Pennsylvania Online Gambling Projected To Generate Over $200 Million In First-Year Revenue

Gambling Compliance: Equally Compelling Reasons For And Against The Legalization Of PA Online Gambling By 2017

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As many reasons as there are to believe that Pennsylvania will pass online gambling legislation before the 2016 session ends, there are an equal number of convincing reasons to believe the bid may fail.

That’s one of the conclusions drawn by Gambling Compliance (GC) Research Director Chris Krafcik, in a new report entitled “Pennsylvania iGaming Special Report – Sept. 2016.”

Senate’s intentions for online gambling remain uncertain

Back in late June, the Pennsylvania House of Representatives took a decisive step forward, when it approved a gaming reform bill (HB 2150).

Shortly thereafter, Pennsylvania Gov. Tom Wolf agreed to earmark $100 million from expanded gambling as part of the 2016-17 fiscal year budget.

Budget promises made and leadership warming are two to the most compelling arguments in favor of Pennsylvania legalizing online gambling, as per Gambling Compliance.

But since July, momentum on the side of gaming reform has stalled, attributed partially to a lack of urgency in the Senate. According to GC, the Senate is still “weighing whether to assemble the $100m gambling-enabling bill this fall or early next year.”

Sources close to GC state that if the Senate does act on gambling reform before the end of the 2016 session, the bill would “likely be composed of a small number of provisions – iGaming, daily fantasy sports, and license fee reforms for Category 3 casinos.”

At present, there are only six session days left in the Senate (Oct. 17 – 19 and Oct. 24 – 26). This leaves a very tight window for it to act, regardless of how narrow the scope of any prospective bill.

GC points out that waiting until 2017 could be damaging to online gambling’s chances, as lawmakers “risk reigniting a lobbying battle over whether video gaming terminals should be included under any expansion of gambling — a battle which has slowed previous efforts to legalize iGaming.”

High court ruling throws a wrench in plans

Since the time the GC report was published, the game has changed — slightly.

Last week, the Pennsylvania Supreme Court found a local casino tax unconstitutional, and gave lawmakers 120 days to resolve the issue. In lieu of this urgency matter, there’s chatter that the legislature may add session days, and may use the opportunity to broach gambling as a whole.

As per House Majority Leader Dave Reed in a comment to the Pittsburgh Post-Gazette: “This adds a new wrinkle, but it’s probably an opportunity to maybe bring gaming as a whole to a head and resolve both issues at the same time.”

Then again, the Senate may now opt to focus exclusively on the local casino tax resolution, fearing gambling expansion talks would muddy the waters. Senate Minority Leader Jay Costa appears to be of this mind, stating, “if we just focus on the local share issue, I believe we can get it done in October.”

Meanwhile, the House is clearly trying to light a fire under the Senate to act soon. Almost immediately following the Supreme Court ruling, the House Gaming Oversight Committee scheduled hearings on the local casino tax decision (Oct. 18), and gambling reform (Oct. 19).

The sobering state of online gambling expansion in the US

The GC report points out the more sobering statistics related to US online gambling expansion. Specifically, that not a single state has legalized online poker or casino games since New Jersey in 2013.

GC Research Services (GCRS) does indicate, however, that five states have a “credible chance of legalizing and regulating iGaming by 2021.”

Among the cited reasons why states haven’t moved on online gambling:

  • Failed initial expectations in the New Jersey online gambling market. Although to be fair, this was more a byproduct of excessively inflated projections than the underperformance of the market.
  • The rise of alternative online gaming sources, most predominantly, social casino.

It is GCRS’s belief that the latter “contributed to a dampening of industry enthusiasm for iGaming expansion.”

Measuring the economic opportunity

Gambling Compliance projects that Pennsylvania’s prospective online gambling industry will generate $203 million in gross gaming revenue during its first year, growing 52.2 percent to $309.2 million by year four.

GC PA Revenue Projections

These estimates are essentially in line with NJ online gambling revenue trends, albeit more on the optimistic side.

First-year online casino revenue

GC Research Services estimates that the PA online casino industry will rake in $149 million in its first year. That figure is moderately higher than the $134.1 million projected using the simple NJ model.

However, there’s cause to believe that Pennsylvania online casinos could register even higher tallies in their first twelve months:

  • Since NJ’s first full year in the industry (2014), there have been marketed improvements in the areas of geo-location, payment processing, and technology.
  • Pennsylvania operators/regulators will have ample opportunity to study the successes and missteps of the NJ industry. By comparison, New Jersey was the guinea pig of the US regulated market.
  • A fair swatch of PA operators will have already gained experience in New Jersey. Presumably, NYX Gaming, 888, and PokerStars, among others, will operate in both states.
  • According to GC, 11 out of the state’s 12 land-based casinos are supportive in principle of online gambling, with Sands Bethlehem being the lone hold out. This leaves the door open for operators to flood the market at launch. Saturation has yet to be an impediment in New Jersey.

Given these variables, a relative comparison to New Jersey’s second year in the industry may prove more in line with reality. Using this as a guideline, and accounting for other factors, such as Pennsylvania’s slightly higher unemployment rate and lower median household income, yields an internal projection of $160.9 million in first year online casino revenue.

Online casino revenue at maturity

GCRS has the PA online casino market growing by 71 percent from its first year to its fourth. Initially this figure comes off as conservative, as NJ online casino revenue is projected to grow by 82.7 percent from 2014 to 2016.

However, because Pennsylvania will presumably get off to a much faster start than NJ, its growth rate will likely be more tempered.

First-year online poker revenue

PA online poker will generate $54 million in its first year, and hold relatively steady after that, according to GCRS. While the trend line is closely in tune with the trajectory of the NJ online poker industry, the figures are not.

In 2014, NJ online poker generated $29.1 million. Using this figure as a basis, PA is projected to rake $41.6 million during its first year — some $12.4 million less than GCRS predicts.

However, online poker operators will enjoy luxuries that weren’t available in New Jersey at launch. These will extend beyond the advantages enjoyed by online casino operators:

  • HB 2150’s lack of a so-called “bad actor” provision doesn’t ensure PokerStars will launch on Day One, but it does open the door for an early stage launch.
  • Online poker is dependent on liquidity, and therefore thrives in larger markets. Thus, on a per capita basis, online poker should perform more admirably in Pennsylvania than in the smaller state of New Jersey.
  • Pennsylvania will be able to more effectively integrate the online and land-based poker worlds, as many of its brick and mortar casinos support thriving poker rooms.

With these intangibles in mind, we project that online poker will generate $50 million in year one revenue, which is more in line with GCRS estimates.

Online poker revenue at maturity

If NJ trends are any indicator, GCRS is probably correct in assuming PA online poker will fail to grow significantly in its first four years. The NJ market declined by 18.1 percent from 2014 to 2015, before rebounding in 2016. The recent uptick is due primarily to the timely entry of PokerStars in March.

However, the one way Pennsylvania (and New Jersey) online poker could grow by leaps and bounds is if an interstate compact were forged between the two. This seems likely by year four, for the following:

  • The way it’s shaping up, the two states will share similar regulatory structures.
  • There will likely be significant overlap among operators.
  • Both states have sizable populations, and can offer nearly equivalent value to one another.

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Bottom line

The fate of online gambling expansion in Pennsylvania lies primarily with the Senate’s willingness to take action. Should it not pass legislation in 2016, then there is no assurance that the new legislature — which will be minus staunch gambling advocate Rep. John Payne — will pass a bill by the June 30 budget deadline.

Failure to act could cost the state upwards of $100 million in licensing fees, and based on Gambling Compliance’s figures, up to $32.5 million in first-year tax revenue.

- Robert DellaFave is a game designer and avid poker player. He writes for several publications centered on legal US online poker and the regulated online gambling industries in New Jersey and Pennsylvania.
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