Will Pennsylvania opening its digital doors prove a game changer?

“This will be the year that something gets done in the US.” It’s a common refrain heard by European gambling execs and one many had long since stopped believing. But the perfect storm of a major budget deficit and looming deadlines meant Pennsylvania became the fourth US state to legalise and regulate online gaming back in October.

The bill provides the broad strokes, including a 54% tax on slots, and 16% on poker and table games, but the regulations themselves are still being drawn up by the Pennsylvania Gaming Control Board, leaving some uncertainty. What is known is there will be 36 licences initially available, 12 for slots, 12 for table games and 12 for poker, with the state’s land-based casinos having first dibs on all three for a $10m fee. If they don’t take their allocation up, and the hefty taxes and fees mean many won’t, outsiders will have their chance to buy an individual licence at $4m a pop.

It is also assumed that Pennsylvania will mimic New Jersey’s skins model, where international firms can operate a site from one of the land-based casino’s licence. This has proved a successful model for firms like Betfair in New Jersey and no hard cap on the number of skins was mentioned in the bill.

However, the slots tax in particular will make it difficult for new entrants to the market that don’t have a land-based presence. Consider that slots makes up around 70% of total revenues in New Jersey, far outweighing table games at around 20% and poker at 10%. Assuming similar weightings for Pennsylvania, the blended tax rate comes out at around 43% – among the highest rates on the planet.

Tweaking the model

As Regulus Partner’s Paul Leyland explains: “The standard remote model demands circa 20-40% of revenue is pumped into marketing, meaning that after content and payment costs, slots will be barely contributing, if at all.”

Leyland therefore argues the market is “unworkable” for marketing-led remote offers and tilted heavily in favour of omni-channel operators. In other words, land-based casinos already spending on marketing can shift their campaigns towards their online offerings without too much pain, but offshore brands like Betfair are liable to struggle.

Pennsylvania became the fourth US state to legalise and regulate online gaming back in October. Credit: New_Folder/iStock

Dermot Smurfit, the CEO of GAN, which will provide a real-money platform to Pennsylvania’s Parx Casino when the market goes live, says Pennsylvania is a feasible market, but only when viewed as a marginal opportunity for firms with an existing business in New Jersey.

“If you have a team and operations in New Jersey, it’s a relatively slight incremental extra cost to launch in a neighbouring state with a bigger population,” he argues.
Indeed, The Stars Group, the largest poker operator in New Jersey, has already said it aims to be first to market when the market opens around Q2 or Q3 next year. GVC, 888 and Betfair were also mooted by analysts as likely benefactors from Pennsylvania coming online.

Wiggle room

There is also the hope of course that the tax rate will come down if participation is less than the state hopes. It is after all in the interest of maximising its tax receipts.

“If no one is taking up the slot licence after six to eight months, that would warrant a conversation about improving participation and that’s when we would come in and talk about a 20-22% rate,” says Jeff Ifrah, head of the US egaming trade group iDEA. “The hope would be the opposition is less vocal at that point, and a change would draw less attention and less lobbying opposition. I do have some hope here because this rate doesn’t work for anyone. The casinos are against it. Even poker operators recognise this is crazy.”

Even with the “crazy” tax rate, Eilers & Krejcik Gaming estimates the market could be worth $200m annually, rising to $300m, should the tax rate be cut to “market rates”.

Good times ahead

Much of that healthy market will be going to the land-based incumbents and their platform providers, but where international firms have some hope is the impact of Pennsylvania on the wider US market. Several experts suggested it could encourage other states to start looking harder at online gaming and even sports betting. Following the bill, The Stars Group said it was “optimistic that Pennsylvania will be a catalyst for other US states to continue the momentum of egaming regulation in the US”.

“As evidenced by the recent positive legislation for online gaming in Pennsylvania, the market potential continues to grow” – Matt Davey, NYX Gaming Group

For Ifrah, it’s a huge step forward with the potential to trigger a domino effect of legislation.

“PA is a major state,” he says. “It’s the biggest state to come on-board so far and it will encourage New York to look at this more seriously. We also have Michigan and Illinois in the background working on bills here. Like you saw with progressive lotteries, which quickly went viral, I think the same could happen here. This is a huge achievement.”

The key is New York, which neighbours both Pennsylvania and New Jersey, is home to a thriving brick-and-mortar casino industry, and has seen its Senate pass an online poker bill two years in a row.

Ifrah believes the casino operators in New York will now be pushing for egaming legislation, for fear of PA consumers staying at home and playing rather than crossing to play in New York.

But is the domino effect an overrated phenomenon? Gary Pretlow, the chairman of the New York Assembly Racing and Wagering Committee, told Gambling Compliance the Pennsylvania legislation would have zero effect on his own state’s actions.

But Chairman Pretlow’s recalcitrance is likely more an example of political positioning than actual reality, says egaming affiliate and analyst, Adam Small. “No doubt New York has its own issues to resolve, which are substantially different than Pennsylvania’s, but the outlook is certainly more attractive today than it was a month ago,” Small adds.

A sporting chance

And the positive momentum could even extend to sports betting, given that the Pennsylvania bill would regulate the activity should the federal ban be removed.

Indeed, NYX Gaming Group pointed to Pennsylvania recently as a reason for reaching a commercial agreement with Scientific Games to develop a US-focused sports betting platform.

“This agreement represents an important step forward for NYX as we continue to position ourselves for greater expansion in the North American market,” says Matt Davey, NYX CEO. “As evidenced by the recent positive legislation for online gaming in Pennsylvania, the market potential continues to grow.”

The short term impact of Pennsylvania coming online then is relatively minimal for the firms not already embedded in New Jersey. However, in the longer term the US represents one of the last genuine blue ocean opportunities for egaming firms, and there’s a chance that Pennsylvania could kick-start the spread of regulation across the US.

Combined with the ongoing Supreme Court case, which could see the federal ban on sports betting overturned, and inter-state agreements to share poker liquidity, European firms would do well to start investing in the US sooner rather than later.