How Will Pennsylvania Online Gambling Operators Adjust To The Brutal Tax Rate?

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Pennsylvania online gambling operators that choose to enter the market will be faced with an effective tax rate of 35 – 40%, due primarily to the legislature’s decision to OK an oppressive 54% tax rate on the popular online slots format.

To say that the path to profitability will be littered with roadblocks may qualify as understatement of the year.

While the 54%/16% tax breakdown on slots and table games mimics that of the state’s successful land-based industry, online operators won’t have access to many of the high margin offerings that allow brick & mortar venues to thrive, namely hotel bookings, food/beverage, and entertainment.

No, instead they’re going to have to make even more broad sweeping adjustments.

Granted, many of these concessions could help operators achieve a stronger bottom line without inflicting too much hurt on players. But they also run the risk of doing more harm than good if taken to an extreme.

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Lower returns on slots

Pennsylvania’s land-based industry is distinguished by its excellent returns on most table games, and its bottom-barrel slot payouts. It would hardly surprise if online operators adopt a similar strategy.

For fiscal year 2016-17, PA land-based slots returned approximately 90.3%. This figure includes video poker games, which average ~95% returns with mediocre play. So it’s more likely that slots alone returned somewhere around 89%.

Compare this to Atlantic City, where slots are far more reasonably taxed and return between 91 – 92%. NJ online slot returns (17.5% tax rate) are even higher, believed to be in the 95% vicinity. And that’s just for slots only. Apply the industry’s solid video poker games, and returns could creep as high as 96%.

Given the 1-2% divide between land-based slots in NJ and PA, it seems plausible that the same gulf will exist online, with PA online casino slots and video poker games combining to return somewhere along the lines of 94 – 95%. This is a small enough difference that players will hardly notice, and helps offset some of the tax burden.

But suppose operators drop the average return to 90 – 91%. Now for every $1,000 wagered, a player will lose between $90 – $100, on balance. This feels like a tipping point, where the benefits of increased revenue per spin will be negatively offset by lower retention rates.

And retaining players is going to be hard enough, given that Pennsylvania operators won’t be able to throw promotional money around as fluidly as NJ operators can.

A table game bonanza

With each passing year, table games make up a bigger percentage of PA’s land-based gaming revenue. Given that the table game tax rate is less than one-third that of the slot tax rate, is it really any surprise why PA casino floors are filling up with blackjack, roulette, and baccarat tables?

Recently, land-based operators have gone beyond simply adding green felts to increase table gaming prevalence. For example, they’ve begun introducing stadium table gaming arenas in droves. Now, one dealer can service dozens of players, reducing staffing costs for the operator while enabling casinos to stuff more table game players onto the gaming floor. Stadium table gaming also holds some appeal to slot players, as outcomes are handled digitally and in isolation.

Another example: high-house edge table game side bets.

We expect similar tactics from online operators, who will be highly motivated to push table gaming on their patrons. Live Dealer games effectively serve the same purpose as stadium gaming, especially if operators institute the Bet Behind feature for blackjack. They’re also a draw for players skeptical about playing table games against computers.

So that’s one way operators can increase table game activity without placing the burden on players.

Mass side bets are another route operators might take to increase the attractiveness of table games. Yes, side bets are more harmful to player bankrolls than the main games, but they’re also completely optional. Don’t be surprised to see most table games coupled with one or more side bets, some of which may be progressives — a nuance that is notably absent in the NJ online casino market.

Finally, operators could experiment with more carnival games, although littering the lobby with too many second-tier titles may prove more trouble than it’s worth.

Promotional cutbacks

Promotions are a highly effective retention vehicle, and operators know this. Unfortunately, it’ll be next to impossible for PA operators to offer the same value as their NJ counterparts.

There’s a few ways the promotional landscape could be different than in NJ:

  • Fewer promotions
  • Shorter promotions
  • Less player friendly promotions

The most conservative way to save a few bucks is to shorten the duration of promotions. Instead of a match bonus running three days, it runs for one. This could prove an effective vehicle, as it’ll instill a sense of urgency in players. It also won’t save the operator much money.

The next step is to just run fewer promotions, but have the remaining promotions provide solid value. Not the greatest solution, as there will be fewer times when players are incentivized to sign in, but not damning either.

Offering more frequent, but less player friendly promos is an attractive, but dangerous, route for operators to follow. If done ineffectively, it could also lead to players leaving a site en masse.

Consider this: In New Jersey, the average welcome offer requires players to turnover their bonus between 10 – 20x on online slots, equating to a cashback rate of 5 – 10%. It’s a pretty solid deal, all things considered, one where players are likely to break even or even come out a smidge ahead. Presumably, casinos offer these bonuses so that players will have a pleasant first experience on the site, and come back for more.

But what if the slot return rate was dropped to 93% and the wagering requirement amped up to 40x? Then the cashback rate would only be 2.5%, rendering it quite common for gamblers to spend both their bonus and deposit before meeting the turnover requirement. How likely is a broke gambler to return to the site compared to one that broke even? Not very, we’d guess.

Oppressive wagering requirements aren’t the only cost-cutting feature that could backfire. Sweepstakes that exclusively favor hardcore players, and mystery bonuses where it’s nearly impossible to win a substantial prize can also turn off the average player.

Operators must tread carefully when rolling out new promotions. Inundating them with fine print could ultimately give the industry a shady image, causing a backlash where players stop frequenting the site.

Conclusion

There are countless other means in which operators could offset the tax burden, including decreased advertising, outsourcing staff, and yes, even raising the poker rake. None of the aforementioned options are ideal for operators, and nearly as many are suboptimal for players.

However, Pennsylvania operators still have a unique opportunity, and at launch will have select advantages with New Jersey ops did not:

  • There have been vast improvements in payment processing, geolocation, and mobile technology.
  • A larger population base for online poker, and possibly a much larger one should Pennsylvania launch as part of a multi-state network with NJ, Nevada, and Delaware.
  • Higher local brand awareness, as most PA land-based casinos are located in population centers such as Philadelphia.

So despite the tax burden, all hope is not lost. But achieving sustainability will require a delicate balancing of the scales. Tip too far in any one direction, and the whole train could come off the rails.

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Robert is a veteran writer and analyst for the gambling industry, with a particular focus on the emergent US online gambling market. An avid poker and gambling enthusiast, Robert offers unique perspectives from both the vantage point of the player and industry professional, and is fit to cover a broad spectrum of topics.

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