Measuring The Positive Economic Impact Of Regulated Online Gambling In Pennsylvania

With Wednesday’s passage of HB 649 by the Pennsylvania Gaming Oversight Committee, the state has taken a decisive first step toward legalizing and regulating online poker and casino games.

If passed into law, either as a standalone measure or as part of the state’s 2016 budget, legalized gambling in Pennsylvania would fulfill a significant portion of the state’s estimated $1.85 billion budget deficit, and provide state coffers with a sizable and sustainable source of income for years to come.

Licensing fees an immediate source of revenue

Although it’s becoming increasingly unlikely that legalized online gambling in PA will generate significant revenue by way of virtual casino games and paid poker rake in 2016, the particulars of HB 649 permit license applicants to begin filing applications within 90 days of the bill’s passage.

Licensees under HB 649 will pay an $8 million licensing fee (this is a change from the initial bill, which called for a $5 million fee), while significant vendors pay $2 million (also up from the original bill, from $1 million).

On balance, we assume that between eight and eleven of the state’s 12 casinos will apply for licenses, resulting in $64-$88 million in revenue, and possibly more than $100 million depending on how much of the $2 million significant vendor fee goes to the state.

Already, some casinos have forged iGaming partnerships, while for others (Harrah’s Philadelphia, Mohegan Sun at Pocono Downs) it seems an inevitability.

The only casino that will definitely not participate in online gambling is the Sheldon Adelson owned Sands Bethlehem. Smaller casinos, such as Lady Luck Casino Nemacolin and Presque Isle Downs and Casino, may also choose to sit out, although representatives of both casinos have expressed keen interest in online gambling.

First-year revenue projections

Based on a composite of revenue estimates, including my own analysis, we project that on average, PA online casinos will generate between $121 – $129 million in total first year revenue, while online poker stands to generate between $39 – $45 million.

However, since the last of these projections were published, a couple of variables have been altered:

• After a long and vigorous vetting process, PokerStars was approved to offer real-money gambling in New Jersey, increasing the likelihood that Pennsylvania and other states will not only follow suit, but approve the operator in a more expeditious manner.
• Popular payment processor PayPal has begun accepting payments from Caesars’ affiliated sites in New Jersey. PA regulated gambling sites that launch with PayPal as a payment option will be less subject to the high prevalence of rejected transactions that plagued the New Jersey industry’s early days, when high acceptance rates arguably mattered most.

Taking these factors into account, I’m inclined to believe that first-year revenues will reside closer to my bullish estimates of $145 million in first year online casino revenue, and $53 million in online poker revenue, for a grand total of just under $200 million.

At the 14% tax rate outlined in HB 649, this equates to $28 million for state coffers.

Pennsylvania online gambling at maturity

At the five-year marker, it’s plausible that Pennsylvania’s iGaming industry will meet or exceed my earlier bull case estimate of $270 million in annual revenue.

Using accumulated New Jersey data as a baseline, our simple NJ model tells us that Pennsylvania iGaming stands to generate $202 million in its second year. However, by year five this number should be pumped up by:

• The growing presence of PokerStars, both on the online casino and online poker fronts.
• Improvements in payment processing acceptance rates, and geolocation technology.
• Operators having a better sense of what works and what doesn’t, namely in the areas of marketing and promotions.
• The expected rate of online casino growth from years two through five.
• The prospect of an interstate liquidity sharing compact with New Jersey.

The latter point warrants further consideration. At a resident pool of nearly 22 million, the top poker operators should be afforded options that the population restrictions of each individual state do not easily permit. Namely:

• Fast-fold game variants: Fast-fold games are the single biggest cash game revenue generator for many ROW operators.
• Non-No Limit Holdem games: Right now, the only non-NLHE variant that gets off that any consistency in New Jersey is Pot Limit Omaha. By nearly tripling the population pool, it opens the door for other games (7-Stud, O8, 2-7 Triple Draw) to coexist with the popular format.
• Bigger tournament guarantees, more freezeouts: Top online poker networks would no longer have to rely on the rebuy/add-on or re-entry formats in order to meet five and potentially six-figure guarantees. Instead, they could be offered at a price point that’s more in tune with the average depositing player’s budget.

In the presence of a shared liquidity compact, and pending the online poker industry as a whole begins to recover from its multi-year decline, it’s conceivable that PA online poker will generate upwards $60 million annually at maturity, with casino accounting for $210 million, for a total of $270 million.

At the HB 649 tax rate, this equals $37.8 million in annual revenue.

Note that this figure excludes additional revenue brick and mortar casino may generate as a direct result of cross-promoting with online properties.

Is HB 649 the best option for Pennsylvania?

HB 649’s companion bill in the Senate — the Senator Kim Ward sponsored SB 900 – calls for a 54% tax rate on interactive gaming revenue and a $10 million licensing fee.

On paper, SB 900 would result in more upfront and sustained iGaming income for state coffers. However, the drawbacks of imposing such a high tax rate outweigh the benefits, as poker operators will be forced to charge higher rake and tournament entry fees, reduce rakeback and cut down on promotional and marketing spend.

Likewise, a 54% tax rate may force online casino operators to lower payback percentages on slot machines, institute unfavorable blackjack rules and offer more high house edge game variants. All of which could have a serious negative impact on player retention rates. More here.

Not to mention, casinos may be dissuaded from paying a hefty $10 million licensing fee if the path to profit depends on their ability to overcome both an insufferable tax rate and PA’s limited population.