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  • Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania

    Projecting the shape and size of Pennsylvania’s regulated online gambling market through 2022.

  • Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania 2

    Contents

    Key numbers 3

    Executive summary 4

    How much revenue will Pennsylvania generate from regulated online gambling? 5

    Tax rate controls the outlook for Pennsylvania online gambling 6

    Projecting revenue to the state from online gambling 6

    Pennsylvania online casino analysis 7

    Year one outlook 7

    Size of the Pennsylvania online casino market at maturity 9

    Pennsylvania online poker analysis 10

    Year one outlook 10

    Size of the Pennsylvania online poker market at maturity 12

    What if Pennsylvania joins other states for online poker? 13

    Author

    Robert DellaFave acts as an analyst and consultant within the land-based and online gambling spheres, with a strong emphasis on the emergent regulated U.S. market. As an avid poker enthusiast, DellaFave offers unique perspectives that blend the vantage points of both the player and the industry professional.

    OnlinePokerReport.com is an award-winning publication covering regulated online gambling markets in the U.S. and beyond. OPR’s reporting is regularly cited by mainstream media, lawmakers, and industry leaders, as are OPR network sites LegalSportsReport.com, EsportsBettingReport.com, and PlayNJ.com.

    PlayPennsylvania.com focuses exclusively on the emerging market for regulated online casino and poker games in the Keystone State.

    http://OnlinePokerReport.com http://LegalSportsReport.com http://EsportsBettingReport.com http://PlayNJ.com http://PlayPennsylvania.com

  • Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania 3

    Key numbers

    Listed below are some top-line projections for how the Pennsylvania online gambling industry will perform in its first five years, assuming legalization in 2017 and an initial rollout in early 2018.

    $364 million

    $426.3 million

    90% Online casino will account

    for approximately 82 percent of gross gaming revenue

    ($189 million) from online gambling in year one, swelling

    to just over 90 percent ($329 million) at maturity.

    -14.6% After a hot start, in which it generates $41 million in its first year, the industry’s

    online poker arm will struggle. Revenue will dip to $35 million

    (-14.6 percent) by year five.

    $126 mil. We believe the state will

    collect at least $126 million in upfront licensing fees, a

    number that could approach $140 million under the right

    conditions.

    Our analysis shows that regulated online gambling in Pennsylvania will generate $230 million in revenue for casinos in year one, growing to $364 million by year five.

    Assuming a tax rate of 20 percent, regulated online gambling in Pennsylvania will pay $46 million in taxes to the state in its first year. After five full years, operators will have contributed $426.3 million in taxes and fees to state coffers.

  • Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania 4

    Executive summary

    Pennsylvania is the golden goose of U.S. online gambling Of any state that has already legalized some form of online gambling or is actively exploring the idea, Pennsylvania represents the biggest economic upside. Total online gambling revenue is projected to reach $364 million annually in Pennsylvania at maturity.

    Other contenders, namely New York and California, may own a larger population, but are only considering online poker legislation. Massachusetts, Michigan, and New Jersey either offer, or plan to offer, both online poker and casino games, but their populations are a tier lower than Pennsylvania’s (12.78 million).

    New Jersey offers a good guess at Pennsylvania’s potential Much Of Our OptiMisM stems from the strong performance of the New Jersey online gambling market. Although New Jersey initially underperformed its exaggerated expectations, the market has grown at a torrid pace, with revenue climbing from $122.9 million in 2014 to $196.7 million in 2016: a growth margin of 60.1 percent. And it hardly appears as though New Jersey has reached maturity – in December 2016, industry revenue was up 30.9 percent year-on-year.

    There are a number of similarities between Pennsylvania and New Jersey – location, population,

    land-based gambling popularity – that lead us to believe New Jersey is a solid comparison model, although not an ideal one.

    To clarify, Pennsylvania will possess key advantages at launch that New Jersey did not have. As a result, it’s positioned to start off at a higher point, but year-on- year growth will be more tempered. There are also factors, both advantageous and adverse, unique to the state, that will separate it from New Jersey. On balance, we project these variables will combine to elevate per capita iGaming revenue in Pennsylvania slightly beyond New Jersey at maturity.

    Tax rate, licensing fees could artificially constrain the market Our prOjectiOns are based on a blend of the tax rates proposed by Pennsylvania House Bill 392 – 14 percent with an additional 2 percent set aside as a local community tax - and Sen. Jay Costa’s proposed 25 percent rate. This is relatively in line with the New Jersey iGaming tax rate: 15 percent + 2.5 percent into the Casino Reinvestment Development Authority.

    However, the Senate may have different plans. Tax rates reaching into the 40 percent range have been floated in Senate conversations around online regulation. Extraordinarily high tax rates or license fees could change the narrative significantly, especially for prospective online poker operators, who may find the cost prohibitive and choose to opt out of Pennsylvania. Online casino operators too would be forced to tighten their belts, resulting in poorer promotions, tighter games, and (perhaps) fewer operators.

  • Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania 5

    How much revenue will Pennsylvania generate from regulated online gambling?

    We project that online gambling in Pennsylvania will generate $230 million in gross gaming revenue in 2018, rising by 58.3 percent to $364 million in year five of operations.

    the grOwth will be remarkably consistent, with year-over-year revenue never increasing by less than 10 percent, and never more than 13.9 percent.

    That said, industry growth margins will be slightly accelerated from 2018 – 2020, for several reasons. Primarily, it is during this span that we’re most likely to see a second wave of regulated operators drip into the market. This would be consistent with the situation in New Jersey, where Pala Casino, Resorts Casino, and Mohegan Sun Casino all launched during the industry’s second year, and Play SugarHouse and PokerStars during its third.

    Also, it will presumably be during the industry’s early years that licensed brands dedicate the most marketing spend, and make the biggest strides in several critical areas, including payment processing, game selection, and mobile.

    The Pennsylvania online gambling industry will be driven primarily by the online casino vertical. We estimate that online casinos will account for 87.4 percent of market share. This is relatively in line with historical New Jersey online gambling market trends, where online casino comprised 81.7 percent of industry revenue in years one through three, and 86.5 percent last year alone.

    2018

    Online Poker GGR

    189

    2019 2020 2021 2022

    41

    $230m

    220

    39

    $259m

    259

    36

    $295m

    296

    35

    $331m

    329

    35

    $364m

    Online Casino GGR

    Base Case Pennsylvania Online Gambling Forecast

    Source: PlayPennsylvania.com

    http://PlayPennsylvania.com

  • How much revenue will Pennsylvania generate from regulated online gambling?

    Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania 6

    Tax rate controls the outlook for Pennsylvania online gambling in january 2017, State Sen. Jay Costa, in a co-sponsorship memoranda, proposed a 25 percent tax rate for online gambling. Past discussions in the Senate have included even higher tax rates, and debate over the appropriate rate is thought to be one of the primary sticking points for passage.

    For online casino, a 25 percent rate would likely result in decreased marketing spend, tighter slots, and less than favorable rulesets for table games. In turn, acquisition and retention rates will almost undoubtedly suffer.

    Backing this theory, note that land-based slot machine revenue in Pennsylvania, which is taxed at an oppressive 54 percent rate, is down 4.5

    percent from 2012 – 2016 (per Pennsylvania Gaming Control Board reporting). As the novelty of the industry continues to wane, it’s plausible that this downtrend will continue, as operators are simply ill-positioned to combat it given meager margins.

    By contrast, table game revenue (taxed at just 16 percent) continues to thrive, up 24.1 percent over the same time span.

    For online poker operators, who already rely on razor thin margins, the tax rate may prove untenable. In a bear case scenario, not a single online poker operator

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