From hero to zero: The faltering progress of igaming leglislation

Such has been the whirlwind rollout of sports betting across the US since the federal ban was struck down by the US Supreme Court in 2018, a total of 34 states, plus the District of Columbia (DC), have legal sports betting up and running within their borders. Slightly fewer – 24 states and DC – have mobile sports wagering. What’s more, US sportsbooks (retail and online) handled $93.2bn in bets in 2022, while revenue surged 61% year on year (YoY) to $7.5bn, spurred by the introduction of legal betting in Kansas and the addition of mobile wagering in New York, Louisiana and Maryland. Today, almost 60% of US adults reside in states where it is legal to put down a sports bet, compared with just 1% before PASPA was repealed when the activity was pretty much restricted to Nevada.    

Online gaming’s rollout hasn’t mirrored sports betting’s explosion, though. Just seven states representing around 12% of the US population – have legalised online slots and table games: Delaware, New Jersey, Pennsylvania, West Virginia, Michigan, Connecticut and Rhode Island.

Rhode Island became the latest to join the club when Governor Daniel McKee signed Senate Bill 948 into law in June, with a monopoly market poised to launch in the diminutive East Coast state next March when the igaming law goes into effect. Since New Jersey went live in 2013, the only two meaningful states in terms of population to introduce icasino have been Pennsylvania (2019) and Michigan (2021). “[It’s] more disappointing than surprising,” responds Manuel Stan, SVP of North America at Unibet parent company Kindred Group, when pressed on whether he is surprised only seven states to date have passed legislation. 

There had been optimism that 2023 would see meaningful progress. That was until online casino bills failed in states like New York, Indiana, Illinois, Maine, Iowa, Maryland, Kentucky and New Hampshire during the first half of the year. Apart from Rhode Island, which bucked the historical trend and passed on its first attempt, this year has turned out to be a damp squib. Protectionism when it comes to commercial and tribal land-based gaming was once again a factor in some states, even though it was proven years ago that digital casinos were additive to the New Jersey market rather than depriving Atlantic City properties of income.

“Fear of cannibalising bricks-and-mortar revenues and tribal casino performance has long been a barrier to igaming legalisation,” confirms Lloyd Danzig, managing partner at Sharp Alpha Advisors.

Besides land-based gambling, another stakeholder is the lotteries that offer games like virtual scratch cards. Online casino becomes a possible threat to their revenue streams. “States that offer ilottery and have instant-win games that look very similar to online casino games – that’s potentially competitive,” says Jesse Chemtob, founder of consultancy Leverage Gaming Solutions and former general manager and VP of casino at FanDuel Group.

Online gaming has had its fair share of powerful opponents down the years, too. Sheldon Adelson, the billionaire casino magnate and Republican Party donor, was vehemently opposed to digital casinos up until his death in 2021. As the founder, chairman and CEO of Las Vegas Sands Corporation, he was also an advocate of the slogan ‘Click your mouse and lose your house’ spouted in anti-online gambling rhetoric a decade ago when states began to legalise igaming.

Negative articles in the US mainstream media of late about the potential harms of online gambling’s (sports and casino) expansion may have had a bearing on bills being unsuccessful this year. So could, as Danzig puts it, “a greater sensitivity to responsible gaming concerns”. The truth is digital versions of slots and tables games are deemed more dangerous products than an online sportsbook.

“The reality is that the two [verticals] represent differing dynamics,” acknowledges Benjie Cherniak, principal at Avenue H Capital. “Interest in sports and sports engagement is at an all-time high, with support from virtually all stakeholders, including the leagues themselves. Casino does not have the same level of support and does not resonate with the public in the same way.”

He continues: “Moreover, there is more opposition from the land-based side when it comes to igaming versus sports betting, so the igaming side was always going to take longer than sportsbook. But that said, the delta, as it pertains to state approval for sports versus casino, is more pronounced than I thought it would be at this stage of the game.”     

Strength in numbers    

Casino may not “resonate” like sports betting, but the vertical continues to grow where it is legal, providing an alternative and reliable revenue stream for online operators and raising additional taxes. According to the American Gaming Association (AGA), there was a 35.2% YoY increase in GGR for the six active states in 2022 to a new record high of $5.02bn.

New Jersey remained the largest in terms of GGR with $1.6bn in 2022, a record for a calendar year in any state. Michigan was in second spot with $1.43bn, while Pennsylvania hit new highs in 2022 as GGR for slots and table games combined reached $1.36bn. Almost a decade on from the switch being flicked on igaming, the New Jersey market is approaching the milestone of $1bn in taxes collected. Meanwhile, Michigan raises almost $300m a year from taxing online casino.

Yet it was the advent of legal sports betting that was the catalyst for igaming fully taking off in a state like New Jersey. Monthly GGR for online casino and poker leapt from around $15m-$30m prior to 2018 to the $40m mark by mid-2019. This was considered by some at the time as the market’s ceiling. Nowadays, north of $140m is a normal month. Part of the huge rise is the early days of friction points around KYC and payments, a lack of available games and Google’s previous ban on gambling ads, however the ability to cross-sell sports bettors into casino proved to be a boon.

Chemtob says: “Online casino was available for five years before sports betting was legalised in New Jersey, so the customer base from a casino perspective before this big cross-sell opportunity was very much evenly balanced in terms of male and female split.

“And that direct casino customer traditionally skews a little bit older than sports betting’s younger male demographic […] sports betting customers are very likely to cross-sell to casino, but mostly table games given the male skew.”

Unsurprisingly, multi-vertical customers are typically more valuable to an operator than a pure sports bettor. Retention specialist Optimove suggests the average “future value” of an active sportsbook and casino player is 50% higher than someone who just actively bets on sports. Without online casino, online sportsbooks can struggle to engage customers when the US sports calendar can, at times, be feast or famine. And they can’t acquire directly through casino those consumers turned off by sports, such as slots players who are often female and older than traditional sports bettors.

The travails of operating and competing in a sports betting-only state were underlined when Kindred Group pulled Unibet from Iowa in Q4 2022 to focus on multi-product states. In these jurisdictions, the lifetime value to CPA ratio is 2.8x, the firm revealed at its Capital Markets Day last year. Stan says two factors were at play, the first being the “incremental size of the market”.

“Online gaming is two to three times bigger than mobile sports betting in the states where it is regulated.” The second factor, he says, is that the vertical isn’t controlled by a few names. “The larger number of brands that an igaming customer plays with compared with sports results in a larger number of operators competing for market share – versus mobile sports betting where the top three operators have approximately an 80% market share. Basically, it’s more operators competing for a larger share
of a larger pie.”

Danzig of Sharp Alpha Advisors singles out the parent company of BetRivers and PlaySugarHouse for praise in multi-product states. “Operators like Rush Street Interactive have leveraged success as a casino-first brand to compete with operators that have a much larger share of online sports betting GGR.” In fact, we could see more casino-led, or even casino-only, operators emerge and carve out a niche if more states regulate online gaming, although the state-by-state nature of US regulation means this wouldn’t be on the same scale as the fragmented UK market where there are hundreds of casino brands compared to a dozen or so bookmakers controlling most of the online sports betting space.

For instance, PlayStar is a year-old challenger digital casino in New Jersey that is already turning heads, so much so that it was announced in July that Glitnor Group is to acquire a 37.5% stake in the startup. These igaming-focused outfits could become potential targets, much in the same way DraftKings snapped up Golden Nugget Online Gaming in an all-stock transaction, completed in May 2022, to broaden its player base and tap into the casino-first cohort.  

Rhode to nowhere?       

Whenever a new state passes igaming legislation it’s usually a cause for optimism among operators and suppliers. The response to Rhode Island approving S948 was somewhat muted, however. Being the 44th state in terms of population (under 800,000 adults), Rhode Island will struggle to move the needle. And with the laws stipulating table games must only be the live dealer kind, and the operation being a monopoly run by Bally’s on behalf of the state’s lottery (the state and IGT receive 85% of slots revenue and 51.5% of table games revenue), means Rhode Island is “the antithesis of interesting”, Eilers & Krejcik Gaming (EKG) MD Chris Krafcik wrote in an acerbic LinkedIn post. He also said Bally’s will be under little pressure, if any, to innovate or provide much beyond a serviceable product.

Eyebrows were also raised regarding, as EKG put it, the “cannibalisation insurance” for the lottery. Bally’s is required to provide financial protection – in other words make up the shortfall – if the lottery experiences a drop-off in revenue. EKG wrote in a note in July that it was a “short-sighted concession”.

The firm added: “We see this first-of-its-kind provision as a potentially negative precedent for future online casino legislation.” Regulatory peculiarities aside, a gauge as to how online casino in Rhode Island is likely to perform can be found in Delaware, a state with a similar-sized population and a lottery-run model. Delaware, which has had online casino since 2013 when it became the first state to launch online gambling, only generates around $1.2m in revenue a month. This puts it firmly at the bottom of the pile of igaming states. 

While Rhode Island is unlikely to pull up trees on the revenue front, you could say at least one state ‘did something’ this year. So, can it help with the optics and perhaps encourage other states to follow suit, albeit hopefully with an open and commercial model instead?

“Rhode Island is a smaller state, so what happens there is probably a non-factor as it pertains to the US at large,” replies Cherniak. “New York is making noise that 2024 could be their year, and that would obviously be a gamechanger for those operators active in the state. One would think that if New York passes casino it should serve as a catalyst for other states to get moving as well.”

Danzig is bearish in the short term but bullish when it comes to igaming’s long-term prospects. “The potential for tax revenue and growing acceptance of online gambling, coupled with an understanding that regulation protects consumers, are tailwinds for legislative efforts nationwide.”

And if he had to pick three states mostly likely to pass legislation? “New York, Illinois and Indiana are states to watch.” Of course, it would be naïve to think people in New York, Illinois and Indiana – or other states without access to legal igaming options – aren’t finding a way to play. Just like they did before PASPA was repealed, ushering in legal sports betting. That can mean entering the tenebrous world of unlicensed offshore sites offering casino games.

“The reality is online casino happens illegally,” Chemtob insists. “People play on their sportsbook sites illegally still, even in regulated states, and those sportsbook sites have a full offering. Those Pay Per Head [services] your neighbourhood bookie is offering have a full betting experience inclusive of online casino. While states have legalised and regulated online sportsbooks, which is a huge step forward, we’re still missing the mark in terms of potential tax revenue and what the consumer expects.”

The question is, though: are the politicians listening?