The regulated gambling industry in the US has been drawing more than the usual level of criticism of late.
It’s probably no coincidence, then, that the American Gaming Association (AGA) chose this moment to release a study highlighting the size of the black and gray markets.
If we take the AGA’s numbers as accurate, Americans are spending $44.2 billion on illegal gambling yearly. That equates to an average of $224 annually, or almost $20 per month for every single American adult.
And that’s only for a few specific types of illegal gambling. In its report, the AGA attempted to produce estimates of the volume of gambling Americans do through the following:
- Offshore sportsbooks
- Offshore online casinos
- Gray market “skill machines”
Defending the Industry’s Reputation
The AGA is a trade group representing the US casino industry, both commercial and tribal. It’s an industry currently facing a minor public relations crisis thanks to less-than-flattering coverage in the New York Times.
Already, New York has begun working on a bill to restrict what types of promotions online betting sites can offer. It’s doing so as a direct result of that article’s characterization of those promotions as “predatory.”
The timing may be largely coincidental. Indeed, enough effort went into the AGA’s study that it could not have begun in response to the NYT piece, though its publication may have been hastened because of it.
Whatever the case, the timing is important. Politicians and the general public may need a reminder that whatever the regulated market’s flaws, it’s better than the black market.
The Black Cloud’s Silver Lining
The $44.2 billion estimated by the AGA is a staggering amount. However, there’s some good news if we look at the breakdown of total gaming revenue.
For one thing, the AGA says that legal gambling was worth $92 billion in the past year. There’s a lot more certainty around that number, as well, since it comes from official revenue reports.
So, by the AGA’s estimate, legal gambling beats illegal gambling by a factor of more than two. In reality, the ratio may be even more in favor of legal gambling.
The AGA estimates that illegal gambling breaks down as follows: $26.9 billion (61%) on unregulated gambling machines, $13.5 billion (31%) on offshore casino sites, and just $3.8 billion (8%) at online sportsbooks.
As a share of all gambling activity, offshore sports betting accounts for less than 3%. With regulated online betting soon to be offered in over half of all states, that’s a testament to the power of regulated markets. Cracking down on illegal gambling rarely works to stamp it out. Providing a better legal alternative does.
By contrast, online casinos are only available in six states. Even so, only 3.3% of the people the AGA interviewed said they had played at illegal online casinos, compared to 11% who had gambled at regulated ones.
Take Industry Guesstimates with a Grain of Salt
That said, we shouldn’t accept the AGA’s numbers without at least a little bit of skepticism. One of the NYT’s main complaints about the industry is how it inflated tax revenue estimates when pushing for sports betting legalization.
The nature of illegal gambling makes such estimates extremely difficult. Regulated gambling companies report their revenue, while unregulated ones do not. The AGA had to make do with a combination of interviews and assumptions that certain aspects of the unregulated business parallel those of the legal market. Given that it published the report to support a policy objective, it’s probably fair to say it would try to avoid erring on the side of an underestimate.
And the error bars on some of these estimates are enormous. For the gray machines, the AGA used states where some data is available to guess at numbers for states without. However, those estimates vary by up to a factor of five, and there’s no guarantee that simply averaging them together as the AGA did will produce something close to the actual number.
More importantly, the AGA’s claims about lost revenue assume that the nonexistence of the black market would transfer all that revenue to the regulated market. In the case of online gambling, that may be true. It may even be the case that legalization increases overall activity. After all, it provides a sense of security and makes deposits and withdrawals easier.
In the case of the gray machines, however, that’s not likely to be true. On that front, the devices benefit from the convenience of being located at stores and bars. Those who use them would not necessarily drive to a casino to play if they were not there. Nor would the states be likely to replace them with casino slots.
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