True Potential US Online Gambling Market?

Internet gambling can generate cash like a milk cow from Wisconsin. However, the key word here is “can,” since most land-based casinos see it as a threat. As it is traditional US operations are showing little profit for all their efforts to date and have been looking for alternative methods to bolster their dwindling coffers; therefore internet gambling is looking rosier to them by the day.

Legalization Optimism

Caesars Entertainment Corp. released a statement on 2 February based on the findings cited by H2 Gambling Capital which estimates that internet poker in the US could yield a potential revenue of $6.9 billion in its third year of operation and as much as $11.6 billion in its seventh year, unfortunately those in favor of internet gambling must jump through many hoops before it’s legalized in the US again.

CreditSights analyst Chris Snow told Internet Casinos in a recent interview that MGM Resorts International’s CEO Jim Murren said he anticipates that online gaming legislation will pass at federal level before this year it out. That said Caesars executives notified investors during a presentation that people who make this kinds of forecasts have not taken into account all the issues at hand, he specifically referred to Snow’s statement.

It’s imperative that the feds support internet gaming legislation for the potential of U.S. internet gaming revenues. H2 says that it depends completely on the federal government regulating the industry. In hindsight things might get out of hand and chaos might ensue.

State legalization

In a new proprietary report on the potential for a U.S. internet gaming market, H2 Gambling Capital said that if the 12 largest states legalized gaming the market could yield as much as $3.4 billion after a 3 year period and could reach the $5 billion mark after 5 years, these are huge figures indeed.

The first question is who’s going to operate these gaming sites In Nevada and New Jersey? Without a doubt the market will be given to the casino operators, however, these states alone can’t swing the pendulum in favor of Caesars or an MGM Resorts.

Data provided by the University of Nevada, Las Vegas, Center for Gaming Research, indicated that Nevada’s poker rooms only brought in $131.9 million in 2011. For New Jersey, potential revenues from all internet casino games will fall between $210 million and $250 million, according to a 2010 study commissioned by the Interactive Media Entertainment and Gaming Association, but several analysts notified Cassaon-casino that only poker might pass in most states. To gauge the potential markets Nevada and New Jersey estimates are just a benchmark, as ballpark figures they still amount to a pretty skinny cash cow, especially if numerous operators must share the cake.

While in other states public operators might receive the cold shoulder when it comes to internet gaming operations. Most states, especially California, widely considered the best prospect for internet gaming revenue because of its large population, could easily put internet gaming operations under the control of Indian tribes, leaving local gaming interests or local lotteries out of the loop. Should California decide to go local, public operator’s prospects might just go down the tube.

A new market?

Even is states allow internet gaming, it might only contribute toward marginal incremental growth. The new market will definitely see an increase in new customers; many online gamblers might just move their business from casinos to the Web.

“I don’t see at as a new form of gambling. I just look at it as a new channel or platform,” David Schwartz, director of UNLV’s Gaming Research Center, told Cassaon-casino. “So I think it’s something that’s necessary, but it might not necessarily add revenue as everybody thinks.”

A speculative question at best is how online gaming will coexist with bricks-and-mortar casinos. Some pundits point to retail equivalents, saying, for instance, Target.com neither adds nor subtracts much revenue for Target Corp. It’s just another access point, as slots are just another product found at casinos.

“I don’t think it’s a layup for these guys,” Snow at CreditSights told Cassaon-casino. “I think it will be ultra competitive. It certainly helps to have the loyalty and the brands, but as we’ve seen online in retail, it’s not always a recipe for success.”

Alternatively, some analysts told Cassaon-casino that the comparisons with online retailers are watered down versions. Widely available to customers are brick and mortar retailers, unlike casinos, and the competition on the Internet is exceptional since there are lower barriers.

Market size

If the competitive environment is too large this will cause a lower profit margin. H2 Gambling’s head of mobile, Joel Keeble of poker and special projects and the editor of the company’s latest U.S. market report told Cassaon-casino that the European internet gaming market comprises of approximately 20 main internet gambling operators. Basically it boils down to just internet poker rooms, since they’re  more likely to gain legislative approval as opposed to other casino games and sports betting, he pointed out that there is only room for five successful poker platforms, even though there are 20.

“Certainly after No. 10 they’ve got very few players,” Keeble said. “For example, the top poker platform in Europe, which is PokerStars, has a peak of about 50,000 players. The next largest, which is Party Poker, has around 7,000 players.”

It goes without saying that peak traffic numbers are an integral component to any online establishment, since a poker platform’s success depends mainly on player liquidity. The larger sites capture the most players because there don’t have any wait times to join a game, the larger the player pools the larger the promotional jackpots.

“That’s the thing with poker,” Keeble said. “In poker, liquidity breeds liquidity, which is why there’s this big race to be the most established.”

The above race also includes huge costs, eating into margins out of the gate. Various operators and pundits postulate that internet poker profit margins can be as high as 50%; this number is not immediately accessible since the operator spends thousands of dollars on marketing in order to generate some form of liquidity. Should the market mature, there’s no guarantee that such high margins could be achieved.

Herewith an example, bwin.party an EBITDA posted a margin of just 12.7% for its second-in-the-market Party Poker platform in 2012. Even though it excludes a potential U.S. market, it is worth mentioning that their poker-based EBITDA just reached $13.5 million. Although the US market will significantly boost the company’s bottom line should their intended partnership with MGM Resorts and Boyd Gaming Corp. come off. However, a fraction of those revenues will only be seen by the two American companies. CreditSights’ November 2011 report indicates that bwin.party holds a 65% stake in the venture in contrast to MGM Resorts and Boyd which holds 25% and 10%, respectively.

Snow at CreditSights said although there is potential to yield some excellent revenues should the market be federally regulated again, there are certain factors such as too much competition which could reduce the market to virtually nothing.

“It is conceivable that internet poker remains competitive, not enough states do it, so you have player gaps, and taxes make it so it’s nice to have but potentially the strength of it is a loyalty aspect rather than the business itself.”

Overall the US market has mass potential. Cassaon-casino was told by Keeble at H2 that between the U.S.’s huge population, wealth and eagerness to wager online, it should be one of the most robust internet poker markets should it legalized on a national level again. His new reports states that after its first year of operation, 28% of the total global internet gaming market would belong to the US, which translates into an estimated $37.2 billion in 2015.

To be honest this type of revenue could not be ignored, the problem is to get the cow into the barn.