The pieces are beginning to move into position in Pennsylvania, as the country inches closer to becoming the fourth in the country to provide legal online gambling.
Temporary regulations have been crafted. Partnerships between land-based casinos and internet gambling businesses are coming to light. And the Pennsylvania Gaming Control Board has begun the application process for certain online gaming permits.
Still, there are loads of wrinkles that will need to be ironed out before the market really takes shape, not least of which being the number of skins (or independently branded sites) the condition will allow each operator to possess.
To help make sense of the situation, Online Poker Report drew upon three sources:
IDEA development, a pro-online gaming lobbying group
Thomas Winter, Senior Vice President and General Manager of Online Gambling at Golden Nugget
Ed Andrewes, CEO at EA Gambling Consultancy, handling Resorts Digital Gaming
A closer look at skins
Most people believed the heavy lifting was after the state passed the gambling law that legalized online gaming in October. But the debate has not exactly subsided.
Skins have turned into the issue du jour for the nascent industry. October’s legislation did not specifically address the number of skins, nor did it set a definite number once the PGCB released the temporary regulations.
However, OPR spoke to some legislative source who said that the bill’s crafters never intended to severely restrict the number of skins.
This was highlighted by iDEA Growth in a letter to the PGCB:
“Lawmakers were conscious of the matter of skins and, if they had planned to restrict their usage, the legislature could have done so easily. Earlier drafts of the legislation did include limits on skins. The matter of skins was addressed at hearings and in discussions with industry participants.
Consequently, the lack of a limit indicates lawmakers reasoned that allowing multiple skins would be beneficial to Pennsylvania’s market. The legislature was aware of skins, considered a limitation, and then consciously chose to not insert one. Regulations should follow that cue.”
Nonetheless, the lack of clarity has resulted in the possibility of multiple versions.
At least two Pennsylvania casino operators (and likely at least three) are pushing for a strict limit on skins. Penn National and Parx Casino are actively calling the PGCB to restrict online gaming sites to only a single brand.
Others are calling for a system like New Jersey, with five skins allowed per permit. It’s not clear which model will win out.
In a statement to GamblingCompliance, the PGCB said it’s weighing this issue very carefully. The PGCB “has not made any decision at this juncture in this matter,” said Communications Director Doug Harbach.
What Penn and Parx National say they want
The firms opposing an open marketplace are publicly arguing that limiting skins is best for the market. They claim this strategy is best for the state’s existing casinos.
Eric Schippers, senior vice president of governmental relations at Penn National, recently told GamblingCompliance, “We would fully support the limit to a skin per operator.”
In 2016, Schippers told Gambling Compliance a New Jersey-style skins model would enable out-of-state online operators “to come in and poach Pennsylvania’s customers for the benefit of their out-of-state operation.”
Parx Casino echoed these sentiments in a Jan. 30 letter delivered to the PGCB.
In the letter Parx wrote:
“The Board must establish a limit on the number of interactive gambling skins an Interactive Gaming Certificate Holder (“Certificate Holder”) may operate, and that limit should be one skin per Certificate Holder, with the different classes of interactive games that the Certificate Holder is authorized to provide on that single skin restricted to the different sorts of interactive games approved in its Interactive Gaming Certification(s).”
Parx went on to state the brand should match or resemble the online casino brand of the certificate holder. If the PGCB listens to the arguments of Parx and Penn National such a limit would be disastrous for customers, for the state, and for the market.
What Penn and Parx National actually want
Unlike a land-based casino, online gaming is not constrained by its location. Every site in the state will be accessible to each person.
With smaller casinos casinos in major population centers are in the online gambling space.
But they’re not on equal footing when it comes to money and brand awareness. Small casinos will have a tough time competing with the better-known casino brands in the market.
Larger businesses not only enter this new market with better brand awareness but can outspend competitors in marketing. And that is assuming the casinos have the funds to get an internet gaming site.
1 way they could offset the startup and marketing cost would be to allow different organizations to launch a branded site under their permit.
Limiting the number of skins will result in several smaller casinos launching what amounts to a site that is bare-bones or passing on online gambling.
Limiting skins benefits…
A strict limitation on skins would benefit some of the casinos in the Pennsylvania market.
However, it not best for the market as a whole. It would make an unequal playing field that favored the larger casinos of the state. These casinos would get what amounts to a bigger piece of a pie.
Limiting skins is a bad idea
In a letter to the PGCB, iDEA Growth recorded three reasons that the state should ignore Penn and Parx National’s pleas.
The experience in New Jersey shows that maximized revenue and the market has grown.
The limitation of skins is anti-competitive and would provide a poor product and user experience to the consumer.
The allowance of skins leads to more competition and innovation among stakeholders.
Let’s have a closer look at each of those arguments.
If there was a model we can look at…
“Experience has proven that online gaming operators will self-regulate to an efficient market size which maximizes operator and state revenue,” the iDEA letter to the PGCB states. “To do so, however, requires licensees to have the flexibility to partner with other game providers and to operate under multiple skins.”
The group concedes there may be a limit to this growth, and the industry could reach a point where manufacturers are additive. But to date, whenever a new brand has established in New Jersey, the overall market was expanded by it.
And New Jersey operators agree.
“The New Jersey market has proved that numerous skins are essential to make a vibrant and competitive marketplace and to provide an incentive for operators to advertise their services,” said Ed Andrewes, who heads up Resorts Casino’s internet performance in New Jersey.
“The present incumbents may feel that by limiting the skins it conserves marketing expense, but experience from other jurisdictions shows a lack of marketing effort and initiative does not grow the market in any respect.”
“Such a limitation would be a step back on the nascent online gaming industry as a whole,” said Golden Nugget’s Thomas Winter. “The only reason to do it would be to protect land-based casino earnings.”
Protectionism doesn’t work
Winter went on to describe the flaws protectionist thinking.
“The New Jersey example has clearly shown that 80 percent of online players were new to casino, including for casinos with very large players database,” Winter told OPR.
“The reason is simple: Online gaming competes with other forms of entertainment such as casual games or streaming services over it cannibalizes brick-and-mortar entertainment. Playing your smartphone is a fun way to kill time when you’re on your own and on the go, while going to a live casino is a social form of entertainment that goes beyond gaming.”
IDEA did not mince words on what that would imply:
“Limiting skins would efficiently pick winners and losers in the Pennsylvania market and hand the market to the state’s biggest land-based casino operators (who are eager to enter the market). Because each permit is extremely expensive (around $10 million plus taxes), smaller operators may just be able to afford interactive gambling operations if they subsidize a number of the permit expense and high tax rates through revenue sharing skin arrangements.
“Even if they can justify the up-front licensing cost, smaller casinos will find themselves at a significant disadvantage when it comes to marketing budgets, which represents a far more significant cost for interactive gambling than it does for conventional, land-based casinos.”
It’s also bad for the consumer
A lack of competition will also cause a user experience that is second-rate as iDEA explains.
“By allowing several skins per permit, Pennsylvania will encourage robust competition among operators,” the team wrote to the PGCB. “That competition will result in increased content for customers and would incentivize operators to create and provide new and innovative games.”
Winter thinks allowing skins is a no-brainer.
“The benefits for patrons are obvious,” he said. “More skins means more choice, better products, better promotions, and more innovation.”
This has been borne out in New Jersey, where Golden Nugget and Betfair provide live dealer games, multiple operators have added virtual sports, and Resorts launched a DFS-sports betting hybrid game.
According to Winter, the ability to offset some costs Golden Nugget has Betfair, two skins and SugarHouse — enables operators to devote more money to innovation and marketing.
“For land-based casinos, it also allows to share the burden of regulatory costs while introducing a new stream of earnings, often in the shape a share of earnings from skin operators,” Winter said. “Brick and mortars licensees can reinvest these savings and additional revenues to boost their own offer and increase their marketing investments. It’s no wonder why all New Jersey licensees have elected to have multiple skins.”
With a $10 million upfront license fee and a 54 percent tax rate on slots, this burden that is shared is crucial in Pennsylvania.
And competition is good for the market
Skins will reduce the amount of revenue the state receives from online gambling in two ways:
A possible decrease in the number of overall licenses sold marketing and advertising dollars spent within the country, due to a lack of competition.
Andrewes considers limiting licensees could lead to several land-based casinos eschewing an internet gambling license.
“I think you can split the present incumbents into two groups in this respect,” Andrewes said. “There are some that will believe that they will need to buy a permit in any event as a defensive measure and would rather contest was restricted. There’ll then be others who believe that the additional skins will provide other business and revenue opportunities and that these will be necessary if they are to justify the initial cost of a permit.”
Will casinos skip the liceneses?
Out of some online poker permits, Winter is convinced Pennsylvania casinos would forego an internet slot or table game permit.
He forecasts an buyer would finally scoops up any unclaimed licenses:
“Legislators have introduced a rule that restricts the number of permits to 12 but at exactly the same time, gives the chance to qualified gambling entities outside PA to apply for permits that PA casinos do not want.
“For that reason, all casinos may wish to secure their permit, an important long-term advantage. If they decide to sell their property down the line the ones who aren’t sure who have casinos can’t afford to let this kind of asset or they want to provide online gaming immediately go, for example.
“There may be a few poker certificates not sold in the first round of this auction but that is because there’s probably insufficient poker earnings for 12 operators to make a profit, irrespective of the number of skins. As far as slots and other table games go, I would be very surprised if not all licenses were sold to PA casinos and if one was not purchased by them, it would for sure find an outside buyer”
How to maximize revenues
“The country will optimize its upfront revenues from selling the licenses in any circumstance,” Winter said, but then added, “More skins will bring more tax revenues down the line.”
The impact on marketing spend from limiting the large tax rate that is online and skins could be disastrous as Winter explained:
“The effects of such a limitation would be important. Because of the tax rate on slots, several operators are likely to rely on existing database and their brand awareness before investing advertising dollars.
“As demonstrated not just in NJ but in any other online gaming jurisdiction outside the united states, online gaming revenues are directly correlated to marketing spend. Even the operators in the world billions in earnings of dollar, keep spending in advertising.
“The more operators that you have, the more marketing dollars, the more earnings and tax dollars for the state. That is an universal rule and Pennsylvania will be no exception.
“A single-skin limit would probably reduce tax dollars by 30-40 percent. For instance, we estimate that 60 percent of New Jersey earnings come from the top grossing skin of five licensees. More competition also means more innovation and better promotions for players benefits.”
Andrewes concurs and considers a model very similar to New Jersey’s is the approach that is correct.
“I would not advocate unlimited skins and I believe the NJ DGE have set the perfect level at five,” Andrewes said. “This has created enough competition to incentivize the operators to invest in marketing and has grown the overall market yet it has not created a ‘free for all’ [which] would be impossible to control.”
Skins is a bad idea
There is no reason to restrict operators to a single skin other than as a favor to a small number of casino operators.
As iDEA said in its letter to the PGCB:
“Competition and innovation will result in higher revenue for the state and increased satisfaction for players … Online gaming operators can self-regulate to an efficient market size which maximizes operator and state revenue when they are permitted to partner with other game providers and to operate under multiple skins.
“The experience of New Jersey of allowing several skins has led to competition, innovation and growing revenue.
“Pennsylvania should emulate that model by clarifying its regulations so that there’s either no limitation on the number of skins which may be operated by each licensee, or by embracing New Jersey’s five skin limitation per permit.”