What can other states learn from the early success of PA online gambling?
Online Poker Report

Four Lessons From The First Year Of Legal Online Gambling In Pennsylvania

Pennsylvania online gambling lessons

July 15 marked the end of an eventful first year of legal online gambling in Pennsylvania.

Coincidentally, the anniversary also turned out to mark the surprise launch of West Virginia’s first online casino. And Michigan made some key progress toward its own launch a few days later.

Regulators in those two states are likely looking at how PA has fared to help them in their own decisions, and those in any jurisdiction considering expanded gambling would be wise to do so too.

While PA online gambling has been a huge success in many ways, the first year was not without its share of missteps. Here are a few important takeaways from year one in the Keystone State.

#1: Online gambling is valuable backup for retail

One common argument against the proliferation of online gambling centers around the fear that it will eat into existing retail revenue. Such cannibalization does not generally materialize, however, nor has it in Pennsylvania.

From the time online gaming launched until COVID-19 forced the shutdown of land-based casinos in PA, retail slots revenue in the state showed no decrease at all. In fact, it rose slightly by 0.3% year-over-year.

More important is what happened after the casinos closed. In states without an online option, gaming revenue fell to zero or close to it. Players either stopped gambling entirely or turned to illegal offshore sites.

In PA, however, legal online casinos and poker rooms were able to meet some of the demand.

Monthly online revenue doubled between March and June, yielding a total win of $174 million. Although that’s not nearly as much as the roughly $1 billion that retail gaming would have brought in over that time, it’s far better than nothing.

COVID-19 may or may not prove to be a once-in-a-lifetime pandemic. Nonetheless, there are many other reasons retail casinos could be forced to close or reduce capacity in future. Online gambling revenue provides an invaluable backup plan in such circumstances.

#2: Set the tax to fit the market

When it comes to legalizing online gambling, there’s perhaps no more important topic of debate than how it will be taxed. Though legalization has several advantages, there’s none more appealing to policymakers than the dollars it will add to public coffers.

Once the legislative wheels are turning, operators will lobby for the lowest numbers they think they can get. Pennsylvania ignored their advice on that front and elected to impose some of the highest gaming fees and taxes in the country.

Most notably, it takes the unique approach of separating slots from tables and taxing the former at 54%. By contrast, neighboring New Jersey has a 15% tax rate on all forms of online gambling.

Even impartial industry-watchers worried that such a rate would ruin the viability of the PA market.

That hasn’t really proven to be the case, at least so far. Twelve of the 13 available licenses sold, 10 sites have now launched, and slots produce the lion’s share of revenue for all but one.

Pennsylvania’s size helps, of course. Hardware and software setup costs mean a smaller state might not be able to attract many operators with such a high rate. But online slots are so lucrative that they remain an appealing opportunity in PA even under an aggressive tax rate.

There is one big downside for players, though. Apparently to help compensate for the higher taxes, online slots in PA tend to have a lower return-to-player (RTP) than those elsewhere.

From the state’s point of view, that’s not such a bad thing. It means there is a smaller difference than there otherwise would be between the new online products and its existing video lottery terminals, which have an even lower RTP.

#3: Don’t rush the launch date

Most of Pennsylvania’s success came in the latter half of its first year. Before that, things were off to a bit of a rocky start.

When July 15 was given as the go-live date, the general expectation was that there would be a big synchronized launch of operators and products. After all, that’s how things went in New Jersey, six years earlier. Based on the result, however, that launch date was too optimistic.

Only two sites were able to launch immediately, followed by one more later the same week. Each had a very limited range of games approved to start with. It also took another four months before the state’s first (and still only) poker room was able to launch, leaving those players in the lurch.

More importantly, the rewards from those first months weren’t significant enough to warrant the frustration and disappointment. Total state revenue for the first four months was under $10 million — less than one week of revenue at the current level of activity, or about half a month prior to casino closures.

#4: Unusual rules create unnecessary inconveniences

One unfortunate trend in US gambling expansion bills has been that many have included weird, idiosyncratic rules.

There are enough differences between states that some variation in laws is to be expected, perhaps even necessary. If a given restriction is completely unlike anything seen in other states, however, there’s a good chance the problem it’s meant to address doesn’t actually exist in the first place.

In Pennsylvania, the main such quirk is the requirement is that online operators prominently feature their land-based partner’s branding.

Elsewhere, this matter would be up for private negotiation between the companies themselves. This requirement was added in PA in part to appease Hollywood Casino owner Penn National Gaming, which initially wanted online brands to be excluded from the market entirely. Since launch, however, there’s been little clarity or enforcement.

PokerStars PA, going out of its way to be compliant, ended up saddling itself with the cumbersome pokerstarmtairycasino domain instead of something more concise.

Conversely, competitors like DraftKings Casino and FanDuel Casino operate their PA platforms from their main websites. Their partner branding is minimal with seemingly no objection from the regulator.

As with the half-cocked launch, the inclusion of this rule ultimately serves little purpose.

By taking things more slowly and avoiding unnecessarily complicated laws, others states can emulate Pennsylvania’s later success — but without the initial stumbles.

Alex Weldon
- Alex is a freelance writer and artist living in Dartmouth, Nova Scotia. He has been doing data-based analysis of the online gaming industry since 2016.
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