To Date, All Delaware Online Gambling Revenue Has Gone To State

Market Size Is Only One Of The Problems Plaguing Online Gambling In Delaware

Delaware online gambling industry woes
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Delaware’s online gambling industry doesn’t get much attention compared to New Jersey’s, or even Nevada’s, but the tiny little state (Delaware’s population is less than one million) does have a regulated industry, and an uncommonly structured one at that.

In part because of the modest size of the market, it’s fair to call online gambling in Delaware an also-ran. But that’s not the only problem Delaware online gambling operators face.

The way the law was crafted has created two serious issues that have contributed to the industry’s underwhelming performance.

These problems were unintentional, and at least one of them can be easily fixed.

Issue #1: A lack of competition

Delaware’s online gambling industry is unique in the US market because it’s run through the state lottery, with the state’s three racinos (Delaware Park, Dover Downs, and Harrington Raceway) acting as the branded operators.

What this means is, unlike New Jersey or Nevada where online operators are free to partner with whomever they choose (or even build their own online platform), the state of Delaware chose the platform providers for all three providers. Delaware selected a combination of Scientific Games and 888 Holdings to serve as the platform provider.

Because of this arrangement, all three operators share online poker liquidity (what little of it there is in Delaware) and are essentially clones of one another, with little individuality. They use the same software (only the brands and color schemes are different) and offer the same slot machines and table games.

This means that the popular non-Scientific Games/888 slot machines on the casino floors at Dover Downs, Delaware Park, and Harrington Raceway, are probably not going to be available online.

As much the racinos would like to sync their online and live offerings to create multi-channel customers, the exclusive deal the state signed with Scientific Games and 888 doesn’t allow the operators to match their online and land-based games.

To be fair, Scientific Games and 888 have begun adding licensed games from other companies in Delaware to better match the games found on the land-based casino floors.

Upshot

The decision to choose a single platform provider helped streamline the process and ensure all three racinos were interconnected, an extremely important aspect in a low-liquidity market.

But it’s also created a noncompetitive environment among the three operators, and limited their ability to differentiate themselves from their competition.

Issue #2: The untenable tax burden

Delaware was an early adopter state, meaning it passed an online gambling bill before the April 30, 2013 launch of Ultimate Poker (the first US licensed and regulated online gambling site) in Nevada.

As a first mover, Delaware’s revenue predictions were, shall we say, on the high-end.

The state expected revenues of more than $5 million in the 2014 fiscal year (the initial revenue expectation was $7.5 million but this was lowered after launch delays), and even more as the market matured.

With these targets in mind, the law mandated the first $3.75 million of revenues generated industry-wide would go to the state. Any revenue above $3.75 million would be split between the state, the casinos, and the horse racing industry as follows:

  • Online slots: the state receives 43.5 percent, the horse racing industry gets 10 percent, and the casinos 46.5 percent.
  • Table games: the state receives 29.4 percent, horse racing 4.5 percent, and casinos 66.1 percent.

Thus far, the split after the $3.75 million threshold is a moot point.

Delaware’s online gambling revenue was $1.4 million in fiscal year 2014, and $1.8 million in the following fiscal year (The fiscal year runs from July 1 to June 30.).

The state received 100 percent of this money, and the operators received precisely nothing.

The good news, if it can be called that, is that revenue continues to rise closer to the $3.75 million threshold mark. In FY2016, the industry generated over $2.5 million in revenue. A detailed monthly revenue breakdown can be found here.

Again, operators didn’t receive a dime — and at the current rate of growth it may be several more years before they realize any sort of reward.

And even if the industry continues to mature, there is little incentive for the operators to devote time and resources to online gambling. Their piece of the pie is, at best, negligible.

More likely, the operators will continue to bleed money through their online offerings.

Why would an operator invest $500,000 in an advertising campaign that has a return of $1 million if all of the revenue generated from it is simply going to the state?

From the operator perspective, that $500,000 campaign didn’t have a positive return of $500,000 (or even $250,000 if we account for the tax rate). It represents a $500,000 loss for the racino.

Upshot

If Delaware expects its operators to ramp up marketing efforts and invest in online gambling, the state must renegotiate the tax rate.

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Steve Ruddock
- Steve covers nearly every angle of online poker in his job as a full-time freelance poker writer. His primary focus for OPR is the developing legal and legislative picture for regulated US online poker and gambling.