Since the infamous Department of Justice (DOJ) interpretation of the Wire Act in December 2011, there has been a flurry of merger and acquisition activity in the U.S. legalized gambling arena, because U.S. land-based casino operators are most likely to be the recipients of online gambling licenses in states where they operate land-based casinos. In fact, most operators are already in partnership discussions or have already partnered with an international online gaming operator or product provider that is able to provide relevant online gambling experience.
This activity represents a scramble by land-based casino companies across the U.S. to begin a process that will lead them to quickly capitalize on the new, potentially robust revenue stream that online gambling is expected to produce. Due to significant unresolved issues between states, at the federal level and from a regulatory perspective, appraising the real potential or even the construct for an equitable online partnership at this point in time could prove to be just short of impossible.
Many believe that online gambling will produce new customers and a precious new revenue stream for land-based operators in the U.S. I agree. But many also believe that online gambling in the U.S. will not be a panacea for most land-based operators. I also agree with that. Unfortunately for the little guy, the biggest brands could overwhelmingly dominate the online gambling space; it may quickly become cost-prohibitive to prosper in the space against the host of powerhouse brands that will be competing for the same customers. “Predatory” won’t even begin to describe it.
Regrettably, “sitting this one out,” as opposed to embarking on the daunting journey, may not be an option either because of the opportunity cost. The use of big data to canvas the Internet for customers ensures that customers will not be exclusive to any one casino. Consider video poker customers: They may not defect entirely, but some customers will eventually divert some money from land-based casinos to the new online gambling option—when they feel like playing video poker but don’t feel like driving. The eventuality is that the little brands will likely become licensed portals that could provide entry to companies that otherwise could not participate in the online gambling industry in the U.S.
To crystallize that point, consider this example: In a market consisting of and limited to 10 operators, only one of which is a big brand, the big brand will likely enjoy something close to a 75 percent market share and the other nine will fight for their fair share of the left over 25 percent. Comparatively, in a market consisting of 10 big brand operators, each would fight to maintain a fair share of 10 percent. There is no gravity model to consider or drive-time analysis to factor in. There is no non-gaming resort-type amenity set to compete with. Customers are the same simple click away from playing the exact game that will be offered by every competitor, and they can choose from a multitude of competitive promotional offers.
One leveling factor may prove to be social media and how social sharing and the online social experience have recently evolved. Stop at a bar and have a beer. It is a social environment. Having a beer at home is not. Social media allows gambling at home to be a very social experience. The online social platform giant is Facebook. It hosts millions of communities and allows gambling at home to be as social as one wishes.
So how will Facebook ultimately affect your online revenues? Is it a key factor? What do you think the ultimate role of Facebook is within the online gambling space? Will Facebook become a major competitor, or will it be satisfied with being a platform provider for you and your conventional competitors? Could Facebook monopolize the social gambling space? What are the fee caps? There is not much gambling on Twitter or YouTube these days. Who’s ready to compete using big data and real social media against social media experts for online gamers? Many still undervalue the potential of social media or do not completely understand the cost against its benefits—it is where a majority of the battle will be fought. And it will all happen on a smartphone. You will be able to gamble anywhere: at a bar with friends, in the tub or from a car with someone else driving—although timing out on a winning poker hand due to a dropped signal could become a problem for someone.
Lotteries will be an evolving online gambling alternative for gamblers. Who knows what online lottery games will ultimately look like to a consumer in a just a few short years? How will those games vary on a state-by-state basis? How will pricing, licensing, regulatory and tax structures compare with conventional online gaming companies? Could lottery games potentially compete with casino-style games in form or format? Or could online lottery games develop into a feeder market serving up new customers to big online casino dragnets?
On the revenue front, I’ve seen dozens of studies about how big the online gambling market in the U.S. actually is—from hundreds of millions to billions. But not many studies, if any, discuss how much real money can actually be made. Infrastructure costs, marketing, taxation, fees and regulations will likely vary from state to state. And although New Jersey, Nevada and Delaware are among the first to offer legalized forms of online gambling and some partnerships have already been formed, the majority of U.S. states have yet to weigh on the opportunity.
According to one prominent U.S. gaming industry leader, New Jersey and Nevada could have a “reciprocity” compact in place by 2014 to address “liquidity,” provided a federal consensus is reached—a major proviso. According to PokerSites.com, “rumors swirl of a renewed push from one state for federal online poker legislation.” This is not necessarily bad, but it may not be inclusive or prioritize the agenda of every state or give equal weight to all agendas, and it would therefore likely be met with resistance from some states.
Constructing an equitable online partnership is severely dependent on at least identifying the unknowns and accurately identifying and forecasting the vortex of where online and land-based revenues meet. It addresses and avoids forecasts that may account for revenues from the same customer. Of note may be that land-based customer defection to the online format will lag well behind the ramp-up of online gambling. But when the biggest brands are ramped up in every state, the revenue produced from the online enterprise will inevitably include revenue from former land-based customers who eventually defect to play online because of convenience and enjoyable social factors. Hopefully it won’t be the 20 percent of the customers who produce the 80 percent of the revenue. Gambling in the U.S. will simply take place in a new way and in a new world—a virtual world to some, although the people who play are very much real and so is the money.
The point to all of this is that land-based operators could agree to a revenue share model today that ultimately may not be equitable. In any event, some amount of land-based gaming revenue loss must be calculated and considered in any partnership discussion, as some land-based revenue will ultimately flow through the online silo.
Unfortunately, as much as the DOJ has essentially cleared the way for legalized online gambling in the U.S., there still remains a variety of very complex issues that the fledgling industry must quickly overcome. The U.S. online gambling industry will be up against regulatory, cost and competitive disparities among states. It will enjoy limited or no initial federal oversight, regulation or governance and comply with restrictive interstate commerce laws and overarching federal supremacy issues, all of which make for a difficult valuation. So appraising the real potential of an online partnership from a land-based operator’s perspective will be no easy task. There is no doubt it will require a severe and detailed analysis, a comprehensive list of key issues to be considered, specialists, lots of insight, lobbyists and lawyers, and a great partner. The assistance of a crystal ball would be nice, too.