Are PA Casinos Looking At Sports Betting As Nothing More Than A Loss Leader?

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When the Supreme Court struck down PASPA in May, opening up full-scale sports betting outside of Nevada, industry stakeholders were ecstatic, especially those in New Jersey, which led the charge.

In the Garden State, casinos and racetracks lined up as quickly as they could to gain approval from the Division of Gaming Enforcement, with two venues opening up books just two days after the state passed its own bill regulating the industry.

In Pennsylvania, the reaction was more tepid. While the state had already legalized sports betting as a part of an expansive gambling package passed last year, it had also instituted an eye-watering $10 million licensing fee and an astronomical 36% tax rate.

Even in a sports obsessed state like PA, such an onerous startup fee and tax burden will be difficult to overcome, due in large part to the fact that sports wagering traditionally yields low profit margins.

Even so, a handful of local casinos have reluctantly come forward and ponied up the cash to open up their own live and online sportsbooks.

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But in such a harsh regulatory environment, can these casinos squeak out a profit from sports wagering? Or is sports betting meant to be something of a loss leader – a way to entice new gamblers onto the property, where they can be funneled towards more profitable games and services?

The roadblocks

Pennsylvania’s 36% tax rate and eight-figure licensing fee on sports wagering is without precedent in the regulated U.S. gambling market, and could do more harm to the industry than good.

In neighboring New Jersey, sportsbook operators pay a more reasonable $100,000 fee and between 8.5-14.25% in tax on revenue. Nevada operators have it even better, paying virtually nothing for a license ($500) and 6.75% of revenue back to the state.

At the PA tax rate, it could take years for sportsbook owners just to break even, much less take home any profit.

In New Jersey, for example, Borgata boasted the highest earnings of any of the state’s casino-based sportsbooks in September, taking in about $2.4 million. Applying PA’s 36% tax, plus around 5% in additional federal taxes, a Keystone State casino raking in a similar figure would be keeping just over $1.4 million. Of course, that doesn’t factor in operating costs or any percentages owed to a casino’s technology partner.

When all is said and done, the property might end up banking significantly less in profit than its after-tax total. They may go in the red.

What’s more, regulated books will be competing with an entrenched black-market, which includes local bookies, along with illegal offshore betting sites, all of which may offer significantly better odds due to the fact that they pay no taxes.

“The legal market in Pennsylvania could be very small — smaller than it should be — because of this tax rate,” William Hill US CEO Joe Asher told the Philly Voice back in June. “Someone will pay the money, but it will be a small business compared to what it could be, because it will be very hard to compete with the bookie. Right now, as we’re talking, you don’t hear a whole lot about Pennsylvania, and that’s because of the structural challenge involving the taxes.”

Getting into the black

Instead of hoping to make money purely off of sports betting, PA casinos may be looking at sports from more of a holistic perspective.

Opening a sportsbook could potentially attract a different type of gambler who may not have visited the casino otherwise. Once inside, they may turn their attention to other games, like slots, blackjack and roulette, while waiting for their preferred sporting event to kick off.

Marketing table games to such customers would be especially beneficial to PA properties, being that the state only takes a 16% cut of table game proceeds. Slots, on the other hand, are taxed at a hefty 54% rate.

Even so, casinos could entice sportsbook gamblers away from the big screens with free slot plays or vouchers for free bets at the tables, squeezing out extra profit they wouldn’t have seen otherwise.

PA online sportsbook operators which also plan to offer online casino games could similarly benefit from an influx of sports bettors. While only five qualified venues have applied for sports betting permits, 10 have so far purchased a license to offer some form of online gambling.

Play SugarHouse, which operates an iGaming site and online/mobile sportsbook in NJ recently revealed that sports wagering has had the effect of boosting its online gambling revenue.

“Our casino bets have also grown since the launch of sports betting,” said SugarHouse COO Mattias Stetz in a release. “Thanks to the deep integration of the sportsbook and the casino in both Android and iOS mobile apps and the desktop site, and players being able to use the same account and wallet, PlaySugarHouse.com casino has also grown across the board.” The growth has been significant too, with Play SugarHouse revenue doubling from August to September.

In order to take advantage themselves, PA online casinos would do well to follow SugarHouse’s lead, and perhaps take things even further by offering table-game centric promotions to sportsbook players to avoid taking a big tax hit on slots winnings.

In addition, iGaming operators could build their online VIP programs to encompass both casino games and sports betting, giving sports fans a reason to cross over from one side to the other to try and earn more points and receive more rewards.

Keeping the competition at bay

Of course, not all casinos are likely expecting to make big money on sports betting, they may simply be trying to “Keep up with the Joneses” to avoid losing patrons to competitors — either in-state or out-of-state — which do plan to offer the service. While it may not add much to their bottom line, it might prevent additional losses in revenue.

There are others, like Parx Casino, which are more receptive to the high bar of entry, because it lessens competition. As per Parx’s Senior Vice President of Sports and Interactive Matt Cullen in an interview with Penn Bets: “I know that we appreciate a high bar for anyone we compete with to come into the market. We’ve always liked a high bar. We’d love for it to be lower, but I think it also weeds out a lot of other companies that might not have the sort of appetite that we do to compete in a space like that.”

While it may be a long slog to profitability, several PA casinos clearly believe that live and online sports wagering will eventually be profitable, or at least beneficial, either directly or indirectly. With the right planning and execution, they just might be right.

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Bill Grinstead

Bill has over a decade of experience working in diverse aspects of the online gambling space. He is currently focused on legal, US online gaming, which he has reported on since the industry first became regulated in the country.

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