California’s borders. Still, their exclusion could knock a couple of points off the expectations, given their role as destinations for gambling in the state.
A billion dollars of free bets?
The allowance for promotional deductions in Prop 27 is one of the most important factors that help determine how much revenue the state could ultimately make.
Comparing other markets with a similar tax calculation, promos represent around 40% of the total gross revenue. That is, operators are deducting around 40% of their gross revenue in the form free bets and sign-up bonuses to reduce the net amount of sports betting proceeds available for the state to tax.
We’ve discounted this percentage in our forecast, partially because of the pure scale of California’s prospective industry. Even reducing the promo expectation to one-third of gross revenue, though, operators figure to award around $1 billion in promotional credits and other bonuses during their first-year scramble to acquire customers.
Deducting those bonuses from the gross forecast leaves operators with about $2 billion in taxable revenue, yielding that $200 million annual tax forecast at the proposed 10% rate. These deductions will trim the effective tax rate on gross revenue down closer to 7%.
Only New York, with its outlier 51% tax, can expect more annual revenue from sports betting than California.
California online sports betting opportunity
For operators and other companies involved in sports gambling, California represents the single largest opportunity in the US. The sheer number of eligible bettors makes it more appealing than any market in the country, and the friendly financial terms and limited licensure create a dream scenario for those allowed to enter the ring.
Launch in California would bring unprecedented spending in the scramble to acquire new customers in the nation’s largest sports betting market. New York’s January expansion has already provided a glimpse of what’s to come, with billions of dollars waiting to be pumped into advertising and promotions. This is another component of the industry in which FanDuel and DraftKings will lead the field for the foreseeable future.
Despite the modest tax rate, the largest brands likely will operate at a loss in California during the primary acquisition phase. The PlayCA forecast figures that promotions will shave a third of gross revenue for the first full year of operation, and that might even be a conservative line. That number is closer to half in some newer markets, such as Arizona and Colorado.