Size Matters: Quantifying the Illegal US Online Gambling Market

Getting a handle on the size of the illegal gambling market is not easy. Whereas licensed operators report their numbers very publicly, the diffuse nature of the illegal market, in multiple jurisdictions, with different or non-existent reporting requirements, makes sizing difficult. Attempts to date have focused on web traffic to known black market operator sites as a proxy for gambling activity. There is certainly going to be a correlation but there are a couple of shortcomings with this approach. First, there is no indication as to the size of wagers. It could be that they are the same as in the legal market, but an argument can also be made that regular gamblers, attracted to the black market over years of prohibition, will wager larger amounts. Determining the average size of wagers is critical to assessing the size of the illegal market. Second, the data lacks granularity: traffic may increase at peak times around major sports events, for example, but we can only guess at the types of verticals and bets which are attractive.

A study in 2022 carried out on behalf of the American Gaming Association relied on survey data from around 5200 adults. It concluded the illegal market in online sports betting and iGaming was worth US$17.3 billion in GGR in 2022. If anything, this feels like an underestimate given that California alone is projected to be worth anywhere from US$2 billion to US$10 billion by those pushing for legalization.

Now, Yield Sec, an analytics firm specializing in gaming (as well as other online consumer markets), has come up with a methodology which they claim addresses these issues. Its technical platform uses gaming and streaming keywords and phrases to find all instances of commercial and referral gambling content, traffic, audience and advertising popularity. The results are categorized into legal and illegal groups and split by audience personas (and spend propensities), sports, product or event. Once the data is separated, the platform uses AI, machine learning and expert human intervention to rank and value threats to individual stakeholders and the ecosystem overall. The Yield Sec Matrix prioritizes these threats by revenue, market share, player and audience protection, compliance, responsible gaming and potential taxation at the State and National level, according to the calendar and events cycle. Based on the results, its report, How America Bets Online, provides an interesting and far more actionable picture of the scale of illegal online gambling in the US.

The Yield Sec report agrees with the American Gambling Association’s figure that GGR for legal online gambling in 2023 was some US$16.0 billion. However, it claims that this figure was dwarfed by the illegal market which it values at almost US$41 billion accounting for some 70 percent of the total six years after the repeal of PASPA. The report gives a total value for online gaming at US$57.8 billion, up from US$54.3 billion in 2022. The legal market gained the lion’s share of the market growth and even captured US$1.11 billion from the illegal operators, although that was barely 2.5 percent of their business. Legal sites have made biggest inroads in sports betting where the legal market accounts for 35 percent out of a total GGR of US$29.5 billion in 2023. This is consistent with a greater number of states legalizing the sports betting vertical and the consequent growth in the addressable market overall.

The type of sports betting activity also supports the argument that the legal market is attracting customers who may not previously have been regular punters. The average minimum deposit with domestically licensed operators was found to be US$10 and the average minimum payout was also US$10, whereas for illegal operators this figure was much higher, at US$100 and US$130 respectively. Whilst not conclusive, the amounts suggest that a rump of experienced gamblers are yet to be attracted to the legal market. Licensed operators are spending US$ millions on marketing and bonuses, but the data suggests they are missing out on large numbers of higher-value customers. This year will likely see some larger operators moving into profit, but other brands are struggling to establish a foothold. Bringing some of this spending back onshore would mean more of them survive and giving consumers a vibrant and competitive market.

Of course, it is not just operators missing out. Money spent with offshore brands is lost to the local economy where it would otherwise be supporting jobs and other commercial activity. Lost tax revenues also mean communities are missing out on funding for local services.

The persistence of the illegal market and what can be done about it

If it is the case that there is a group of experienced gamblers playing with illegal operators, then it’s unlikely that the industry’s warnings of betting unprotected will have much impact. This group is familiar and comfortable with the illegal market and suggestions their bets will not be honored will probably not ring true. In any case, offshore companies like Bovada, MyBookie and BetOnline are long established and will be trusted by customers. That said, another American Gaming Association report , albeit from 2020, found that more than half of Americans that bet on sports with illegal operators believe they are wagering legally. This will likely have changed in four years, but there will still be an education piece to tackling illegal operators. In some jurisdictions around the world, the licensing authority takes it upon itself to inform the public of the benefits of betting with licensed operators, a far cry from the complete advertising bans seen elsewhere. Certainly, to contemplate, as some states are doing, placing restrictions on all types of gambling advertising at a time when there is a large unchannelized component to the market feels self defeating. Offshore operators pay little or no tax and don’t incur the compliance costs that go with the licensed sector. They are thus at a competitive advantage and can choose to plough much greater sums into marketing and bonuses. Taking away the one advantage that the legitimate industry has is unlikely to achieve the regulatory aims of high channelization, robust tax revenues and strong consumer protections.

Part of the reason for the persistent size of the black market is the presence of so many illegal operators. The Yield Sec report found that whilst there were just over 100 legal online sports betting operators, 860 illegal sports betting operators still target the US market apparently unconstrained. Their position is strengthened by an army of 638 affiliates promoting illegal sites, five times as many as promote legal sites.

No taxation without…

It is no secret that newly legalized states and land-grab promotions by sportsbooks have brought about sizeable growth in gaming revenues. 2023 was a record-breaking year, the third in succession, witnessing commercial gaming revenues reach a record US$66.66 billion, 10.3 percent higher than 202 . Sports betting revenue was up 46.0 percent from US$7.56 billion in 2022 to US$11.04 billion in 2023 with online accounting for the lion’s share of this amount. The iGaming market also continued its explosive growth in 2023, with combined online casino revenues from six active states reaching US $6.17 billion, a 28.2 percent increase. Whilst land-based continues to deliver the bulk of the over US$14 billion in taxes paid by the industry, the contribution of online is in excess of US$2 billion and getting larger.

Al Capone once boasted, “They can’t collect legal taxes from illegal money.” In his case federal agents proved him wrong, but he would have been correct had he referred to illegal gambling which remains untaxed in the states where customers live. The rates of tax on GGR vary widely by state with further complications when it comes to deductions. But if the profits made from money gambled offshore was taxed at just 15 percent, that would equate to at least an extra US$6 billion in tax revenues.

Perhaps to address this perceived shortfall, several states have reviewed or promised to review their tax rates. New York, with an effective tax rate of 51 percent is already making profitable legal gambling in the state practically unachievable. Elsewhere Illinois has switched from a flat 15 percent tax on adjusted gross revenue to a new progressive rate ranging from 20 percent to 40 percent. New Jersey is considering doubling its tax rate to 30 percent and a proposal to boost Massachusetts’ rate from 20 percent to 51 percent failed in May. Just one month after Ohio allowed legal bets, Governor Mike DeWine proposed doubling the tax rate from 10 percent to 20 percent. This was not a revenue-based decision, his office claimed, but designed to send a message to the industry that Ohio intends to take regulation seriously and would not allow a wild west to emerge in sports betting.

On top of state taxes, the federal government collects 25 cents for every US$100 wagered on sports. When the average payout rate is 91 percent or more, this takes an especially big toll because operators are paying tax regardless of whether the house wins or loses. This has led some to call it the illegal bookmaking preservation tax. This last point is relevant when it comes to operators’ role in tackling illegal gambling. The best way to achieve high channelization rates is to have a well-regulated, diverse and financially successful domestic market. Whilst states toy with punitive tax rates, black market operators are content to capitalise.

Regulators worldwide are waking up to the fact that holding their licensees to high standards of consumer protection, anti-money laundering and responsible gambling compliance, with all the costs involved, has to be matched by a more robust attempt to tackle the illegal market. That means enforcement. The Australian Communications and Media Authority has long been at the forefront of enforcement actions with dozens of offshore gambling websites blocked over many years. In the last edition of the IMGL Magazine, we also looked at enforcement steps in Europe and the formation of a collaborative group of regulators to tackle the issue.

In the US, early attempts at enforcement are now being seen with Michigan State blocking Bovada and US representatives calling on the Department of Justice to step in. The challenge is that whilst these services may be termed ‘illegal’, it is not always clear that they have contravened any laws. For operators who have been running gambling sites offshore for many years without challenge, it is no simple task to force them to close. The question is whether there are enough laws on the statute book to shut them down through the courts. A huge effort would be involved across all 50 states to put the illegal market out of business which is why some have called for the federal government to get involved.

For operators, this kind of activity is an essential quid pro quo for the increased amounts of tax they are being asked to pay. But there may be more they can do in the fight against the illegal operations. By working together with regulators, they may be able to apply pressure on their suppliers not to work with the illegal market. Again, Michigan has led the way by requiring suppliers to the internet gaming industry to complete Illegal Gambling Attestation forms.

In the end, a team effort is required. As the Yield Sec report concludes, monitoring, policing and enforcing against the availability and presence of illegals must become a leading strategy for all legal stakeholders, including regulators, operators, affiliates, payments providers, media platforms, law enforcement and state treasury teams. Going after the illegal operators is not the only path Yield Sec advise since controlling the marketplace can be more effectively achieved through controlling the means by which the audience find, encounter and, often unknowingly, engage with illegal gambling: advertising, search and social media promotion. Each stakeholder has their own part to play in the battle for control over the marketplace. Illegal gambling is not simply a problem for the regulator, or for law enforcement: it is a problem for all legal marketplace participants, including operators and affiliates. Only when everyone understands their marketplace, and their status within it, clearly and effectively, and accepts the fact that the marketplace is the victim of criminal activity, can the legal stakeholder community each act in their own best self-interest and do their part to move the needle against crime.

With a US$41billion GGR prize at stake and the consequent taxation that would come from it, with all the commercial and community benefit both can provide, it has got to be worth the effort.