Will Expanded Gambling In Pennsylvania Cannibalize Land-Based Casino Revenue?

One of the chief concerns of any new form of gambling is that it will cannibalize revenue from existing venues. Will this be the case in PA?
Green apple with a bite taken out

One of the key talking points in the debate over expanded gambling in Pennsylvania was whether or not new revenue sources would cannibalize business from the state’s existing gambling verticals.

These concerns warranted consideration, as Pennsylvania was already home to the second largest land-based casino industry in the US, generating more than $3 billion every year since 2011.

On October 30, Gov. Wolf penned HB 271 into law, signaling that the positive economic impact of new revenue from gambling more than offset any losses established venues will suffer.

But is this really the case?

Satellite casinos may be biggest upfront threat

One of the more eye-opening provisions of HB 271, is that it will allow the construction of up to 10 satellite casino throughout the state.

Satellite casinos are essentially smaller land-based casinos, capped at 750 slot terminals and 30 table games (40 after one year). Under the law, licenses will be auctioned off with a minimum bid of $7.5 million, with existing category 1 and 2 license holders getting first crack.

There are provisions in HB 271 designed to protect existing venues. Namely, facilities must be located at least 25 miles away from a land-based casino, with the exception that a license holder can build its own satellite casino within 25 miles of its main attraction.

In addition, municipalities can opt out of the auction process, and as of today, approximately 200 of the state’s 2,560 already have.

Given this is does appear that the state’s four Philadelphia-based casinos are protected, as

  • Satellite casinos cannot be built to the east, as the 25-mile buffer zone extends into New Jersey.
  • The county immediately to the west, Chester County, is seeing a large number of municipalities opt out.

Mount Airy Casino also appears safe, as nearby Wayne, Pike, and Carbon counties have all opted out. Sands is slightly more susceptible, as Reading appears to be embracing satellite casinos, but not very.

As for the state’s western casinos, they’re also partially protected because they all border other states to the west, south, or north. And Rivers, Meadows, and Lady Luck are positioned so that their buffer zones partially overlap, creating a bit more breathing room.

Hollywood Casino at Penn National, located in Grantville near Harrisburg, appears most vulnerable, as there isn’t another casino in close proximity. Thus, it’s patrons come from 360-degrees around the casino.

Penn National senior vice president for public affairs Eric Schippers has made his discontent known, telling Penn Live “We are beyond disappointed by the legislature’s ill conceived and hasty gaming expansion plan, which will have a uniquely punitive impact on our Hollywood Casino in Grantville and the jobs it represents.”

Still, 26 municipalities from neighboring Lancaster County have opted out, offering some protection.

Threat of cannibalization: Minimal to nonexistent for most, moderate for Penn National

VGTs not something to worry about, yet

One of the biggest points of contention over the PA expanded gambling bill was whether or not to legalize video gaming terminals (VGTs). The Senate was vehemently against them, while the House held a much softer stance.

In the end, a compromise was met: Up to five VGTs would be permitted at truck stops that met certain qualifications. For example, to be eligible they must sell at least 50,000 gallons of diesel a month, and be coupled with a convenience store with parking for at least 20. It is expected that approximately 130 stops throughout the state will qualify.

Also, counties which host a brick & mortar casino have the right to forbid VGTs in their locales. To date, Washington, Monroe, and Northampton (home to Sands) Counties have opted out.

VGTs will not be permitted in restaurants, bars, and taverns, which some members of the House were pushing for.

Given their limited reach, and the fact that illegal VGTs already exist throughout the state, it’s improbable that land-based casinos will feel the burn from the VGT provision.

However, should the law be extended to include places where alcohol is sold and off-track betting parlors, the story changes.

Illinois, which legalized VGTs in 2012, has seen its Riverboat Casino revenue nosedive in recent years, down 13.7% from 2012 to 2016. And Schippers has stated that Penn National Gaming revenue at its three IL casino is down 8-10% since VGT legalization.

VGTs still appear to be a net positive for Illinois overall, generating $811 million in tax revenue from 2012-2016, but the cannibalistic impact on casino revenue is undeniable.

Threat of cannibalization: Next to nothing right now, but becomes major concern if VGTs are allowed into bars/taverns/OTBs

Online gambling is not cause for concern

This one is sort of a no-brainer: Pennsylvania online gambling will not cannibalize land-based casino revenue. We only need to examine statistics and anecdotes based on the performance New Jersey online gambling market, live since November 2013, to see why.

In March 2017, when Pennsylvania held a hearing on online gambling, both Golden Nugget AC and Caesars submitted testimony that online and land-based customers come from two different stocks, with very little overlap between the two. And where overlap did exist, these players increased their play at land-based casinos upon signing up online.

Even dating back to 2014, President and CEO of Boyd Gaming Kevin Smith claimed that “85 percent of [Borgata] online players have not had rated play at Borgata in at least two years.”

What NJ online gambling has done is prove an effective driver to Atlantic City casinos. In 2015, Kahlil Philander, Brett Abarbanel, and Toni Repetti released a report indicating that “a robust complementary (positive) relationship between online and offline gambling is found.”

Further evidence of the complementary impacts of NJ online gambling can be found simply by looking at Atlantic City revenue trends. From 2006 – 2015 industry revenue dipped from a high of $5.22 billion to $2.56 billion — effectively halved.

In 2016, AC saw its first gains in a decade, despite the closure of five of its 12 casinos from 2014-2016. The year-0n-year gains of 1.55% were hardly cause for celebration, but do indicate that AC revenue has stabilized. And thanks to extensive renovation projects, the projected opening of Hard Rock Casino next summer, and the continued growth of online gambling, the boardwalk city could be headed toward a revival.

In some ways, Pennsylvania casino operators have even less to fear from online cannibalizing land-based than New Jersey.

Pennsylvania is more a locals market, as opposed to the tourist market of Atlantic City. Thus, while we do expect there to be more overlap between land-based and online, online casinos will be able to more effectively leverage their customer databases to drive land-based traffic.

On the negative side, the oppressive tax rate on slots (54%) will make it so online operators won’t be able to pour enough dollars into marketing and player retention, damaging their player liquidity and, subsequently, their ability to get online players to visit affiliated brick & mortar brands. While this negates the risk of cannibalization even further, it impedes the industry’s ability to complement land-based.

Threat of cannibalization: None


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