Pennsylvania Is Already Winning Big From Expanded Gambling, Before A Single Wager Has Been Placed

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As recently as October, the state of Pennsylvania was looking at a harrowing budget deficit for the 2017-2018 fiscal year, with no clear solution. By Halloween the state had passed its $32 billion dollar budget, including $200 million in expected revenues from the newly expanded gambling industry.

Now, despite that it’s only January and we’re still months away from the first legal online wager or satellite casino opening, the Keystone State has already racked up more than $50 million in revenue as a result of the expansion and appears to be well on its way to speeding past that $200 million goal.

Valley Forge puts in first

The first new revenue generated for taxpayers by the new Pennsylvania gambling law came in while the ink from Governor Tom Wolf’s signature was still drying.

Valley Forge Casino has a Category 3 license, which classifies it as a resort casino. Prior to the new law, only resort guests or patrons of other amenities on the premises were allowed to gamble in the casino. That requirement has now been lifted, and the state’s two Category 3 licensees (Valley Forge and Lady Luck Nemacolin) can allow gambling by the general public.

The one caveat? Each Category 3 licensee must pay a $1 million fee to the state for this new privilege. Valley Forge didn’t dwell on the decision, ponying up the fee within 48 hours of the law passing. Unlike most parts of the new law, this went into effect immediately.

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Penn National wins first Category 4 Auction

Most of the money that’s come in so far – $50,100,000, to be exact – came from a single, seemingly excessive bid by Penn National Gaming (the parent company of Hollywood Casino in Grantville, PA) to open a mini casino in the town of Yoe, just an hour south of their main casino.

Penn National topped three other bidders to win the first satellite casino auction, earning exclusive rights to a section of central PA that the company considers essential to maintaining and growing its existing market share in the Keystone State.

The other three bidders’ identities have not yet been revealed, but we now know there are at least four companies pursuing a Category 4 (satellite casino) license, and this was just the first of 10 scheduled auctions in the first half of 2018.

It should be noted that Penn National recently announced they are acquiring Pinnacle Entertainment Inc. for $2.8 billion. Pinnacle owns Meadows Casino, which is located 25 miles south of Pittsburgh, and is another likely bidder in an upcoming Category 4 auction. The company has already shown its willingness to spend in this area, and it wouldn’t be at all surprising to see them make another 8-figure bid.

Given the minimum bid of $7.5 million and the high bar set by Penn National, satellite casino auction proceeds alone should exceed $100 million by the June 30th fiscal year end. The number could be a lot higher, depending on how many companies decide to pursue one.

On tap: Pennsylvania iLottery

The next big revenue source from the new law will likely be the launch of the state’s online lottery, expected to be live by the Spring. The state is expecting to generate $250 million from the iLottery in its first five years online, although that figure could be a bit optimistic.

Even if the results are ultimately somewhat disappointing, it’s reasonable to assume at least $1-2 million per month in revenue once the iLottery gets going. If the launch date is in early Spring, the state could potentially earn an extra $5 million or so by the end of the fiscal year.

Still to come: online gambling license fees

And finally we have online gambling license fees, which will range from $4-10 million depending on what games the applicant is planning to offer. And given there are 12 licenses available, associated revenue could max out at $120 million.

While Pennsylvania will almost certainly reap a king’s bounty on these fees, the initial number of applicants will quite likely be well below the maximum as each casino makes their own calculations about the value of this new market. In the face of these high up front fees and sky high effective tax rates, some operators will likely be scared away from the market.

A major factor in some casinos’ decisions will be whether or not licensees are allowed to have skins (multiple brands) operating online under the same license. In New Jersey, some licensees have as many as 8 different brands operating, which can help mitigate the up front cost and risk associated with having a license. In Pennsylvania, given the significantly higher fees and tax rates, skins will be even more important.

At a bare minimum, the state should realize $30-40 million in licensing fees for online gambling by mid-year, as Rush Street Gaming (Owners of Sugarhouse Casino and Rivers Casino) and Caesars (Harrahs Philadelphia) in particular are nearly certain to pursue a full license for table games, slots and peer-to-peer gaming, and there are several other confirmed or likely partnerships between the state’s land-based casinos and online gaming companies.

Conclusion

While only a couple of payments have come in so far, the state of Pennsylvania has already taken in $51,100,000 as a result of the new gambling expansion law and looks like it could possibly surpass $200 million before a single online wager has been made.

Factoring in an additional $50 million for the remaining satellite casino bids, $5 million from iLottery revenues and $40 million in online gambling license fees, the number should already be up to $150 million by the middle of the year. And this is really just the beginning, as once revenues start flowing into the new casinos (online and live), there will be taxes to collect.

The new law may not be perfect for operators, with taxes and fees well above what people were hoping to pay. But for the state, things seem to be working out just fine.

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Adam Small has been an entrepreneur in the online gambling space since 2004. He is a cofounder of PocketFives.com and owner of several businesses in the industry.

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