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The Michigan House Ways and Means Committee recently held a hearing to discuss several gaming expansions under consideration by the legislature, including online gambling.
Michigan is the leading candidate to pass online gambling legislation in 2019, and the hearing was believed to be nothing more than the next step in that process. And that’s how it started.
The hearing was chaired by the bill’s sponsor and online gambling supporter Rep. Brandt Iden.
Iden did an excellent job laying out all the reasons Michigan should legalize online gambling, and everything was moving along as expected. That was until representatives from the state budget office testified.
Channeling concerns from the governor’s administration, the budget office explained how it harbored the same cannibalization concerns that led to former Gov. Rick Snyder’s veto of a similar piece of legislation last year.
The fear: Michigan online gambling will cut into the money the state receives from its successful lottery. That lottery includes a thriving online component.
If it passes online gambling legislation, Michigan would be one of only two states with both a legal online lottery and online casino games. Pennsylvania has also legalized both, but the launch of PA online casinos is still several months away.
So with no market to base its projections from, the budget office was left to speculate. The conclusion it reached was one out of every $6 spent at online casinos would be poached from the MI online lottery.
Intuitively, it makes sense.
The online lottery’s instant win games bear a striking resemblance to online slot machines. So much so that the average person would be hard-pressed to tell the difference. And that’s where the cannibalization concerns stem from.
However, these same concerns have been raised every time a new delivery method has come along.
It happened when online casino games were legalized in New Jersey, only it was speculated that the land-based casino industry would bear the brunt of the cannibalization.
That never came to pass. In fact, online casinos have been good for the New Jersey land-based casino industry.
Similarly, brick-and-mortar retailers were adamantly opposed to online lotteries, claiming it would diminish foot traffic and sales. That also turned out to not be the case. The budget office even admitted Michigan’s lottery retailers have benefitted from the presence of online lottery during the hearing.
Yet, the lottery is extremely concerned that online casinos will cannibalize its revenue. And because of a lower tax rate, the budget office believes that cannibalization will cost the state millions of dollars each year.
Will online casinos cannibalize Michigan’s online lottery?
The truth is, no one really knows.
As noted, the games are very similar.
Beyond that, online slot machines are also more evolved when it comes to features, gameplay and selection. And with a lower tax rate, online slots should theoretically have a better return to player (RTP) than the lottery’s instant win games.
That said, all available evidence points to online casino trivially cannibalizing the lottery, or being beneficial.
The budget office spent plenty of time talking about cannibalization. But it overlooked a critical area: Online casinos will infuse the state’s gambling ecosystem with a lot of new players and money.
Even in its doomsday scenario, where 15% of online casino is poached from the lottery, that means that 85% of the revenue would be new money. And just like some lottery players will spend money at online casinos, there will be online casino players that spend money on online lottery products. The cannibalization goes both ways.
Finally, plenty of people partake in both activities. Once a person puts some virtual nickels in an online slot machine, he or she doesn’t cease all other gambling activity.
Another overlooked factor is player behavior.
Attempts to change gambling behaviors rarely bears fruit.
If steering customers toward games the casino wants them to play were possible, then the games with the highest house edges and least overhead would be packed. The reality is, casinos have to offer a wide variety of games to appeal to as many people as they can.
Lottery players play the lottery for specific reasons, not because it’s the only game in town. They can already bet online at offshore casinos and sportsbooks.
So what are those reasons?
For starters, lottery games tend to be simplistic, and current customers are comfortable and familiar with them. Plus, they trust their state-sponsored lottery.
There’s also the notion that “if I’m going to gamble, at least my losses are going to a good cause (the state coffers) and not padding the bottom line of a casino.”
Shifting a player from the lottery to a casino, or vice versa is akin to converting a Pepsi drinker into a Coke drinker. The easier route is finding people who drink neither, or who will switch back and forth based on factors beyond taste.
Converting lottery customers into online casino customers is a mammoth undertaking.
As such, it’s unlikely online casinos will focus marketing dollars trying to convert lottery customers (customers who are likely happy with the product) into online casino customers when there is a plethora of new customers without any loyalty sitting on the sidelines.