While brick-and-mortar casinos in many states have been outpacing their 2019 revenues this year (having been closed for much of 2020), there are exceptions. Deutsche Bank analyst Carlo Santarelli has crunched the data for internet gaming versus brick-and-mortar casinos in Pennsylvania and reports, “We think it is worth considering the notion that the presence of icasino in PA could be stunting the casino recovery.”
Of those states that permit online gambling, Pennsylvania was chosen by Santarelli because it is “a state that provides the most granular data around its icasino operations and, as such, provides more insight into the trends and variant dynamics between the icasino and B&M facilities.”
Those trends, as it happens, are negative. During March, April, and May of 2021, traditional casino revenue in Pennsylvania fell 12 percent, rose 1 percent, and fell 3 percent, respectively.
This coincided with the opening of two new casinos, one near Pittsburgh and the other in the stadium district of Philadelphia, both owned by Cordish Gaming. This dilution of the marketplace meant that — on a same-store basis — Pennsylvania terrestrial gaming was down 22 percent in March, 10 percent in April, and 12 percent in May.
“On a stand-alone basis, given the pandemic, these results would appear reasonable in isolation,” Santarelli observed. “However, when compared with performance across a host of other states across the Northeast, Midwest, and Southeast, they stand out a bit.”
Santarelli’s control group was a set of seven other states in which gross gaming revenue increased 2 percent in March, 19 percent in April, and 12 percent in May. Even so, “Definitive conclusions around the sustainability of current trends and cannibalization of brick-and-mortar facilities are difficult to support with confidence.”
However, when confronted with $10 million in Pennsylvania igaming revenue from July through December of 2019 (the first seven months in which it was legal) versus $68 million per month over the last 14 months, “We continue to question just how different the customer is.”
Digging deeper into the Pennsylvania numbers, Santarelli found internet casinos spending more than their brick-and-mortar counterparts on player acquisition and retention. He also noted that slot revenue is roughly the same percentage in the two spheres, although table games are taking more share in icasinos of late and that internet slot holds were half of those for their terrestrial counterparts — 4.8 percent against 9.9 percent.
‘Though the convenience of a pocket casino is surely a strategic advantage, if you’re a slot customer, it appears the icasino is actually the value play for your entertainment dollar as well,” Santarelli wrote. “Said differently, the entertainment dollar lasts twice as long in the icasino environment.”
Brick-and-mortar casinos in Pennsylvania are spending 9 percent less on promotions than they did in 2019. By contrast, their online counterparts are being aggressive, numbers show. “That being said, as most recognize, players are not comped on actual losses, but theoretical losses, as defined by coin-in (a.k.a. handle),” Santarelli wrote.
Taking a wider view, Santarelli penned, “The bull case for icasino has been one of a rolling wave of favorable legislation making icasino a driver of growth for years to come.” Even so, he notes, immediate opportunities are limited. Michigan legalized igaming prior to the coronavirus, but didn’t launch it until after the pandemic (to sizable revenue numbers), while Connecticut has only just legalized it for the Native American tribes.
“Accordingly, we find the theme of the pandemic making iCasino legalization a likely source of funds for states, far less likely now, post bailouts, than perhaps was the case 6-12 months ago, especially given the lack of progress by front-runner states, namely Indiana and Illinois,” Santarelli expanded. “As such, we think the rollout of iCasino is likely to be a lot more challenging than most expect, and far more challenging than sports betting. As per our findings here, we also think there is some merit to cannibalization of traditional casino operations, which would thereby lessen the desire of certain casino operators that haven’t had success in iCasino or aren’t well positioned to succeed in the vertical, to push for legalization.”
As Santarelli observed, igaming was put before the Indiana Legislature, where it died in committee, and is having difficulty making headway in Illinois. (Santarelli: “We find passage unlikely within the next year.”) Both states, however, have seen significant numbers from online sports betting. Connecticut’s internet gambling is deemed “highly likely” to launch within the next year, Interior Department approval pending, bringing the number of states in which it is legal to six (New Jersey, Pennsylvania, Michigan, Delaware, and West Virginia are the others.) Santarelli says “prospects are dim” for a bill in Missouri’s Legislature and “negligible” in North Dakota. In the latter instance, even legislative assent would be subject to ratification by voters.
In conclusion, Santarelli pegged U.S. internet gambling as a potential $4 billion-a-year business, with New Jersey currently leading with $1.16 billion, Michigan close behind with $1.14 billion, Pennsylvania contributing $860 million, and West Virginia far behind at $50 million. He cautioned that any forecast “is not without considerable risk, as it implies that … the pandemic/stimulus has had little to no impact on icasino spend and as such, trends will remain largely firm.” Also, the five current jurisdictions have to see play expand by 18 percent, going up to 27 percent once Connecticut goes live.
