Analysis: Maryland Online Sports Betting Success; Tax Revenue To Come

Posted on December 13, 2022

In many ways, the Maryland online sports betting launch was a success. The market opened for business on Nov. 23 with seven online sportsbooks.

During the first nine days, those operators handled $160.2 million worth of wagers, generating $25.9 million in gross sports betting revenue.

However, Maryland sports betting tax revenue actually decreased following the addition of online betting.

The Maryland Lottery and Gaming Control Agency released its November sports betting revenue report Monday morning. According to those numbers, the state only received $704,728 in tax payments, compared with $781,642 in October when only retail betting was available.

This dip in tax revenue comes despite the largest sports betting handle in state history. Between retail and online betting, Maryland bettors placed $219 million worth of wagers.

But not to worry. This is only a short-term trend.

Promotional spending means limited Maryland tax revenue in year 1

Maryland bettors who sign up for an online sportsbook account are flooded with initial offers. Deposit matches, free play and other sign-up promotions are used by operators to attract new customers.

It’s essentially part of their marketing budget. The companies are spending their own money to gain loyal customers and, ultimately, market share. It’s especially common in new markets such as Maryland where a first-mover advantage is key.

But in Maryland, as in most states, companies can deduct this type of spending. Since it comes off their bottom line, taxable revenue isn’t anywhere near the gross gaming revenue.

For example, FanDuel Maryland accepted $89.9 million worth of bets and generated slightly more than $11 million in revenue. But their promotional spend was $29.4 million. As a result, their taxable income was in the red. They reported a loss of $18.6 million.

Bingo World and online sportsbook partner BetRivers Sportsbook was the only online licensee in Maryland in the black after deductions. They reported $28,410 in taxable revenue and paid $4,261 to the state.

Gross revenue for Maryland operators was a combined $25.9 million, but statewide taxable revenue from online operations was -$38.3 million.

Maryland regulations will fix this trend

Luckily for Maryland state coffers, unlimited promotional spending is only allowed for the operators’ first fiscal year. After that, promotional spending is capped at 20% of its taxable win from the prior year.

Maryland regulators allow operators to declare what their fiscal year is. For most operators, the fiscal year is the same as the calendar year. Therefore, most online licensees that launch before the end of the year will have unlimited promotional spending until 2024.

These rules allow the market to mature organically. By the time promotional spending is capped, the sites will have already established a foothold and set up the state for a fruitful future.

Maryland Sports Betting Revenue Analysis

Maryland’s launch compares well with major betting markets

Outside of tax revenue, Maryland’s November report bodes well for the future of online sports betting in Maryland. Numbers from these first nine days hold up favorably compared with other major sports betting jurisdictions.

During the first 10 days of online sports betting in Michigan, the 11 operators handled $115 million and generated $13.3 million in gross revenue. Those operators also posted taxable revenue in the red. Michigan is one of the most successful sports betting markets in the country, and Maryland outperformed it in handle and gross revenue.

On a per capita basis, Maryland held up well even compared with the largest gambling market in the country.

New York allowed its residents to bet online last January. In its first nine days of operation, the state’s four online sportsbooks handled $603 million worth of wagers, resulting in $48.2 million in revenue. Given that Maryland’s population is slightly less than one-third that of New York’s, the Old Line State is only slightly behind New York’s current pace.

On the other hand, the Empire State is one of the rare exceptions where promotional spending isn’t deductible. Thus, the tax revenue for the New York government was much higher than Maryland’s.

That system is good in the short term for public coffers but bad for the industry’s health. It’s part of the calculus that all states are up against as they decide their sports betting markets.

Sportsbook hold percentage is still incredibly high

A sportsbook’s hold percentage is what percentage of the total handle operators keep as profit. Historically, the average is anywhere between 5% and 7%.

But Maryland sportsbooks’ hold percentage is nearly double the upper end of the spectrum. Since the inception of sports betting about a year ago, Maryland sportsbooks have a 13.5% hold percentage.

Online sports betting, as predicted, added a ton of new betting to the market. The law of large numbers dictates that as more bets are placed, the hold should start regressing to the average.

That hasn’t happened yet. Online sportsbooks reported a 13.9% hold for November. However, this could stem from many novice bettors attracted by sportsbook promotions. As the market matures and sharper bettors stick around, this figure is still expected to drop. But month to month, there will be fluctuations, often based on how the home teams do in a given month.

The state’s brick-and-mortar sportsbooks posted a 14.4% hold during November.

Sports bettors flock to established brands

One of the most shocking takeaways from the Maryland report was how much of the market share went to DraftKings and FanDuel. We knew they’d lead, but not by this much of a blowout.

The two major online sportsbooks made up 85.7% of the total market. FanDuel reported a handle of $89.9 million, which represented 48.3% of the total online market. DraftKings Sportsbook MD handled $69.6 million worth of bets — 37.4% of everything wagered online in Maryland.

BetMGM Maryland was a distant third with a handle of $15.1 million.

The numbers show just how little an established retail brand meant to Maryland bettors. Yes, FanDuel partnered with Live! Casino & Hotel, but the online experience doesn’t have the Live! brand visible anywhere.

MGM National Harbor is the highest-grossing brick-and-mortar casino in Maryland. Last week, when the MLGCA released the casino revenue report, MGM National Harbor reported gross earnings of $71.6 million for November. Yet, its online sportsbook only managed to garner about 8% of the market.

It was even worse than that for Caesars, which has a casino presence in the state with the Horseshoe Baltimore. The same is true for Hollywood Casino Perryville, which partnered with Barstool Sportsbook to run its online operation.

Those brands came in fourth and fifth place for Maryland handle, as expected. However, Caesars combined with Barstool to take just 5% of the state’s bets.

Promotional spend, marketing needed to catch FanDuel and DraftKings

In New York, where Caesars doesn’t have a brick-and-mortar presence anywhere in the state, the Caesars online sportsbook was able to compete thanks to massive promotional spending. Despite the inability to write off promotional spending from their bottom line, Caesars claimed nearly 43% of the market in the first 10 days.

In Maryland, they only spent $707,790 on promotions. By comparison, FanDuel spent $29.4 million and DraftKings wrote off $26.6 million. They combined for $56.1 million of the $63.8 million total spent on promotions in the state.

Plus, perhaps the steam from last football season’s national Caesars campaign has been lost. While JB Smoove was all over TVs last football season, the brand has reeled back advertising this year in an effort to become profitable.

As for Barstool, founder Dave Portnoy did not appear in Maryland after the launch, as in several other just-launched states. The Barstool ground game was not activated, and Barstool’s early Maryland numbers reflect that lack of attention here.

It just shows that to earn market share in the sports betting game, you have to pay to play.

Photo by PlayMaryland
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Steve Schult

Steve Schult has covered the gambling world for the last decade. With stints as a staff writer for the World Series of Poker and Bluff Magazine, as well as the online content manager for Card Player Media, the New York native covered high-stakes poker tournaments and the overall casino industry. He’ll shift most of his focus to the Virginia, Maryland and Florida markets as a managing editor for Catena Media.

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