High tax rate, limitations on skins are just some of the problems

When PA Online Casinos Finally Launch, They’ll Face A Lot Of Obstacles

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It’s not exactly being sabotaged, but there are some casino companies doing everything in their power to undermine Pennsylvania‘s forthcoming online gambling industry.

Thus far, there have been several superfluous policies:

  1. A burdensome 54 percent tax rate on online slot revenue.
  2. An online gambling prohibition at land-based casinos.
  3. A requirement that all skins are accessed through some form of sub-domain of the land-based license holder.
  4. A provision that limits customers to a single account per operating platform.

Proponents of these measures claim they are being protectionists, and have Pennsylvania’s best interests at heart. In reality, stifling competition will only serve to weaken online gambling revenue (along with the amount of tax revenue to the state), and by extension, harm its land-based casinos, since the state’s casinos will be the lead online gaming operators.

Here’s why none of these policies are beneficial.

The online slot tax rate

After robust debate, the Pennsylvania legislature settled on a bifurcated online gaming tax rate that mirrors its land-based gaming tax rates:

  • 54 percent on online slot revenue
  • 16 percent on online table game revenue
  • 16 percent on online poker revenue

Two of those rates are in step with online industry averages, but the slot rate has created concerns about the overall viability of the market.

Slots account for roughly 70 percent of all online revenue in New Jersey. That means, as go slots, so goes the online gambling industry.

The high tax rate will erode already slim margins. That will reduce the return-to-player rates Pennsylvania’s online casinos offer, and cut into the amount of marketing and promotions casinos can do.

Both of these things will have an impact, and both will hinder the state’s ability to maximize online gambling revenue.

However, it should be pointed out that the same concerns were voiced when Pennsylvania burdened its land-based casinos with the same 54 percent tax rate back in 2004 — a rate far above industry norms.

Despite the onerous slot tax, Pennsylvania casinos have made it work. So much so that Pennsylvania has become the second biggest gaming market in the country, trailing only Nevada.

How it works in NJ online casinos

That said, online and land-based casinos have very different margins.

Based on information from several online casino operators in New Jersey, here’s how a dollar of online casino revenue gets divvied up:

  • 24 cents to advertising
  • 20 cents to player reinvestment (player promotions and retention costs)
  • 18.5 cents to payment processing, KYC, geolocation costs, and platform and content royalties
  • 17.5 cents to taxes
  • 12.5 cents to general and administrative needs, including staff
  • 2.5 cents to other regulatory fees

After accounting for all these things, online operators get about five cents of profit from each dollar of revenue. Land-based casinos in New Jersey get roughly $0.15-$0.20 of profit for every dollar wagered, plus the additional revenue generated from hotel stays, dining, drinks, retail and entertainment.

That dynamic will likely keep some casino-only operators who would have otherwise been interested in planting a flag in Pennsylvania out of the market, but at the end of the day, operators will likely find a way to make it work.

However, it will also make it difficult for legal site to compete with black market operators free of this burden.

Online gaming prohibition at casinos

Regardless of whether or not you agree or disagree with the tax rate, it makes more sense than the prohibition on online gambling at land-based casinos that was slipped into the legislation.

The prohibition is an absurd overreaction to a problem that doesn’t exist.

Like the tax rate, the rationale for the prohibition is rooted in protecting land-based casino revenue. But rather than protecting land-based revenues, this policy, like all the others, only serves to diminish online revenue.

Not a very good policy

In addition to losing revenue from land-based visitors who might play online while waiting for a table at a restaurant or in their hotel room, the prohibition will diminish the efficacy of one of the best online gambling acquisition channels: on-property registration.

The goal of on-property online gambling isn’t to turn land-based gamblers into online gamblers. Rather it’s to provide your customers with a way to bring the casino home with them. And the best time to get someone to register an online account is when they’re in your casino.

That’s a harder sell when the person isn’t allowed to try it out. If they can’t deposit and play for 15 minutes at the casino, they won’t know what they’re missing when they get home.

Why you should let people sign up on property

At the casino:

  • They’re acutely aware online gambling is available;
  • They’re going to register an account through your online casino and not a competitor;
  • Someone can walk them through the registration process;
  • You can provide them with a bonus for registering an online casino account.

How important is on-property registration? So important that Resorts Atlantic City has set up a dedicated space to facilitate the process: its iGaming Lounge.

According to Ed Andrewes, the head of Resorts’ online gaming division, “The Resorts iGaming Lounge has acted as an excellent training ground for inexperienced online players and has provided almost 25,000 registrations for the online service.”

A prohibition on online gambling at physical casinos means no iGaming lounges or even online gaming kiosks.

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Skin restrictions

Another premeditated bruise Pennsylvania decided to inflict on its yet-to-launch online gaming industry is a requirement that skins (online gaming sites operating under the main casino licensee) not only prominently display their affiliation with the main license holder, but their websites must be accessed through the main license holder and setup as sub-domains or sub-folders.

What regulators said

In its latest “clarification,” the Pennsylvania Gaming Control Board stated:

“All interactive gaming skins must, at all times, clearly identify the interactive gaming certificate holder or an entity within the interactive gaming certificate holder’s organizational structure, on the display screen visible to players.

 “Interactive gaming operator licensees are not permitted to offer interactive games in this Commonwealth independent from an interactive gaming certificate holder and the interactive gaming certificate holder’s webpage or the webpage of an entity within the interactive gaming certificate holder’s organizational structure.”

Additionally, the PGCB has decided to limit players to a single account per operating platform, and the account restriction is even more convoluted than the affiliation regulation:

“A player shall have only one interactive gaming account for each interactive gaming certificate holder or interactive gaming operator licensee. Each interactive gaming account shall be non-transferable; unique to the player who establishes the account; and distinct from any other account number that the player may have established with the interactive gaming certificate holder or interactive gaming operator licensee for non-interactive gaming activity.”

That’s a bad idea…

As mentioned in this column, fewer skins will lead to:

  • Higher operating costs for the main license holder, possibly making the burden to great to bear for some PA casinos.
  • Fewer choices for consumers.
  • Fewer marketing dollars spent.
  • Less competition and innovation.
  • The loss of licensing fees the state would have procured.

Bottom line in PA

These burdens and restrictions make Pennsylvania:

  • A less desirable market for online gambling operators to enter.
  • A more burdensome market for companies to operate in.

At the end of the day, the decisions Pennsylvania has made will tamp down revenue, empower black market operators and hurt consumers.

- 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.
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