Should the Supreme Court lift the federal ban on sports betting, Pennsylvania casinos could swiftly realize nearly $400 million in annual gross gaming revenue (GGR) from the activity, most of which would be generated from online books.
That’s one of the upshots of a recently released and complimentary monthly report from Gambling Compliance, entitled U.S. Sports Betting Tracker.
Measuring the impact of online sports betting in PA
According to GC, Pennsylvania sports betting will generate $383.4 million per year, more than any of the other states currently positioned to be a first-mover in the regulated sports betting industry (New Jersey, Delaware, New York, Mississippi) and nearly 65% more than the existing Nevada market.
The firm projects that 71.7% of revenue from all of these states combined (excluding NV) will come from online betting. However, this figure is a bit deceptive as only Pennsylvania and New Jersey will have online sports betting, which means that online revenue must account for an even greater segment of total revenue in these markets.
Although precise numbers are not provided in the report, we gather that PA online sportsbooks will account for approximately $310 million — a staggering 81% — of sports betting revenue in the Keystone State.
In total, the five states set to move on sports betting are projected to generate $770 million in annual GGR. Toss in Nevada, and suddenly we’re looking at a $1 billion industry.
Bigger than online gambling?
Last October, Pennsylvania penned legislation that extended the reach of its land-based casino industry, and legalized several new gambling verticals. Notably, in addition to legalizing sports betting in a post-PASPA world, the bill calls for the legalization of online casino and poker games.
Presumably, the first iGaming sites will open their doors to the PA masses sometime in H2 2018, with the licensing process beginning sometime before then. The industry should create a windfall of new revenue, but will it be more than what’s projected for online sports betting? Based on GC’s projections, we believe that no, it won’t.
In 2017, neighboring New Jersey generated $245.6 million in revenue. Based strictly on resident counts, that would equate to roughly $358.2 million in online gambling revenue for Pennsylvania, a good bit more than the PA online sports betting projection.
However, the New Jersey market is near-maturity, while PA will take several years to reach its potential. More importantly, PA operators will be hit with an oppressive 54% tax rate on online slots, compared to just 17.5% with NJ. This could mean that fewer operators will participate in the market, and of the ones that do, they may be forced to cut back on marketing and customer retention spend, resulting in lower revenue.
Factor in several other negative comparisons, such as PA’s lower median household income, and it wouldn’t surprise if PA iGaming does just 50% of NJ’s per capita revenue during 2019, and 75% at maturity. At 75%, PA would generate roughly $270 million per year from iGaming, $40 million less than what Gambling Compliance projects for the state’s online sports betting industry.
Of course, too many variables are still in flux to say with full confidence that online sports betting will be bigger than online gambling, but we’ll have a better picture once the online gambling licenses are awarded.
Online sports betting operators will have their own problems
The environment for online sports betting ops in Pennsylvania will be problematic, to say the least. Not only will casinos have to fork over a $10 million upfront licensing fee — far more than what any other state’s sports betting legislation presently requires — but they’ll be hit with a 36% tax on gross gaming revenue.
There’s more. There is also a federal excise tax equal to 0.25% of handle. That may not sound like a lot, but it works out to about 5% of revenue. On top of that, there is also the possibility that professional sports leagues will require a so-called “integrity fee,” which could soar as high as 1% of handle — or ~20% of revenue.
The idea of a 1% integrity fee recently emerged in an Indiana sports betting legislation bill, HB1325.
Live sports books may be able to sustain such a heavy burden, but the task is more difficult for online operators, who rely solely on wagers for revenue and must pay for platforms, Know Your Customer protocols, geolocation costs, and a variety of other expenses unique to online.
Also, and this is especially true in the industry’s early days, new online sites must devote substantial marketing dollars to raising brand awareness.
In our opinion, the Pennsylvania legislature made several egregious blunders when forging their expanded gambling bill. Of them, the most serious misfire was assuming online sites could just as easily weather the same brutal tax rates as their brick & mortar counterparts.
They cannot, and under present law it’s likely operators won’t have full freedom to market to their target customers, and may even offset costs by raising the house take. In a best case scenario, this results in lower revenue. In the worst case, online operators won’t be able to find a path to profitability.
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