Bloomberg Law
Oct. 27, 2021, 8:00 AM

Five Lessons From New Jersey’s Esports Gambling Experience

Harry Jackson
Harry Jackson
Fox Rothschild LLP

Should esports platforms be defined as iGaming or sports betting? This classification is vital to gambling jurisdictions that limit the number of iGaming/sports betting “skins” or branded websites that can be offered by a casino operator, as esports betting platforms look to enter into new agreements with casinos to offer their product.

These exclusive skins are being scooped up by the larger internet gambling and sports betting platforms, effectively “freezing out” any esports-specific platforms from being able to do business in that jurisdiction. As state legislatures look to define “esports” for purposes of expanding gambling offerings, we must review the need for also including regulations for esports-specific skins.

This is a major issue in New Jersey where almost all of the skins are already accounted for, and the cost of skin agreements is prohibitive to new esports companies due to limited licenses.

As more U.S. gaming jurisdictions begin to introduce legislation to authorize esports betting, esports operators may find themselves on the outside looking in when entering jurisdictions that limit the number of available branded websites or “skins.” Lawmakers and regulators looking to expand into esports gambling can look to New Jersey’s model to learn valuable lessons on how to structure their own related legislation.

Limited Skins Can Go Fast

Setting a hard cap on the number of skins available can “freeze out” the esports industry. In New Jersey, each licensed land-based casino has an opportunity to apply for an internet gaming license, and each casino or racetrack may apply for a sports wagering license. New Jersey allows for each internet gaming licensee to partner with up to five unique brands or “skins” to provide websites offering internet gambling games. New Jersey also allows each sports wagering license to partner with up to three skins to provide online sports betting. This means that there are a finite number of skins available in New Jersey.

New Jersey legalized internet gaming in 2013. As the New Jersey online gaming industry nears the end of its first decade, operators have already scooped up the majority of available skins, raising the price of the remaining available licenses due to dwindling supply. Similarly, New Jersey legalized sports wagering in 2018, and online sports betting skins are in even shorter supply.

Esports Betting Needs a Classification

Even if a new esports betting operator in a limited skin jurisdiction could afford one of the available skins, which skin would it need to enter the market?

With “sports” in the name, one would assume that an esports betting provider would be required to obtain an online sports betting skin. Many jurisdictions, however, do not clearly include all types of esports as part of the definition of sports available for wagering.

If an esports betting operator were to take wagers from spectators of a live League of Legends tournament, the activity would likely fall under the sports wagering regulations and a sports wagering skin would be required as spectating a live competition would be similar to watching and betting on a “traditional” sport.

But what if an esports betting operator were to design and offer its own competitive video game for patrons on its platform? What if players could wager on their own performance in an online game of Fortnite or Valorant? This offering may be akin to how online betting operators design and offer slot or casino games, and a state could require an internet gaming skin instead.

Without a clear definition, a gaming regulator has discretion to require one or both types of skins, depending on the underlying activity. Obtaining one skin is already going to be costly, especially for a brand new operator—requiring the operator to obtain a skin of each type would likely force the operator out of the state entirely.

How To Handle Taxes?

The internet gambling vs. sports betting classification will also affect the tax treatment of the underlying revenue. New Jersey set a 15% tax on gaming revenue derived from internet gambling, but online sports betting revenue is taxed at 13%.

Without knowing exactly how much they will be taxed, eSports betting operators are walking blindly into negotiations for a skin.

The Cost is Climbing

Only one esports operator currently holds a gaming skin in New Jersey, and it did not come cheap. In late 2020, Esports Entertainment Group Inc. (EEG) announced that it had entered into a Sports Wagering skin agreement with Twin River Worldwide Holdings Inc. (Twin River), which operates Bally’s Atlantic City.

Per EEG’s SEC filings, the terms of the agreement require EEG to pay Twin River $1.5 million and issue 50,000 shares of common stock upon the launch of EEG’s website, with another $1.25 million and 10,000 more shares due annually for the 10-year lifespan of the agreement. New Jersey hopes that additional esports operators will join EEG in the market.

Create a Third Type of Skin

So what is the fix? The easiest solution would be for a legislative change that would define esports under its own category of skin—separate from internet gaming or sports wagering.

New Jersey has already amended its sports wagering law to clarify prohibited types of esports wagering, so it is not adverse to making edits to the existing law. By carving out a third category of gambling skin, esports operators would not be left to guess which type of skin they need and what their tax treatment would be.

This solution could also help to reduce the costly barrier to entry for esports betting operators, as they would not be required to compete for one of the few remaining internet gambling or sports wagering skins.

Regardless of the fix, gambling jurisdictions utilizing the limited skin model that are looking to court the lucrative esports betting market need to consider this painful barrier to entry to their markets for esports betting operators, due to the unique qualities of esports.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owner.

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Author Information

Harry Jackson is a partner at Fox Rothschild LLP, a member of the firm’s Corporate Department and co-chair of the firm’s American Indian Law Practice Group. Based in Atlantic City, N.J., he focuses his practice on gaming regulatory and compliance matters, including emerging sectors and technologies.

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