[toc]The path toward legalized online gambling in Pennsylvania has become muddied.
Last week, it emerged that Sen. Robert Tomlinson was finding success convincing fellow members of the Pennsylvania Senate Community Economic & Recreational Development Committee (CERD) to push for tax rates on online gambling that paralleled the rates land-based casinos pay.
Those rates: 16 percent on table games and poker, and an oppressive 54 percent on slots.
Online poker players may feel they are in the clear (16 percent is high but not untenable). But the reality is that if a 54 percent rate on slots is pushed through, the state’s entire online gambling industry would be crippled from the get.
Higher taxes = fewer operators
By imposing a higher tax on slots, Pennsylvania is all but guaranteeing that it takes in less in upfront operator fees.
Based on our internal projections, Pennsylvania could generate upwards of $126 million in license fees, pending a more reasonable tax rate of 20 percent. That’s enough on its own merit to fulfill the $100 million earmarked for gaming reform in the 2016/17 fiscal year budget.
Unfortunately, there is a real possibility that somewhere between half and all potential online gambling operators would opt out of Pennsylvania if the rate on slots was set at 54 percent.
And why?
- One reason being, online slots are an operator’s bread and butter. These games account for more than 80 percent of online casino revenue in New Jersey.
- Unlike land-based casinos, online sites have only one means of generating revenue. That’s through gaming.
- By contrast, land-based casinos can eat a higher tax rate on slots because they offer a slew of lower taxed, non-gaming amenities, most of which produce high margins for the casinos. Examples include food and beverage, entertainment, retail outlets, hotels, and spas.
Put simply, there are few paths to profitability for a business, any business, where more than 80 percent of its revenue is taxed at 54 percent.
With fewer operators in the picture, it follows that there would be fewer, or even no, online poker sites.
What about online poker-only operators?
An argument could be made that if Pennsylvania does impose an oppressive tax rate on online slots, but not online poker, that operators will simply launch online poker sites exclusively.
Probably not going to happen.
The reality is that online poker margins are razor thin to begin with. Not to mention, online poker generates far less gross gaming revenue than online casino.
In New Jersey, online poker sites took in just $26.5 million in 2016. By comparison, they generated $170.2 million from online casino, representing a roughly 6.5:1 ratio in favor of online casino. In March 2017, online casino accounted for 89.6 percent of total industry revenue.
Furthermore, despite only being taxed at 15 percent, NJ online poker revenue is trending flat. By contrast, NJ online casinos have shown a prolific ability to increase gross gaming revenue. In March 2017, online poker revenue was down 8.5 percent year-on-year, versus a staggering 49.8 percent uptick for online casino.
Bottom line: Online casinos are a much more profitable endeavor for operators, with a bigger upside. Standalone poker sites in a market that services just 12.8 million, not so much.
But even if they did…
Assuming an operator did launch an online poker-only operation in Pennsylvania, it would be an oppressive playing environment for players.
Remember, that under current proposals, PA online gambling operators would have to pay $8 – $10 million in upfront licensing fees. Significant vendors would have to fork over $2 million.
To put this in perspective, the Borgata/Party online poker network in New Jersey only generated $9.2 million in gross gaming revenue for all of 2016. At $8.6 million, WSOP/888 in New Jersey fared even worse.
And even perennial powerhouse PokerStars NJ only grossed $11.5 million over the past 12 months. That’s barely enough to cover to cost of a license if that were net revenue.
Put frankly, what operator in their right mind would opt-in to a struggling industry where its gross annual revenue was on par with its upfront licensing fees? None, we assume.
But assuming at least one operator bites the bullet, they’d have to rationalize it by charging players significantly more cash game rake and tournament fees. They’d also spend less on reinvestment programs — meaning less rakeback, promotions, and smaller welcome/no-deposit bonuses for players.
For players, the black market will ultimately prove more appealing. And it would be difficult to blame them for shunning legal online poker in favor of shady sites that offered a more appealing playing environment.
No one wins
The simple reality is that a 54 percent tax rate on slots, now compounded further by the recent notion that the PA lottery could run the state’s online gambling business, will kill the PA online poker industry before it can find its footing.
There’s a reason why every single NJ online poker operator is under the umbrella of a licensee that also offers NJ online casino games. That’s because online poker isn’t worth it on its own, especially in the small New Jersey market.
Pennsylvania isn’t much bigger (~3 million more residents). And the licensing fees would be much higher. Such a rate nearly demands that license holders interested in online poker supplement their operation with an online casino rollout.
But who is going to bite if they can’t turn a profit?
