The pieces are beginning to move into position in Pennsylvania, as the state inches closer to becoming the fourth in the country to offer legal online gambling.
Temporary regulations have been crafted. Partnerships between land-based casinos and online gambling companies are coming to light. And the Pennsylvania Gaming Control Board has begun the application process for certain online gaming licenses.
Still, there are plenty of wrinkles that will need to be ironed out before the market really takes shape, not least of which being the number of skins (or individually branded websites) the state will allow each operator to possess.
To help make sense of the situation, Online Poker Report drew upon three sources:
Most people thought the heavy lifting was over after the state passed the gaming law that legalized online gambling in October. But the contentious debate hasn’t exactly subsided.
Skins have turned into the issue du jour for the nascent industry. October’s legislation didn’t specifically address the number of skins, nor did it establish a concrete number when the PGCB released the temporary regulations.
However, OPR spoke to a legislative source who said the bill’s crafters never intended to severely restrict the number of skins.
iDEA Growth highlighted this in a letter to the PGCB:
“Lawmakers were aware of the issue of skins and, if they had intended to limit their use, the legislature could have done so easily. In fact, earlier drafts of the legislation did include specific limits on skins. The issue of skins also was addressed at hearings and in discussions with industry participants, including iDEA.
Therefore, the absence of a limit suggests lawmakers concluded that allowing multiple skins would be beneficial to Pennsylvania’s market. The legislature was aware of skins, considered a limit, and then consciously chose not to insert one. Regulations should follow that cue.”
Still, the lack of clarity has led to the possibility of multiple models.
At least two Pennsylvania casino operators (and likely at least three) are pushing for a strict limitation on skins. Penn National and Parx Casino are actively lobbying the PGCB to restrict online gaming websites to just a single brand.
Others are calling for a system like New Jersey, with five skins allowed per license. Right now it’s not clear which model will win out.
In a statement to GamblingCompliance, the PGCB said it’s weighing this issue very carefully. The PGCB “has not made any determination at this juncture in this matter,” said Communications Director Doug Harbach.
The companies opposing an open market with multiple skins per license are publicly arguing that limiting skins is best for the market. They also claim this approach is best for the state’s existing casinos.
Eric Schippers, senior vice president of governmental relations at Penn National, recently told GamblingCompliance, “We would fully support the limitation to one skin per operator.”
In 2016, Schippers told Gambling Compliance a New Jersey-style skins model would allow out-of-state online operators “to come in and poach Pennsylvania’s customers for the benefit of their out-of-state operation.”
Parx Casino echoed these sentiments in a Jan. 30 letter sent to the PGCB.
In the letter Parx wrote:
“The Board should establish a limitation on the number of interactive gaming skins an Interactive Gaming Certificate Holder (“Certificate Holder”) may operate, and that limitation should be one skin per Certificate Holder, with the different categories of interactive games the Certificate Holder is authorized to offer on that single skin limited to the different categories of interactive games approved in its Interactive Gaming Certificate(s).”
Parx went on to say the single brand should also match or resemble the certificate holder’s land-based casino brand. Such a limitation would be disastrous for the market, for the state, and for consumers if the PGCB listens to the highly flawed arguments of Parx and Penn National.
Unlike a land-based casino, online gambling isn’t constrained by its location. Every gambling site in the state will be available to every person authorized to participate, regardless of where they live.
In the online gambling space, large casinos in major population centers are on equal footing with smaller casinos located in far-flung locales when it comes to potential reach.
But they’re not on equal footing when it comes to money and brand awareness. Small casinos will have a difficult time competing with the better-known casino brands in the market.
Larger companies not only enter this new market with better brand awareness but also can outspend smaller competitors in marketing. And that’s assuming the smaller casinos even have the capital to get an online gambling site off the ground.
One way they could offset the startup and marketing cost is to allow other companies to launch a branded website under their license.
Limiting the number of skins will likely result in several smaller casinos passing on online gambling or launching what amounts to a bare-bones site.
A strict limit on skins would benefit some of the casinos in the Pennsylvania market.
But it’s certainly not best for the market as a whole. It would create an unequal playing field that favored the state’s larger casinos. These casinos would receive what amounts to a bigger piece of a smaller pie.
In a letter to the PGCB, iDEA Growth listed three reasons the state should ignore the pleas of Parx and Penn National.
Let’s have a closer look at each of these arguments.
“Experience has shown that online gaming operators will self-regulate to an efficient market size that maximizes operator and state revenue,” the iDEA letter to the PGCB states. “To do so, however, requires licensees to have the flexibility to partner with other game providers and to operate under multiple skins.”
The group concedes there may be a limit to this growth, and the industry could reach a point where additional brands are no longer additive. But to date, each time a new brand has launched in New Jersey, it expanded the overall market.
And New Jersey operators agree.
“The New Jersey market has proved that multiple skins are necessary to create a vibrant and competitive marketplace and to provide an incentive for operators to market their services,” said Ed Andrewes, who heads up Resorts Casino’s online operation in New Jersey.
“The current incumbents may feel that by limiting the skins it saves on marketing expense, but experience from other jurisdictions shows that a lack of marketing initiative and effort does not grow the market at all.”
“Such a limitation would be a step back on the nascent online gaming industry as a whole,” said Golden Nugget’s Thomas Winter. “The only reason to do it would be to protect land-based casino revenues.”
Winter went on to explain the flaws protectionist thinking.
“The New Jersey example has clearly shown that 80 percent of online players were new to casino, including for casinos with very large players database,” Winter told OPR.
“The reason is simple: Online gaming competes with other forms of entertainment like casual games or even streaming services more than it cannibalizes brick-and-mortar entertainment. Playing on your smartphone is a fun way to kill time when you’re on your own and on the go, while going to a live casino is a social form of entertainment that goes beyond gambling.”
iDEA didn’t mince words on what that would mean:
“Limiting skins would effectively pick winners and losers in the Pennsylvania market and hand the market to the state’s largest land-based casino operators (that are willing to enter the market). Because each license is extraordinarily expensive (up to $10 million plus taxes), smaller operators may only be able to afford interactive gaming operations if they subsidize some of the license expense and high tax rates through revenue sharing skin agreements.
“Even if they could justify the up-front licensing cost, smaller casinos will find themselves at a significant disadvantage when it comes to marketing budgets, which constitutes a much more significant cost for interactive gaming than it does for traditional, land-based casinos.”
As iDEA explains, a lack of competition will also lead to a second-rate user experience.
“By allowing multiple skins per license, Pennsylvania will encourage robust competition among operators,” the group wrote to the PGCB. “That competition will result in increased content for consumers and would incentivize operators to produce and provide new and innovative games.”
Winter thinks allowing multiple skins is a no-brainer.
“The benefits for patrons are obvious,” he said. “More skins means more choice, better products, better promotions, and more innovation.”
This has been borne out in New Jersey, where Golden Nugget and Betfair offer live dealer games, multiple operators have added virtual sports, and Resorts launched a DFS-sports betting hybrid game.
According to Winter, the ability to offset some costs through skins — Golden Nugget has two other skins, Betfair and SugarHouse — allows operators to devote more money to marketing and innovation.
“For land-based casinos, it also allows to share the burden of regulatory costs while introducing a new stream of revenues, often in the form a share of revenues from skin operators,” Winter said. “Brick and mortars licensees can reinvest these savings and additional revenues to improve their own offer and increase their marketing investments. It’s no wonder why all New Jersey licensees have elected to have multiple skins.”
With a $10 million upfront license fee and a 54 percent tax rate on slots, this shared burden is crucial in Pennsylvania.
Limiting skins will reduce the amount of revenue the state receives from online gambling in two ways:
Andrewes believes limiting licensees to a single skin could lead to several land-based casinos eschewing an online gambling license.
“I think you can divide the current incumbents into two groups in this regard,” Andrewes said. “There are some that will feel that they will need to buy a license in any event as a defensive measure and would rather competition was limited. There will then be others who feel that the additional skins will provide other business and revenue opportunities and that these will be necessary if they are to justify the initial expense of a license.”
Outside of some online poker licenses, Winter is less sure Pennsylvania casinos would forego an online slot or table game license.
He predicts any unclaimed licenses would eventually be scooped up by an outside buyer:
“Legislators have introduced a rule that limits the number of licenses to 12 but at the same time, gives the opportunity to qualified gaming entities outside PA to apply for licenses that PA casinos don’t want.
“For that reason, all casinos will want to secure their license, an important long-term asset. Even the ones who are not sure they want to offer online gaming immediately or who own multiple casinos can’t afford to let such an asset go, for instance if they decide to sell their property down the line.
“There may be a few poker certificates not sold in the first round of this auction but that’s because there’s probably not enough poker revenues for 12 operators to make a profit, irrespective of the number of skins. As far as slots and other table games go, I would be very surprised if not all licenses were sold to PA casinos and if one was not bought by them, it would for sure find an outside buyer eventually.”
“The state will maximize its upfront revenues from selling the licenses in any case,” Winter said, but then added, “More skins will bring more tax revenues down the line.”
As Winter explained, the effect on marketing spend from limiting skins and the high online tax rate could be disastrous:
“The impact of such a limitation would be significant. Because of the high tax rate on slots, a number of operators are likely to rely on their brand awareness and existing database before investing advertising dollars.
“As demonstrated not only in NJ but in any other online gaming jurisdiction outside the US, online gaming revenues are directly correlated to marketing spend. Even the largest operators in the world, generating billions of dollar in revenues, keep spending around 25 percent of their gross revenues in advertising.
“The more operators you have, the more marketing dollars, the more revenues and tax dollars for the state. That’s an universal rule and Pennsylvania will be no exception.
“A single-skin limitation would probably reduce tax dollars by 30-40 percent. For instance, we estimate that only 60 percent of New Jersey revenues come from the top grossing skin of all five licensees. More competition also means more innovation and better promotions for players benefits.”
Andrewes concurs and believes a model similar to New Jersey’s is the correct approach.
“I would not advocate unlimited skins and I think the NJ DGE have set the right level at five,” Andrewes said. “This has created enough competition to incentivize the operators to invest in marketing and therefore has grown the overall market yet it has not created a ‘free for all’ [that] would be impossible to control.”
There’s no legitimate reason to limit operators to a single skin other than as a favor to a small number of casino operators.
As iDEA said in its letter to the PGCB:
“Competition and innovation will result in higher revenue for the state and greater satisfaction for players … Online gaming operators can self-regulate to an efficient market size that maximizes operator and state revenue when they are allowed to partner with other game providers and to operate under multiple skins.
“The experience of New Jersey of allowing multiple skins has resulted in competition, innovation and growing revenue.
“Pennsylvania should emulate that model by clarifying its regulations so that there is either no limit on the number of skins that may be operated by each licensee, or by adopting New Jersey’s five skin limit per license.”