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Regulated Online Gambling: a Billion-Dollar Opportunity for Pennsylvania

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Regulated Online Gambling: a Billion-Dollar Opportunity for Pennsylvania Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania Projecting the shape and size of Pennsylvania’s regulated online gambling market through 2022. Contents Author Key numbers 3 Robert DellaFave acts as an analyst and consultant within the land-based and online gambling spheres, with a strong emphasis on the emergent Executive summary 4 regulated U.S. market. As an avid poker enthusiast, DellaFave offers unique perspectives that blend the vantage How much revenue will points of both the player and the Pennsylvania generate from industry professional. regulated online gambling? 5 Tax rate controls the outlook for Pennsylvania online gambling 6 Projecting revenue to the state OnlinePokerReport.com is an from online gambling 6 award-winning publication covering regulated online gambling markets in the U.S. and beyond. OPR’s Pennsylvania online casino analysis 7 reporting is regularly cited by mainstream media, lawmakers, and Year one outlook 7 industry leaders, as are OPR network sites LegalSportsReport.com, Size of the Pennsylvania online EsportsBettingReport.com, and casino market at maturity 9 PlayNJ.com. Pennsylvania online poker analysis 10 Year one outlook 10 Size of the Pennsylvania online PlayPennsylvania.com focuses poker market at maturity 12 exclusively on the emerging market What if Pennsylvania joins other for regulated online casino and poker states for online poker? 13 games in the Keystone State. Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania 2 Key numbers Listed below are some top-line projections for how the Pennsylvania online gambling industry will perform in its first five years, assuming legalization in 2017 and an initial rollout in early 2018. Our analysis shows that regulated online gambling in Pennsylvania will $364 generate $230 million in revenue for casinos in year one, growing to million $364 million by year five. Assuming a tax rate of 20 percent, regulated online gambling in Pennsylvania will pay $46 million in $426.3 taxes to the state in its first year. After five full years, operators will million have contributed $426.3 million in taxes and fees to state coffers. 90% -14.6% $126 mil. Online casino will account After a hot start, in which We believe the state will for approximately 82 percent it generates $41 million in collect at least $126 million of gross gaming revenue its first year, the industry’s in upfront licensing fees, a ($189 million) from online online poker arm will struggle. number that could approach gambling in year one, swelling Revenue will dip to $35 million $140 million under the right to just over 90 percent (-14.6 percent) by year five. conditions. ($329 million) at maturity. Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania 3 Executive summary Pennsylvania is the golden goose of U.S. online gambling Of any state that has already legalized some form Other contenders, namely New York and California, of online gambling or is actively exploring the idea, may own a larger population, but are only considering Pennsylvania represents the biggest economic online poker legislation. Massachusetts, Michigan, and upside. Total online gambling revenue is projected New Jersey either offer, or plan to offer, both online to reach $364 million annually in Pennsylvania at poker and casino games, but their populations are a maturity. tier lower than Pennsylvania’s (12.78 million). New Jersey offers a good guess at Pennsylvania’s potential Much Of Our OptiMisM stems from the land-based gambling popularity – that lead us to strong performance of the New Jersey online believe New Jersey is a solid comparison model, gambling market. Although New Jersey initially although not an ideal one. underperformed its exaggerated expectations, the market has grown at a torrid pace, with revenue To clarify, Pennsylvania will possess key advantages climbing from $122.9 million in 2014 to $196.7 at launch that New Jersey did not have. As a result, it’s million in 2016: a growth margin of 60.1 percent. positioned to start off at a higher point, but year-on- And it hardly appears as though New Jersey has year growth will be more tempered. There are also reached maturity – in December 2016, industry factors, both advantageous and adverse, unique to revenue was up 30.9 percent year-on-year. the state, that will separate it from New Jersey. On balance, we project these variables will combine to There are a number of similarities between elevate per capita iGaming revenue in Pennsylvania Pennsylvania and New Jersey – location, population, slightly beyond New Jersey at maturity. Tax rate, licensing fees could artificially constrain the market Our prOjectiOns are based on a blend of the tax However, the Senate may have different plans. Tax rates proposed by Pennsylvania House Bill 392 – rates reaching into the 40 percent range have been 14 percent with an additional 2 percent set aside floated in Senate conversations around online as a local community tax - and Sen. Jay Costa’s regulation. Extraordinarily high tax rates or license fees proposed 25 percent rate. This is relatively in line could change the narrative significantly, especially for with the New Jersey iGaming tax rate: 15 percent prospective online poker operators, who may find the + 2.5 percent into the Casino Reinvestment cost prohibitive and choose to opt out of Pennsylvania. Development Authority. Online casino operators too would be forced to tighten their belts, resulting in poorer promotions, tighter games, and (perhaps) fewer operators. Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania 4 How much revenue will Pennsylvania generate from regulated online gambling? We project that online gambling in Pennsylvania will generate $230 million in gross gaming revenue in 2018, rising by 58.3 percent to $364 million in year five of operations. the grOwth will be remarkably consistent, with Also, it will presumably be during the industry’s year-over-year revenue never increasing by less than early years that licensed brands dedicate the most 10 percent, and never more than 13.9 percent. marketing spend, and make the biggest strides in several critical areas, including payment processing, That said, industry growth margins will be game selection, and mobile. slightly accelerated from 2018 – 2020, for several reasons. Primarily, it is during this span that we’re The Pennsylvania online gambling industry will be most likely to see a second wave of regulated driven primarily by the online casino vertical. We operators drip into the market. This would be estimate that online casinos will account for 87.4 consistent with the situation in New Jersey, where percent of market share. This is relatively in line Pala Casino, Resorts Casino, and Mohegan Sun with historical New Jersey online gambling market Casino all launched during the industry’s second trends, where online casino comprised 81.7 percent year, and Play SugarHouse and PokerStars during of industry revenue in years one through three, and its third. 86.5 percent last year alone. Base Case Pennsylvania Online Gambling Forecast Online Poker GGR $m $m Online Casino GGR $m $m $m Source: PlayPennsylvania.com Regulated Online Gambling: A Billion-Dollar Opportunity For Pennsylvania 5 How much revenue will Pennsylvania generate from regulated online gambling? Tax rate controls the outlook for Pennsylvania online gambling in january 2017, State Sen. Jay Costa, in a percent from 2012 – 2016 (per Pennsylvania co-sponsorship memoranda, proposed a 25 percent Gaming Control Board reporting). As the novelty tax rate for online gambling. Past discussions in of the industry continues to wane, it’s plausible the Senate have included even higher tax rates, and that this downtrend will continue, as operators debate over the appropriate rate is thought to be are simply ill-positioned to combat it given one of the primary sticking points for passage. meager margins. For online casino, a 25 percent rate would likely By contrast, table game revenue (taxed at just 16 result in decreased marketing spend, tighter slots, percent) continues to thrive, up 24.1 percent over and less than favorable rulesets for table games. the same time span. In turn, acquisition and retention rates will almost undoubtedly suffer. For online poker operators, who already rely on razor thin margins, the tax rate may prove Backing this theory, note that land-based slot untenable. In a bear case scenario, not a single machine revenue in Pennsylvania, which is taxed online poker operator enters the market, costing the at an oppressive 54 percent rate, is down 4.5 state tens of millions in tax revenue over time. Projecting revenue to the state from online gambling By acting in the first half Of 2017 (leading to gambling revenue. Thus, we believe the $426.3 a launch at the start of 2018), we believe that million in state revenues generated directly via Pennsylvania stands to generate $426.3 million from online gambling is merely one part of broader uptick online gambling tax and license fees through 2022. for the state’s entire gaming industry that will result from regulation of online casino and poker games, A significant portion of that total (~30 percent) will an uptick that will drive additional tax revenue via come in the first year in the form of licensing fees, multiple channels to Pennsylvania. providing a source of immediate budgetary relief. Our analysis assumes a tax rate of 20 percent, a Evidence suggests that online gambling has primary
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