[toc]At Tuesday’s joint hearing of the Senate Community, Economic & Recreational Development Committee and the House Gaming Oversight Committee, two very vocal opponents of online gambling in Pennsylvania based their opposition on one central argument.
In short, Sen. Robert Tomlinson and Anthony Ricci, CEO of Parx Casino, contended that an online gambling rollout would result in less tax revenue for the commonwealth.
Yet, all material evidence points to the contrary. The reality is online gambling is far more likely to have an additive impact on total casino industry revenue, resulting in higher tax revenue and operator margins.
Cannibalization a baseless claim
Both Tomlinson and Ricci assert that online gambling will cannibalize foot traffic from the state’s 12 casinos. This claim is based primarily on conjecture, as NJ online gambling operators have had quite the opposite experience:
- In his hearing testimony, Caesars SVP of Government Relations David Satz cited that 80 percent of Caesars’ online casino signups were not existing Total Rewards members. And that a fair segment of Caesars online-first customers do wind up visiting the operator’s land-based properties.
- In 2015, Landry’s VP of Online Gaming Thomas Winter indicated that “80 percent to 85 percent” of Golden Nugget‘s online customers were previously not regular visitors to its land-based casinos. The roughly 20 percent that were increased their number of visits.
- One of the highlights of surveys conducted by The Innovation Group was that “more survey participants state their spend and frequency to land based casinos would increase with the ability to play online.”
Granted, New Jersey and Pennsylvania boast very different casino markets. All NJ casinos are located in Atlantic City. In PA, casinos are distributed throughout the state, with clusters located at large population centers.
In his written testimony, Ricci notes the differences between the two markets and reasons why PA isn’t as well-positioned for a successful online gambling rollout:
“All [NJ] casinos are concentrated in one central location, Atlantic City, as New Jersey created a destination type market that drew from the population centers of Philadelphia, northern New Jersey and New York rather than the more locals, convenience structure built in PA. In fact, only 5% of New Jersey residents live within 25 miles of a casino, as opposed to two-thirds in PA.
Due to our more extensive geographic reach, there is much less upside opportunity and a much greater risk for cannibalization of the existing business.”
But that’s just not right
There are two primary issues with this logic:
- In order for cannibalization to occur, online gamblers will have had to already exist in land-based casino databases. However, as proven in New Jersey, online and land-based gamblers are from two different demographic stocks. Online gamblers don’t visit land-based casinos because they’re far away; they don’t visit because the demographic groups represented aren’t interested — or at least they’re not until the online sites incentive them to be.
- The convenience structure of land-based casinos in Pennsylvania will act as an incentive for new online gamblers to visit live venues. In New Jersey, the distance factor is a deterrent, and yet new signups via online sites are still making the trip.
The tax rate problem isn’t a problem at all
In the current legislation, the proposed tax rate on online gambling is set at 14 percent, with an additional two percent reserved for local communities. This stands in strong contrast to the effective 59 percent rate on brick and mortar slot revenue.
The wide gulf proved a point of contention for both Tomlinson and Ricci. Parx is of the mind that players will gravitate away from the higher taxed slots and toward the friendlier, lower taxed options. The result: incrementally higher industry revenue, but lower tax revenue.
In his testimony Ricci states the following:
I find it impossible to assume that a brick-and-mortar casino paying 59% in taxes will not lose significant business to an online operator paying 15% in an open, unprotected market.
In our estimation this statement doesn’t hold water, for the following reasons:
- Cannibalization myths have already been thoroughly debunked (see above).
- The average casino patron will probably not be acutely aware of the discrepancies in tax rates. Thus, it will not influence their decision on where to play.
- The tax rate discrepancy is not nearly as wide as suggested, as Pennsylvania taxes it table games and poker at just 16 percent.
- Land-based casinos will still be heavily incentivized to market to their land-based customers over their online customers.
When $1 at 59 percent is worth more than a $1 at 16 percent
The latter point may raise some alarm bells. Wouldn’t an operator be foolish to market their land-based properties if the tax rates on online gambling are so much lower?
No, for the simple fact that a lower tax rate doesn’t necessarily equate to higher margins.
Online gambling sites have a singular means of generating revenue, and that’s through gaming. Even at low tax rates, the margins are low because operators have to continually incentivize players to come back for that singular activity.
By contrast, brick and mortar casino have myriad ways of generating revenue, many of which are taxed at much lower rates than 59 percent:
A few examples:
- Hotel stays
- Retail purchases
- Food and beverage
- In the case of Pennsylvania, table games and poker
Maybe the casino doesn’t make huge margins on players who only play slots. But in so long as those players partake in any of these higher margins activities, that player is arguably worth more to the casino’s bottom line than any online player, low tax rate or not.
The real benefit of PA online gambling
Pennsylvania’s brick and mortar casinos are well-established entities that collectively and reliably generate over $3 billion per year. From the casino perspective, the incremental revenue generated from online gambling should be viewed primarily as an added perk.
The real benefit, and Rush Street Interactive President Richard Schwartz pointed this out in his hearing testimony, is that online gambling is a “proven player acquisition tool.”
Thus, savvy operators are:
- not going to divert significant marketing spend away from brick & mortar and toward online — which could result in cannibalization
- going to spend their comparatively meager online gambling marketing budgets on incentivizing players to visit their land-based properties.
We’ve witnessed this phenomenon in New Jersey, where cross promotions have become more prevalent, and perhaps without coincidence, Atlantic City is entering a revitalization stage.
With the right marketing strategy, a similar result can be achieved in Pennsylvania. And not a moment too soon, as the industry is beginning to show signs of fatigue.