How Sportsbooks Make Money

If you’ve lost a few bets while playing at a sportsbook, the question might seem obvious. How do sportsbooks make their money? By beating me, of course.

But the truth is, for every bet you lose, on the other side, there was someone winning. Thus even though your ticket ended up uncollected and in the trash, there was another ticket being cashed in for winnings.

So that exchange of bets certainly can’t explain exactly how the sportsbook makes any money and why there are dozens of other sportsbooks desperate to get in the game and take your bets.

So what gives? How is this not only a profitable business but a hugely profitable business?

It’s called vigorish, vig for short, and is also known as juice.

Understanding vig

When you and your friend decide to bet $20 on Sunday’s game between your respective favorite teams, that $20 bet means that the winner will receive $20. So why when you bet $20 with a sportsbook do your winnings come out to less than $20?

The answer to that question is simple. The bookmaker charges for its services by attaching a fee to the bet, known as juice, the cut or vig — short for vigorish, which comes from the Russian word meaning “winnings.”

On a rare occasion, you can find a sportsbook that only charges 5% for vig, but the standard across the industry is 10%. That means for each $1.10 you are wagering, you can expect to get back $1 in winnings. And you can see the vig clearly shown in the bookmaker’s posted odds:

  • Chargers -3.5 (-110)
  • Broncos +3.5 (-110)

It doesn’t matter which side you bet; a winning ticket will only pay -110. So to make sure that it turns a profit regardless of the outcome, the bookmaker’s goal is to create a point spread that results in equal action on both sides of the line.

It wants as many people to bet on the Chargers as bet on the Broncos. The bookmaker doesn’t care who wins the game; it cares how you bet and where you bet. And it will move the line if necessary to influence where you bet.

Famously in Week 9 of the 2018 NFL season, bookmakers in Vegas failed at this very task. There were 11 teams that received an inordinate amount of action that week, and all 11 won their games and covered the spreads.

The Chiefs were playing the Browns and were favored by eight points, and 90% of the bets on that game went to Kansas City. They won by 16, and overall that weekend, sportsbooks in Las Vegas lost $10 million on NFL bets.

Vig is in place to help sportsbooks weather a storm like that, or if they’ve done the right job of setting lines right in the middle of a matchup, ensure that they make a profit regardless of who wins.

Do you have to pay vig?

Yes, you have to pay the vig. It’s no different from any other built-in service charge. If you want DoorDash to deliver you food, you pay for it.

If you want to buy seats to a concert through Ticketmaster, you pay the attached charges. And if you want to place a bet through a legal sportsbook, you pay the vig.

You can, however, find ways to reduce your vig and pay the sportsbook less. Sometimes as the point spreads move, so does the vig. You can, on occasion, find lines of -105 to as low as -103. Sometimes the vig will move even when the line doesn’t.

When action is spread equally on a game, the vig might drop down to -105 since the sportsbook is no longer at high risk for taking an overall loss. Although if that game isn’t seeing equal action, the sportsbook does find itself at some risk, so there will be no extra discounts for you.

Every decision a sportsbook makes involving the point spread, moneyline and the associated vig is done to maximize its profits. When it sets a line or posts odds, it is never making a prediction on who it thinks will win the game or event.

It is trying to predict the betting public and influence the bettors into putting action down equally. When sportsbooks successfully do that, they always turn a profit.

Why we have odds

Sports betting only works if the playing field is leveled. Without odds or point spreads, you could never bet on Alabama vs. Mississippi State because no one in their right mind would ever take the Bulldogs.

And if no one will bet on the Bulldogs, no one can bet on the Crimson Tide on the other side. And on and on this would go, leaving us very few games to bet on, and very few sportsbooks remaining in operation.

Odds make bets on these otherwise lopsided matchups possible. With a point spread, there will be bets placed on Mississippi State. Give the Bulldogs enough points, and they’ll get the desired 50% of the action. The same with moneylines, puck lines, run lines and any other bet that requires odds to make it a bet worth making.

Those odds also give sportsbooks control over their ability to make a profit. They use the juice/vig to make their money, and then they use the odds to control the bettors, split the wagers and make sure that the juice becomes nothing but profit.

Remove the odds, and remove the sportsbooks’ ability to set their own odds, and you would remove the sportsbooks’ profit and reason for being in business. And then you would have many very unhappy sports bettors.

Are sportsbooks in Colorado legal?

Yes. In 2018 the US Supreme Court overturned the 1992 law that made it illegal for states to set their own sports betting laws. The case heard involved the state of New Jersey, but it opened the door for other states to create their own sports betting laws, which Colorado did in 2019.

At the time of the ruling, the majority opinion stated that Congress could still pass laws to regulate gaming in the United States if it chose to do so. But in the absence of its action, each state has been left to its own devices on determining sports betting within its borders. Colorado’s legislature passed a law in early 2019 to legalize all forms of sportsbooks — retail, online and mobile — and the voters approved the new law in November.

Current casinos operating in Colorado can apply for a master license, which, if granted, allows them to open a retail sportsbook in their casino. That license also allows them to partner with an online sports gaming license holder to run an affiliated internet-based sportsbook and mobile app.

To gamble on sports in Colorado, you just need to be at least 21 years old and physically within the borders of the state. You do not need to be a resident.

The history of sports betting

Betting in America has been around since the time of the country’s creation. In fact the Revolutionary War was partially funded with a lottery, which was a common way at the time for the colonial governments to raise money.

The very first horse racing track was built on Long Island in 1665, although at the time, betting wasn’t widespread and was mostly limited to between horse owners. Dice and card games could be found in pubs across the young country, and by the early 1800s casinos were popping up.

In the 1860s and 1870s all three legs of the Triple Crown began running, and pari-mutuel betting really began to take shape. Betting on boxing began to flourish, and as a general rule gambling was accepted throughout the country until the early 1900s.

The Black Sox

The year was 1919, and the Chicago White Sox were heavily favored to beat the Cincinnati Reds in the World Series. But the White Sox didn’t hit, ace Eddie Cicotte looked sluggish in losing two of his starts, and the Reds won in a huge upset.

And then the rumors started, and then the investigation, and then the accusation that a number of White Sox players had been paid to throw the World Series, the most sacred of American sporting events.

In all, eight players were implicated in the scandal and permanently banned from baseball, and attitudes about gambling on sports began to change across the country. Morality led the way — “gambling was wrong.”

Then came the laws — “gambling is illegal.” And eventually there was acceptance that only people of ill-repute would engage in sports gambling. And that’s how it would stay for quite some time.

Post-war shift

Then a crack in prevailing attitudes came in 1949, when in the boom following World War II, and to jumpstart its tourism industry, the state of Nevada legalized sports gambling.

In the 1930s, it had legalized most other forms of gambling, but the laws in 1949 were new and challenging the majority’s feeling about betting on sports. But not the government’s.

Outside of Nevada, the sports betting landscape was dominated by organized crime, which got the attention of the federal government and new president John F. Kennedy, a committed enemy of the mob with his Attorney General brother Robert Kennedy.

They orchestrated the Federal Wire Act in 1961 that levied fines and handed out prison time to anyone involved in placing sports wagers over wire communications.

More laws were passed that were also all designed to stop illegal sports gambling: The Travel Act (1961), Sports Bribery Act (1964) and the Illegal Gambling and Business Act (1970).

The reality is that these laws did very little to curtail illegal sports gambling, which continued to blossom. What it did do, however, was limit legal sports betting throughout the other 49 states.

Atlantic City, then PASPA

That lasted until New Jersey voters passed a referendum in 1976 to legalize gambling and casinos in Atlantic City, which welcomed the opening of its first casino in 1978.

Attitudes had changed, and no longer were Americans morally opposed to sports betting. In fact, in the government’s own report released in the mid-1970s, it said, “How can any law which prohibits what 80 percent of the people approve of be enforced?”

The reality is it couldn’t, but people sure tried. Pete Rose was banned from baseball in 1989 for betting on MLB games, including those he was involved with, and more federal legislation followed.

In 1992, PASPA (the Professional and Amateur Sports Protection Act) was passed, effectively banning states from being able to enact their own sports betting laws.

It got worse in 2006 when Congress passed the Unlawful Internet Gambling Enforcement Act, which was an attempt to force offshore sportsbooks to lose US customers because they could no longer use credit cards or other means of transferring money to accounts.

Legal battles

Even though, the following year, the NBA was rocked by the revelation that referee Tim Donaghy had accepted bribes to influence game totals, the states and the citizens were growing restless. A few places in the Northeast began opening limited casino gaming, followed by passing new sports betting laws.

There were setbacks as the lower courts struck down those laws, but the fight for legalization had begun in earnest. States began hammering away at PASPA, and specifically, New Jersey went after the law, hoping to legalize sports gambling across the entire state.

In 2016 it filed a writ with the Supreme Court. In 2017 the court heard arguments on the case. And in 2018, the court handed down its ruling and overturned PASPA, giving the states the right to pass their own sports gaming laws.

And now here we are today, with almost every state in the country having passed new laws to create legal sports betting markets, or currently debating the merits and details of those new laws.

The difference between a sportsbook and betting exchange

Chances are you’ve wagered at a sportsbook, either in person or online, or at least have a fairly good understanding of what a sportsbook is. You may have also heard of a betting exchange, but there is a strong likelihood that you’ve never actually used one. So what are the differences, if there are, in fact, differences?

Essentially with a sportsbook, you are betting on an event to happen against that sportsbook. If the event does happen (your bet wins), you get paid.

If the event doesn’t happen, you lose your bet, and the sportsbook keeps your money. Since the sportsbook is acting as the house, it sets up the odds, and it’s up to you to decide if you want to bet.

Placing wagers through a betting exchange, however, eliminates the house. The exchange is just the facilitator of the bet; it isn’t the other party.

The bet you place is against another bettor, just like you’ve been doing your whole life. “I bet you $10 I can make this shot.” You put the wager out there, and if someone takes you up on it, you have a bet.

At a betting exchange, you create the odds, or you agree to take the odds that someone else creates. The betting exchange has nothing to do with the odds or taking bets.

It’s simply a place where two gamblers who want to take opposite sides of an event can come together and make that bet. I may really want to bet on a certain boxer and at certain odds, but no one I know wants to take my bet. I would then go to a betting exchange, post my desired bet, and then wait for someone to take it.

While the betting exchange doesn’t post odds or create bets, it does act as a secure way to make those bets. It will hold on to both parties’ wagers and then transfer the money to the winner of the bet, making sure that all bets are paid off. And for these services, it will deduct a small fee.

Betting exchanges aren’t much of a presence in the United States, largely because the state laws regarding sports betting are so different. Without federal sports gambling laws that would put everyone into a national exchange and under the same rules, an exchange would have to set up 50 different exchanges, which would severely limit the market.

No such limits exist in the UK and the rest of Europe, which is why betting exchanges are so popular over there.

How profitable is sports betting for casinos?

Because there are always two sides to a bet, sports betting has the lowest winning percentage of any casino gaming, when looking at it from the casino’s perspective. Casinos keep just over 5% of their take on sports wagers. It’s still hundreds of millions of dollars, but three-card poker, roulette, craps, baccarat, blackjack and slot machines all make more money.

The percentages for those casino games are considerably higher as well. The casino keeps 5% of the money on its sports wagers, but more than 12% for all table games, including just over 11% for blackjack.

But even though sports betting only increases the overall revenue for a casino by a small percentage, it brings in money in other ways. Think of it like a coffee shop that makes very little money selling coffee.

But that coffee draws customers in, which in turn has them buying pastries, sandwiches and other more profitable items, making money for the coffee shop.

People go to a casino because they want to place a series of sports wagers. While they’re visiting the casino, they’ll order drinks, have something to eat, sit down at a slot machine, and maybe wander over to the blackjack table for a few hands.

Maybe the casino only makes a few dollars off the sports wagers, but overall having that sportsbook available has increased its revenue substantially.

How much sports betting revenue is expected in Colorado?

The market for betting in Colorado is big, with optimistic projections calling for as much as $6 billion in placed wagers, $400 million in operator revenue and $40 million in generated tax revenue.

Part of the reason the outlook is so rosy is that Colorado took the lessons learned from other states and applied those to its laws. The 10% tax rate on operators’ revenue is right in line with the most successful states in the country. The state also didn’t handcuff the sportsbooks by imposing maximum bet limits, opting instead to leave that up to each operator.

Going live in the middle of the COVID-19 crisis hampered the launch of legal betting and has led to slower than expected revenues in the beginning. But long term, the sports betting money is expected to flow freely in Colorado.

Conclusion

If you are in the group of people who want sportsbooks and need sportsbooks, then the reality is that you also want sportsbooks to keep making a profit. Not off of you, of course. You want to pick nothing but winners. But let them take their juice, and let them stay in business.

In Colorado there is now no reason to ever slink over to an offshore sportsbook again. Betting is legal in the Centennial State, and it’s now widely available. The biggest names in the business are here, filled with multiple betting options, and more than ready to take your wagers. Let’s all enjoy it together.