This is the second in a two-part series examining what can help sports betting and online casinos succeed in Pennsylvania — but also what could hold them back. Read part one first to get the whole story.
When Pennsylvania passed its gambling expansion bill in 2017, the sky was the limit to its potential.
As one of the most populous states in America, Pennsylvania was suddenly the largest state with legalized sports betting as well as online casinos and poker.
That’s what we were told. With such hype, however, comes ample responsibility. Responsibility not to embrace the industry, not to succeed, but simply to get it right.
From the jump, the Keystone State faced a steep hill to climb. Lawmakers instituted outrageous tax rates and required expensive fees for licensing that immediately put operators in a deep hole, affecting important budgets such as marketing and promotions.
Combined with restrictive state regulations and limited online skins, the odds of Pennsylvania sports betting and online casinos and poker succeeding are slim. Time will tell, but this world does not appear fit to cultivate a burgeoning Pennsylvania gambling industry.
Tax rates, licensing fees impact on marketing and reinvestment
Taxes and fees a ‘hindrance’ on PA operators
The big picture always makes headlines.
Some $150 billion a year is wagered via illegal sportsbooks, much of which regulated operations will attempt to capture. Our own white paper estimates a $275 million online gambling industry in four years.
Embedded within, however, are the details that cause concern: 36% tax on sports betting revenue in Pennsylvania in addition to the 16% rates each for online poker and table games and 54% rate for slots. Not to mention the $10 million for licenses to offer sports betting. Or the $10 million to offer online poker, tables and slots.
For perspective, look no further than New Jersey, where operators pay just $100,000 for sports betting licenses (plus $250,000 retainer) and $400,000 for internet gaming (plus a $250,000 Responsible Internet Gaming Fee). The state taxes sports betting revenue at a 14.25% base rate. Additionally, track partners undergo a 15.5% rate. Online casinos, meanwhile, pay 9.25% in taxes.
“Yes, I believe Pennsylvania can be competitive with other jurisdictions,” said Jennifer Roberts, associate director at the International Center for Gaming Regulations at UNLV. “However, I’m cautious … because I want to see the impact of a 36% tax rate. This may place some hindrance on operators with innovation, competitive pricing and product development. Only time will tell.”
Plenty of pieces not only need to fall into place in order for Pennsylvania’s expanded gaming to succeed, but they also need to mesh together. The synergy of using online sportsbooks to drive traffic to online casino boosts each industry. Such cross-selling has worked well in New Jersey, which has seen both sports betting and online casinos take off as a result.
Conventional wisdom suggests a market with astronomical fees and tax rates will not thrive. But the new world of legalized US sports betting has not seen one like it before, especially in a state trying to become the first with both online lottery and online gaming operational within state lines.
PA sports betting a ‘volume driver’
Before even entering the market, operators looking to open up shop in Pennsylvania found themselves behind the eight ball.
Timothy Wilmott essentially said as much during a recent earnings call for Penn National Gaming, which owns Hollywood Casino. The CEO noted that “the only market that has a significant online sports betting business is New Jersey, and we don’t operate there.”
He lauded the standalone retail sportsbooks at Penn National properties in West Virginia and Mississippi. Those properties have operated with “healthy margins” because of “appropriate” tax rates. Pennsylvania, though?
“Pennsylvania, it’s more of a volume driver for us and we have to monetize those guests elsewhere in the casino because the tax rate is extraordinarily high and that makes it very difficult to drive any level of profit whatsoever.”
Engaged fans, customers can only do so much
The waiting game will certainly tell a story. But there is a cautionary tale of sorts among us now.
All else being equal, according to Managing Director at Eilers & Krejcik Gaming Chris Grove, Pennsylvania sits in position to capitalize as much as any other state in the gambling landscape.
A more engaged fan base, Grove said, “suggests that a given state should do better than competing states when it comes to sports betting.” With Philadelphia and Pittsburgh, the Keystone State certainly possesses those avid fans. Grove explained:
“The issue is that all things aren’t equal in Pennsylvania, and we don’t know at this point how the negative weight on the scale will counterbalance the inherent appetite for sports betting.”
Of course, we don’t know how much effect these high fees and rates will have on the wallets of operators. However, we do have an idea of how tight a dollar becomes in Pennsylvania.
High rates hold back reach of PA operators
Few resources at their disposal
Grove aptly described Pennsylvania’s high fees and rates as “nosebleed.” Online gambling already operates on razor-thin margins, much slimmer than those of land-based operators.
They enter the game with fewer resources when it comes to advertising, marketing, and promotions. After licensing fees, those budgets become even smaller.
As laid out in our white paper, the breakdown of $1 in New Jersey and Pennsylvania paints a bleak picture for PA operators, specifically as it relates to online gambling.
In each state, after a number of budgeted items take their toll, about 5% of profit remains for an operator to do as it pleases. Taxes, though, gouge the wallets of Pennsylvania operators. As a result, not much money is left for marketing and advertising. New Jersey operators, meanwhile, enjoy about double the percentage available to their PA counterparts.
This graphic from Eilers and Krejcik Gaming depicts a general market that features a 13% tax rate. Consider how slim those slices become in a sports betting market with a 36% rate. Profits become even more marginal, and the available spending for marketing follows suit, especially if operators slash these budgets to accommodate in other areas.
This could lead to underperformance
Such cutbacks could ultimately have a negative impact on customer experience and market performance.
“Operators are going to have to cut something in order to avoid a flood of red ink; the question really comes down to how the cuts are going to be distributed across marketing, product, and return to player,” Grove said.
He later added:
“The absence of robust marketing and promotional spend would definitely handcuff regulated sports betting in Pennsylvania. Cuts there narrow two critical avenues for customer acquisition. You’re going to win fewer players from the illegal market, and you’re going to reach persuade fewer people who aren’t currently sports bettors.”
Apple guidelines could tank progress
While a step forward for the state’s sports betting industry, a heavy shackle still weighs it down.
The lengthy delay leading up to that launch remains a sticking point, even after SugarHouse launched its online sportsbook. Leading up to its testing, Play Pennsylvania reported that the major issue for online casino operators is the Apple app store refusing to list PA sports betting and casino apps.
The rationale behind the denial is that most online casino and sports betting apps feature functionality that is a “wrapped” version of a website as opposed to its own app on a native iOS platform. So, these apps are rejected on the grounds they are not “app-like” enough.
Things got even worse for iPhone gaming apps after a June 3 update to the App Store Review Guidelines. The new guideline states that real-money gaming apps looking to reach or remain in the store must move all of the games onto a native iOS platform by Sept. 3.
Most online casino games are coded in HTML5. To switch every game title to iOS, get them vetted by regulators again, and approved by Apple would realistically take more like nine months to a year.
For online sportsbooks, this issue does not appear as concerning. But for Pennsylvania properties aiming to roll out online casinos that integrate their online sportsbooks, these guidelines prove worrisome.
This becomes an issue for operators, who will certainly face additional cost and delays in attempting to launch an Apple version of their products. And why wouldn’t they? About 40% of smartphone users, according to Statista, use an iPhone.
The current solution seems to be to develop separate sports betting apps from the online casino offering. The lack of integration is a big blow to the attempt to cross-sell online casino to sports bettors. Which, if you recall, is one of the few things that make weathering the high taxes and fees related to sports betting feasible.
Restrictive regulation prevents PA from capitalizing
Rightfully so, much of the detraction when it comes to Pennsylvania gambling expansion surrounds these sky-high fees. Even state regulations, though, play their part.
That is not to say this is the state’s lone issue. Operators in Pennsylvania are also handcuffed with limited skins.
In New Jersey, flexibility and freedom reigns. Licensees in the state are afforded up to three online skins for sports betting. Currently, 14 online sportsbooks operate in the Garden State with another three expected to join the fold by football season.
Pennsylvania, though, limits operators to a single skin.
On top of this, a smaller field of competition plagues the Pennsylvania landscape.
The argument goes that fewer online products prevent, as best they can, cannibalization. Though, in reality, it holds back operators from capturing more of the population. It does not allow recognizable brands, such as DraftKings Sportsbook in New Jersey, from entering the Keystone State.
Consider, then, those Pennsylvania residents who took advantage of legalized sports betting in New Jersey, specifically with DraftKings. They developed familiarity with the product, but with no PA option, they may elect to just stay in the New Jersey market. After all, operators might not be able to offer promotions worthy enough for Pennsylvanians to make the switch.
That same cannibalization take is what led Pennsylvania to prohibit online casinos and poker from being used at any of the state’s casinos.
Ironically, such legislation could hurt the industry more than help. Good things stem from offering online services. As Online Poker Report detailed last year, the online side of things helps operators much more than it harms.
Ed Andrewes, who heads online gambling for Resorts Atlantic City, says iGaming, “has acted as an excellent training ground for inexperienced online players and has provided almost 25,000 registrations for the online service.”
It’s not about simply having a product for consumers, or even having an online alternative for those unwilling to travel to a casino. An on-site, online casino allows guests to participate in gaming while waiting for a table at a busy restaurant or while lazing in their rooms.
To boot, customers at brick-and-mortars can receive face-to-face help while registering for an online account, allowing them to ask questions along the way during what can be, to some, tricky and confusing registration processes.
Where’s the harm that outweighs the help?
Increased competition yields better results
Imagine a restaurant opening up in town, the first eatery in that area. It monopolizes the town, able to charge any price it wishes with minimal marketing needed. If another restaurant enters the fold nearby, however, the two businesses will compete with one another.
More competition leads to more options for the masses.
Certainly, a narrower field of competition bodes well for operators. But for consumers, that is not ideal.
Consider action surrounding the Super Bowl and March Madness. One sportsbook, like DraftKings in New Jersey, introduces a Super Bowl squares game and then a bracket pool for the tourney. Then FanDuel Sportsbook does the same. Without competition, for argument’s sake, such marketed offerings might not take place. The same can be said for sign-up bonuses and various free-bet promotions.
It works in New Jersey
Look no further than nearby New Jersey to see where more competition leads to more success.
The Garden State has flourished since its first sportsbook opened to the public in June 2018. In less than a year, the New Jersey sports betting industry swelled from a three-sportsbook industry in its first month to a 24-brand Titan. It has accepted more than $2.6 billion in wagers during that time, generating some $178.6 million in revenue.
Certainly, New Jersey prospered in its first three months. Eight sportsbooks (five retail and those three online products) combined for $152.7 million in handle and $16.5 million in revenue.
September signaled the boom of New Jersey online sportsbook market, as five brands went live. Another six have since launched.
Since September, the Garden State’s 24 retail and online sportsbooks have combined for nearly $2.5 billion in handle and $162.1 million in revenue. The online side of NJ sports betting has driven those totals, accounting for nearly 74% of the industry’s total revenue and more than 75% of accepted wagers. In fact, online wagering has boomed in New Jersey of late, as better than 80% of wagers made over the past three months has come via online sportsbooks.
PA casinos, operators remain skeptical
Pennsylvania stands as the fifth-most populous state in the country and the largest online gaming state. They want it to work. But the above issues make that increasingly difficult.
Margins are slim, Wilmott told investors recently, “because there were no returns to be realized.” Others share the belief.
Evan Davis, vice president and general counsel for SugarHouse Casino, praised the property and its customers for how sports betting has grown at the Philadelphia casino. Even so, Davis remains wary.
“What I would say is, obviously we’ve seen over the first few months, we’re really pleased with what we’ve seen,” Davis said. “Having said that, we’re still concerned with the long-term profitability of sports betting given the disproportionately high tax rate.”
Essentially, operators enter the Pennsylvania market with wishful thinking.
We’re hoping this works, we’d like this to work, but we’re not overly optimistic.
PA wants to outgrow NJ
New Jersey has quickly grown into the gold standard for online sports betting and casino.
Pennsylvania certainly wants to one day out-perform it. But only time will tell if it can. Grove is one who does not believe it is possible:
“If operators are consistently presenting consumers with pricing, promotions, and product that are obviously inferior to what bettors can get from the illegal market with a phone call or a couple of clicks we will likely see Pennsylvania lag behind New Jersey on a pound-for-pound basis.”
Pennsylvania has the population to succeed. It has respected casino properties. It has two strong fan bases.
But these sky-high fees and tax rates sit as spike strips lining the highway, just waiting to send drivers careening off the road.
Only time will tell if the Pennsylvania gaming industry can overcome these obstacles and thrive.