Conclusions Of Michigan Online Gambling Study Based On Antiquated, And Since Updated, Data
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Online Poker Report

Misguided Cannibalization Fears Could Derail Michigan’s Online Gambling Efforts

Detroit Michigan
A letter obtained by Online Poker Report suggests cannibalization concerns are at least partly responsible for holding up a Michigan online gambling bill.

The letter, described as a look at the “Potential impact of online gambling on commercial casino revenue,” was requested by Michigan lobbying firm McAlvey Merchant Associates.

Research was conducted by Matt Hanley, the president of Meloria Solutions LLC. Meloria is a Michigan-based company with a rather threadbare website and a microscopic web presence.

Who hired McAlvey Merchant Associates, and why the lobbying firm chose Matt Hanley’s unknown Meloria Solutions LLC to conduct the research is unclear at this juncture.

Letter relies on outdated research

There are several immediate problems with the five-page report.

It begins innocently enough:

“You have asked me to analyze the proposal to allow online gambling in Michigan with respect to potential impacts on state revenues, especially those from the three commercial casinos in Detroit and the state lottery.”

Hanley’s review notes that research on online gambling is relatively sparse, but goes on to cite a study done by Kahlil Philander. Notably, the study was conducted in 2011, before online gambling was legalized in any state.

Interestingly, Philander released an updated version of this research in 2015 (with real-world examples, Nevada, Delaware, and New Jersey to base the models off of) that shows online gambling has been beneficial to land-based casinos:

The research note from Hanley starts to go off the rails soon thereafter.

Unreasonable assumptions lead to ridiculous conclusions

Hanley outlines a rather absurd scenario where Michigan legalizes online gambling, but total gaming in the state revenue remains static.

He then uses Philander’s research to ascribe a 30 percent cannibalization rate without adding any revenue from online gambling, while factoring in online gambling’s reduced tax rate.

In practice, Hanley is saying online gambling will be 100 percent cannibalistic, and won’t increase total gaming revenue one iota. And on top of that, online gambling websites will cannibalize the brick and mortar casinos in Michigan a further 30 percent, per Philander’s now outdated 2011 research, and generate fewer tax dollars.

As I wrote in a previous column, after reading Philander’s more relevant 2015 research paper:

The study is titled Consumer spending in the gaming industry: evidence of complementary demand in casino and online venues, and it firmly debunks the cannibalization claims made by many anti-online gambling crusaders.

As the trio of researchers note, “The potential threat of online gambling’s cannibalization of the offline gambling market is an industry hot topic at conferences and in the media.”

Yet the group’s research indicates online gambling won’t cannibalize land-based casinos, and more importantly, in reality, online gambling is complementary to land-based gambling.

The researchers used prior research on the topic to create a number of models that helped them come to their conclusions. Namely, there is “a robust complementary (positive) relationship between online and offline gambling… In no model did we find evidence of a cannibalistic relationship among the gambling modes.”

Based on the letter prepared by Hanley, it appears the Michigan legislature has received some outdated information on the potential impact of online gambling.

A second problem

Hanley’s assumptions fail yet another critical test.

Online gambling may not be legal in Michigan, but that doesn’t mean it isn’t taking place.

What the bill legalizing online gambling would do is take the activity out of the control of black market operators, who would be replaced by the state’s land-based casinos. A memo penned by the Poker Players Alliance in response to the study, reinforces this critical point.

Online gambling is happening in Michigan right now, so even if there is cannibalization, the casinos are already being cannibalized. Worse yet, the state is receiving zero tax revenue from it.

Were online gambling legalized, the land-based casinos would be the operators, offsetting any cannibalization, and the state would tax them accordingly.

Image credit: f11photo / Shutterstock.com

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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.