So What Is New Jersey’s Online Gambling Market Really Worth?

John Brennan was the first I saw to question New Jersey’s official estimates regarding online gambling revenue.

As Brennan and others have noted, there’s a considerable gap – nearly a billion dollars  – between what the state is projecting for first-year online gambling revenue ($1.2 billion) and forecasts from analysts.

So who’s right? And what exactly can we expect in terms of online casino revenue – and therefore tax revenue – in the initial year of regulated online gambling in New Jersey?

Before I take a whack at that question, a few important notes:

• New Jersey’s official projections are for their 2014 fiscal year, which begins in July of 2013.
• The size of an online gambling market is generally expressed in Gross Gaming Yield (GGY), which is the net casino revenue after player winnings (but not promotions or other costs) are paid.
• New Jersey’s base tax rate for online gambling is 15% of GGY. Casinos must also pay a 2.5% tax into the Casino Reinvestment Development Authority (or an additional 5% to the state, but that option appears rarely exercised). It does not appear that the state is including this additional tax in their projections.

Comparing NJ online gambling market estimates

Let’s start with a quick comparison of New Jersey’s estimates and a selection of industry research reports.

• Wells Fargo Securities (2013) sees a range of $650mm – $850mm for a full Year 1, based on a per-player annual spend of $111-$149.
• The New Jersey FY 2014 Budget (2013) pegs year 1 revenue at $1.2b based on the Year 5 target of the Wellso Fargo report.
• Gambling Data (2013) argues for a $235mm – $288mm range based on per-player annual spend of $38. Modeled on Italian market.
• H2 Gambling Capital (2010) puts the Year 1 number at $410mm.
• And finally Econsult (2010) forecasts $210mm – $250mm.

That’s a pretty broad range.

Eliminate the NJ projections (because they just restate Wells Fargo), add up all the other scenarios and you’re looking at an average estimate of about $412mm in GGY for New Jersey’s first calendar year offering online gambling.

Chuck out NJ, the highest and lowest projections and the consensus forecast for year one online gambling GGY for New Jersey operators becomes $261mm.

New Jersey and the United Kingdom

GamblingData, sister site of information provider GamblingCompliance, based its New Jersey report on data from the Italian market. So I thought a back-of-the-napkin modelling of New Jersey based on the UK gambling market might provide further context for the above projections.

• The UK online gambling market had a GGY of £1.71b in 2011, according to a GamblingData.com report. Subtract sports betting from that total and you’re at roughly £1b (or about $1.5b in USD).
• The UK has a population of ~53mm, of which roughly 80% are legal gambling age for a gambling population of 43mm.
• 56% of adults participated in some non-lottery gambling in UK in 2010, and among active casino players, 39% played online. I wasn’t able to find corresponding numbers for New Jersey, but it’s worth noting regardless.
• NJ has a population of ~9mm and about 72% are of legal gambling age for a gambling population of 6.5mm.
• The gambling population of NJ is about 15% the size of the gambling population in the UK.
• Applying that ratio to GGY in the UK suggests New Jersey’s market could generate about $225m annually – fairly close to GamblingData’s low-end estimate of $235mm.

This is obviously a very crude analysis. But it nonetheless indicates that high-end estimates for New Jersey are not supported by comparisons to mature, online gambling markets with high participation rates.

Arguments for low-end estimates

The clear conclusion at this point: New Jersey’s official estimates are inconsistent with both analyst estimates and data from comparable markets.

But there are additional arguments supporting a GGY projection on the low end of – and perhaps even lower than – consensus projections:

• Online gambling seems unlikely to launch by the start of fiscal year 2014 (July 2013), so New Jersey probably won’t have a full calendar year to hit projections (more on that below).
• NJ had a lower-than-average participation rate in online poker pre-Black Friday (per research by Kahlil Philander & Ingo Fiedler).
• Mobile betting is driving no small part of worldwide growth, and it’s unclear if New Jersey will have a full slate of mobile options at launch.
• Companies may choose to launch with a limited lineup of games due to technical, economic regulatory and / or marketing concerns, depressing participation and revenue.
• Companies will need time to acquire the data that will allow them to optimally target customers.
• Unlicensed online casino operators will siphon off some level of market share. They are entrenched in search results via affiliates and don’t face the same cash out problems online poker sites face.
• Unforseen complications could delay launch.

Arguments for high-end estimates

Of course, there are some reasonable points that can be raised to support a higher-end estimate for the first year of regulated online gambling in NJ (although not enough to lend credence to New Jersey’s official projections):

• The novelty factor of regulated online gambling will potentially drive participation rates (temporarily) higher.
• The massive amount of (free) press surrounding launch will likely have a similar impact.
• PokerStars is an X factor. The presence of PokerStars in New Jersey could super-charge both PR and the novelty factor.
• Casinos will almost certainly front-load their promotions (and marketing) at and around launch in an attempt to secure market share.
• Casinos already have larger and sophisticated customer lists to work with.
• “Online poker tourism” – residents of other states moving to, or setting up a part-time residence in, to play online poker – could allow New Jersey to punch above its population weight.
• There’s already some adoption of online gambling in New Jersey status quo via online horse race betting.

So what it’s worth?

I agree with (just about) everyone else – New Jersey’s official estimates are driven far more by political need and budgetary magic math than by sober, rational analysis of the market.

But how far off are they? Two important conditions impact that answer.

The PokerStars impact

First, I believe that PokerStars will have  a material impact on the size of New Jersey’s online gambling market. The company has the software, the expertise and the customer list to immediately command substantial market share in New Jersey. But I think PokerStars also expands the market; the interest in their return, the pressure PokerStars places on competitors to offer more value to players and their proven marketing savvy all suggest PokerStars can bring players into the market that might otherwise pass.

Assuming PokerStars gets the nod from regulators, and that the launch of real-money gambling takes place  within a month or two of the start of the fiscal year, I think we can reasonably expect a $250mm -$300mm GGY for New Jersey’s first year.

The fiscal year impact

Those are both big assumptions. The bigger of the two is that the state of New Jersey will be ready to launch real-money online gambling by (or near) to the start of their 2014 fiscal year in July 2013.

I don’t have any first-hand information regarding how far along regulators are in New Jersey, but from a public perspective a July launch seems implausible at best. No licenses have been issued and regulations have yet to be promulgated, reviewed & adopted. In fact, we don’t even know what games are approved for online play in New Jersey.

Every month that NJ delays beyond the start of the fiscal year chops somewhere between $20mm – $25mm from their GGY potential for (fiscal) year one.

My estimate

New Jersey certainly has the potential do $300mm+ in the first calendar year following launch. If PokerStars is part of the equation, I could see that number moving up toward $330mm.

But on the question of the likely GGY for fiscal year 2014, I’d imagine we’ll end up looking at a number much closer to $150mm – $200mm. Given the progress to date, I just can’t see a full-fledged launch until fall 2013 at the earliest. And even that could prove optimistic.

In this scenario, the State of New Jersey is overstating expected revenue from online gambling for FY 2014 by roughly $1b, and, ergo, overstating tax revenue by about $150mm.