How a severe restriction on ‘skins’ would impact Pennsylvania’s egaming market

When Pennsylvania became the fourth state to give egaming the green light last October, you could loosely compare it to encountering an oasis in a dusty desert after five long, barren years since the last state, New Jersey, passed online casino and poker legislation. And as the second-biggest gaming state in the US, not to mention the fifth-largest in terms of population with almost 13 million residents, Pennsylvania always was – and remains – a coveted egaming prize.

For the Keystone State’s 12 brick-and-mortar casinos (plus another downtown Philadelphia property due to open in 2020), online gaming is a chance to leverage their strong brands to build online channels and new revenue streams. And for the out-of-state and international operators, it’s an opportunity to tap into a potentially lucrative market and expand their footprints in the US.

Yet since gambling expansion bill H271 was signed into law five months ago, lawmakers and the Pennsylvania Gaming Control Board (PGCB) haven’t clarified an important issue: how many individually branded websites, or ‘skins’, each operator can launch. Amid this uncertainty and inertia, powerful land-based properties are lobbying for skins to be severely limited. This includes Parx Casino, which is Pennsylvania’s largest casino in terms of revenue with around an 18% share of the market.

In a six-page letter submitted to the PGCB at the end of January, Parx called for skins to be restricted to just one per licensee and that this single skin’s branding should “match or be predominately the same,” as the brand of the Interactive Gaming Certificate holder. In short, a site should carry a land-based property’s name and branding. Parx is expected to launch its own branded site powered by GAN after inking a multi-year deal with the supplier back in 2014 and launching a social casino product.

Another vocal supporter of skin restrictions is Penn National Gaming, owner of Hollywood Casino at Penn National Race Course and now Meadows Racetrack and Casino following the recent $2.8bn acquisition of Pinnacle Entertainment. Chris Sheffield, SVP and managing director of interactive gaming, says: “We believe that multiple skins provided by offshore or out-of-state operators would inevitably cannibalize the land-based casino businesses in Pennsylvania, putting many jobs and the Commonwealth’s land-based gaming tax revenues at risk.”

Sheffield adds: “The best way for Pennsylvania to increase gaming and tax revenue is to use online gaming as a natural extension of the Commonwealth’s land-based facilities to help drive visitation. Out-of-state operators would focus on driving visitation across the state’s borders and online-only operators would likely focus on converting land-based players to play solely on their platforms. This will risk jobs and decrease tax revenues for Pennsylvania.”

Divide up the pie

On face value, it is probably understandable why Parx and Penn National – and possibly other operators – want to replicate their strong positions in the online arena by slamming the door shut on those ‘outsiders’ seeking to launch their brands in the state via land-based license holders. However, opponents of a one-skin limit deem it to be simply protectionism by the brick-and-mortar heavyweights.

Critics also argue that a severe restriction would lead to a lack of choice, which is bad for consumers, and would stifle innovation and the introduction of new products. The nascent market would become stale, struggle to reach its potential, and lead to fewer tax dollars for state coffers. “Local players think that if they can limit the market they will have a bigger piece of the pie, [but] that pie is going to be a lot smaller,” says 888 Holdings’ head of commercial development, Yaniv Sherman.

Such is the concern among online operators about the lobbying for limits, that 888 CEO Itai Frieberger also penned a letter in February to the PGCB to argue the case for allowing multiple brands to operate. As well as dismissing the suggestion of cannibalization, he stated that a multi-brand approach “stimulates healthy competition” and “increases market size, resulting in larger gaming duty.”

As the only company to hold licenses in all three regulated states, 888 is eager to plant its flag in the ground in Pennsylvania with its B2C and B2B casino and poker platforms. The Gibraltar-based operator is partnered with Mount Airy Casino Resort and is also likely to power the poker platform for Caesars-owned Harrah’s Casino & Racetrack.

Meanwhile, pro-egaming lobbying group, the iDevelopment and Economic Association (iDEA), of which 888 is a member, is calling for either no limit on skins or a five-skin limit per licensee. For iDEA’s Jeff Ifrah, it’s simple: more brands equal more players. “There is a concept in marketing called channelization – the more channels, games, skins and brands you offer, the more consumers come to play,” he tells EGR NA. “If you really want to have access to the millennials and the people who are educated and who will spend the money, then you are really going to have to keep their attention. And to do that you need as much buzz going on out there as possible.”

“Pennsylvania should be looking to emulate almost every aspect of the New Jersey market” – Jeff Ifrah, iDEA

He also underscores the need for Pennsylvania to follow New Jersey’s lead. “I just think it is a very short-sighted and narrow approach to look at the gaming opportunity in Pennsylvania and demand that it must be limited to the brands associated with the 13 casinos. Pennsylvania is a bigger market than New Jersey and, for it to exceed New Jersey’s economics, it should really be looking to copy almost every aspect of the New Jersey market, not differentiating itself from it.”

Drawing comparisons

Despite New Jersey getting off to a sluggish start in late 2013, the market has maintained an upward trajectory with annual GGR climbing to almost $246m in 2017 – up from $122.9m in 2014. Online accounts for around 10% of gaming revenue. February was the 12th consecutive month that revenue across the sector exceeded $20m, while iDEA argues that each time a new brand, or skin, has launched in the Garden State (there are now total of 17 skins), it has expanded the market as a whole.

New Jersey limits each operator to five distinct online brands, which has enabled domestic and overseas brands like Betfair, Pala, SugarHouse, Virgin and others to launch using the interactive gaming licenses of five Atlantic City’s operators (Borgata, Caesars, Golden Nugget, Resorts and Tropicana).

PokerStars and Mohegan Sun offer online gaming via Resorts’ license, and Ed Andrewes, owner of EAGCC, the consultancy company that has a management agreement with Resorts’ online arm, supports an open and competitive marketplace. “It goes back to the whole equation of needing enough competition to encourage marketing,” he explains.

“I’m a firm believer that when operators spend on marketing it increases the whole market. Obviously, that doesn’t go on forever, so you can’t say that if one of the brands is marketing particularly heavily it is not going to have some cannibalization on the other brands, but, on the whole, every product and every market in the online gaming sector benefits from marketing.”

Frieberger made the point in his letter that licensees’ profitability would be boosted by sub-brands, as has been the case in New Jersey with Betfair and SugarHouse helping Golden Nugget to report record monthly revenues. Golden Nugget and its licensees recorded $7.8m in February. Despite having a modest presence in the US, European brand Betfair Casino has performed particularly well in New Jersey, as has out-of-state operator SugarHouse which only launched 18 months ago.

“I really do think it [New Jersey] would have been significantly smaller [without multiple skins],” Andrewes asserts. Yet Sheffield is of the opinion that New Jersey’s growth cannot be solely attributed to new players. “Much of the growth is due to general improvements in payment processing, product, and increased customer awareness and trust, which always takes time to build,” he says.

He also highlights online poker’s malaise in the Garden State despite multiple brands operating there. “We have actually seen poker decline in that market, even following the entry by new and large poker operators such as PokerStars. Poker in New Jersey is down by 8% YoY, which many argue is a result of too much competition for this market, lack of liquidity, and the different poker platforms making it more difficult for customers to spread their play.” Instead, Sheffield suggests the most effective model for Pennsylvania is for the major land-based operators to partner using a single poker platform to share liquidity and maximize the market.

Market forces

In New Jersey, many of the land-based casinos have harnessed their brands and, to a certain extent, customer databases to build strong positions in the online market. So even if global online operators enter Pennsylvania, Parx, Penn National et al. are still likely to be major players. As (probably) will be the recently sold Sands Casino Resort Bethlehem, the second highest-grossing casino in 2017 with around $545m in revenue from slots and table games.

Then there is Rush Street Gaming which owns Rivers Casino in Pittsburgh and SugarHouse Casino in Philadelphia. The revenues from these two casinos combined account for 20% of the market (surpassing Parx), while online division Rush Street Interactive and its in-house built PlaySugarHouse.com have made an impression in New Jersey, which gives it a head start in Pennsylvania. (Rush Street Interactive refused to be drawn on its position regarding potential skin restrictions when approached by EGR NA.)

Of course, the elephant in the room for all would-be egaming brands, though, is the oppressive 54% tax rate on GGR for slots. Indeed, Sherman says that with slots accounting for 70% of the market in New Jersey, executives have been “crunching spreadsheets day and night ever since the bill was passed in Pennsylvania” to see if the numbers add up.

“Multiple skins provided by offshore or out-of-state operators would inevitably cannibalize the land-based casino businesses” – Chris Sheffield, Penn National Gaming 

Table games, and especially poker (both taxed at a more palatable 16%), will be key for user acquisition and cross-selling slots, he says. Meanwhile, Penn National has been a fierce critic of the slots rate since the outset. “The 54% tax on slots is ridiculous and unprecedented,” Sheffield states. “We are still considering our strategy for licenses and content, but certainly there will need to be strategy for delivering slot content at a lower cost to mitigate the high task rates.”

Another hurdle is the eye-watering $10m license fee to offer slots, table games and poker when the licensing application window opens, probably next month. Pennsylvania’s brick-and-mortar casinos will have 120 days to apply, after which any unsold licences are up for grabs to out-of-state casinos and online operators. After 90 days of the 120-day window, licenses for slots, table games and poker can be purchased individually for $4m each. Again, the land-based casinos have first dibs and it could be the case that these operators shovel up all – or at least the lion’s share – of the available licenses.

Furthermore, if the skins were to be restricted, it could deter the smaller casinos from applying for licenses because they wouldn’t be able to alleviate the cost burdens by licensing skins to third-party brands, typically on a revenue-sharing model. If the barriers to entry are considered too high, licenses will be left unsold. This is why iDEA says skin restrictions are “anti-competitive,” effectively pick winners and losers, and hand the market to state’s largest land-based casino operators. “I just think Parx and the others feel they have a competitive advantage and they can shut everyone else out of the market,” Ifrah remarks.

“I can see why some are calling for [skins restrictions], but I think they are wrong” – Ed Andrewes, EAGCC

The decision on skins could turn out to be absolutely pivotal in the way Pennsylvania’s egaming market develops. It really could make or break the sector. Either the Keystone State will be dominated by the big land-based names who have the market all to themselves, or they could be joined in a slugfest by out-of-state and global online operators. 

Andrewes, who wishes to see the latter scenario materialize, is unequivocal when he says: “This whole protectionist standpoint will, ultimately, mean it is a much smaller market than if there were a number of skins and much more spent on marketing.”

He continues: “I can see why some are calling for it, but I think they are wrong. And I think the government would be wrong to allow it because they will find they will get tax from a far smaller market.”