Pennsylvania Making Money in Gambling

Pennsylvania Making Money in Gambling

Pennsylvania Making Money in Gambling 1

Prior to the overturning of the PASPA (Professional and Amateur Sports Protection Act) in 2017, Pennsylvania’s budget was looking grim. With the state’s finances running into a deficit of the billions, the sensitive nature of raising taxes on people’s income was not palatable to many politicians in government. Fortunately the Supreme Court determined that the PASPA was unconstitutional, which opened the door for states such as Pennsylvania to legalize and regulate sports betting as a way of raising revenue.

In 2018, Pennsylvania roared ahead with legalizing sports betting along with opening the door to online gaming (iGaming), fantasy sports betting and expanding the types of games offered at physical brick and mortar outlets.

It is envisaged that with the reformation of gambling in Pennsylvania, revenue generated from licenses and taxes will ease the deficit burden hanging over PA. This avenue of managing’s PA’s finances has not come without its controversies.

How can Pennsylvania gambling be sustainable?

There are several points of contention that has been raised by the gambling industry in PA. The foremost is that the cost of licenses and the heavy tax rate imposed by the state are overwhelmingly excessive. At $10m each for an iGaming or sports betting license it is understandable that there are concerns from operators that the industry may not be sustainable. In addition to the perceived aggressive pricing of licensing, tax rates imposed are on average twice that of New Jersey (a state which is much more mature in gambling channels). With higher tax rates, in order for betting operators to make a profit they may pass on the tax cost to gamblers. Naturally, with passing on the tax cost leads to worse odds for players which may drive away players to neighboring states, thus leading back to lower profits anyways. High licensing fees and high tax rates may create an unsustainable environment for the gambling industry in PA, which means resolving the budget deficit in PA is only plugged for the short term.

Damned if you do and damned if you don’t

When the PGCB announced the opening of submissions for gambling licenses there was little to no response by gambling operators. In fact, the inactivity was quite noticeable and there was concern that there would be no purchases of the licenses offered by the PGCB. Behind the scenes, industry experts were crunching the numbers to try and make “it” work for casino operators. It would be fair to say, that with a lack of data for forecasting profitability, assumptions would have to be made and ironically it would be the casinos that would need to consider gambling on purchasing the licenses in order to expand their gambling channels.

With only days looming to the dead line for application of gambling licenses, a sudden influx of submissions was received by the PGCB. There’s an obvious greater fear of missing out on part of increased market share overriding the fear of being unprofitable. It’s a case of casino operators “all in” or “all out”. And the outcome is “all in”.

What is the Pennsylvania Gaming Control Board?

The Pennsylvania Gaming Control Board (PGCB) is the Pennslyvania state government body that administers gaming policy, implementation and adherence, monitoring and controls, and fines and penalties.

This department existed pre 2017, however due to the change in gaming laws in 2017, its relevance is now really coming into purpose. The change in gaming laws brought an avalanche of work upon the PGCB and thus has had to increase the size of their workforce.

It currently has over 300 employees and their responsibilities include:

  • Formulating and implementing a licensing framework for the casino industry.
  • Applying and ensuring licensing requirements are met by new casino operators.
  • Ensuring equipment and software used by betting operators comply with regulation.
  • The establishment of legal and regulatory committees to oversee the vision and direction of gaming in Pennsylvania.
  • Monitoring and ensuring compliance to regulations for operators in the gaming industry. This may include audits, fines and penalties and legal action.

The PGCB is therefore responsible for the pricing of licenses and directly influences the finances of the state of PA.

PA licensing categories

The framework created and implemented by the Pennsylvania Gaming Control Board (PGCB) required gambling operators to purchase one off gaming licenses. These licenses have generated a boost to PA finances for the year.

These licenses can be categorized as follows:

Online gaming

Key points

  • Also known as iGaming
  • Split into Table Games, Poker and Slots
  • Each category is $4m, or if purchased together at a discounted price of $10m
  • Multi skins allowed

The PGCB issued online gaming licenses referred to as “Interactive Gaming Certificates”. The quantity of available licenses were based on the number of physical land casinos which was 12. iGaming certificates could be purchased as a package for online table games, poker and slots for $10m, or individually at $4m each.

A total of $114m was raised from the purchasing of iGaming licenses from casino operators. Four operators did not purchase the package deal for online gambling but instead bought table games and slots licenses individually whilst skipping out on the online poker license.

Sports betting

Key points

  • $10m per license
  • Multi skins not allowed
  • PA tax rate 36%; NJ taxed rate 9.75%

The purchase of a sports betting license includes the rights to have both a physical and online presence. Seven licenses were purchased equating to a total of $70m raised.

Four of the seven licenses purchased have already become operational at temporary venues. Under the terms and conditions with the PGCB, sports betting operators are not allowed to offer multiple brands under one license. This contrasts with iGaming in which multiple brands under one license is permitted.

Take note of the difference in tax rate between PA and NJ, 36% vs 9.75% respectively. Margins will be cut thin in PA operated sport books, they simply just won’t be as competitive as NJ sport books. In particular “online” sport book placements will unlikely grow as anticipated in PA. The tax rate is simply too high, and better odds will be found on other online sites by players. The battle ground for sports betting appears to be challenging in PA.

Mini-Casinos

Key points

  • Also known as satellite casinos
  • Auctioned for a minimum of $7.5m for slot machines and $2.5m for table games

The PGCB has made available ten mini-casino licenses. A mini-casino is defined as having between 300 to 750 slot machines and 30 table games.
Also known as satellite casinos the PGCB held an auction to sell them. Five were purchased at a whopping total of $127m. At an average of a touch above $20m for each mini casino license sold, the pricing just seems absurdly high. The remaining five mini casino licenses were not sold due to a lack of bidders.

Rules of locality of mini-casinos have been mentioned by the PGCB, with the intention of not intruding on existing gambling facilities by implementing restricted areas.

Airport gaming

Key points

  • $125,000 to $2.5 million depending on the size of the airport.
  • Only offered to airport ticket holders that have checked in and are waiting to board a plane.

Yet to be made operational. The framework is that airports will be able to purchase licenses to allow them to operate physical and online gaming for airport ticket holders that have already past check in.

Truck stop gaming

Yet to be made operational. The framework will allow “truck stops” a maximum of five video-gaming terminals (VGT) at truck stops. Only truck stops that sell an average of 50,000 gallons of diesel per month, have an onsite convenience store and with a land size of more than three acres are allowed to operate VGT’s.

VGT’s will have a maximum bet of $5 with a maximum payout of $1,000.

Fantasy Sports Betting

Key points

  • $50k per license
  • Tax rate 15%
  • Minimum age 18

6 fantasy sport operators have purchased a license amounting to $300k in revenue raised.

Revenue to Cost Comparison

The current 12 casino operators in PA have an approximate range of gross wagering income between $15m to $820m for the calendar year 2018.

The top three, being Sands Casino Bethlehem, Parx Casino and SugarHouse Casino, together make up over 50% of the industry bricks and mortars takings.

Those towards the bottom of gross wagers are: The Meadows, Mohegan Sun Pocono, Presque Isle Downs and Lady Luck Casino, in which it is estimated to be a maximum of $132m combined per a year. These casinos will struggle to compete in the environment that the PCGB has created as they don’t appear to have the economy of scales.

Licenses averaging $10m will eat into their profits. And this is not taking into consideration investment into new infrastructure, operational processes and marketing campaigns. There is also a thought that online and potentially sports betting will eat into the existing gaming revenue generated by physical casinos. Ineffect, cannibalizing their pre-existing business channels.

The cost of purchasing a mini-casino license appears to be ridiculously out of proportion with the potential revenue that could be achieved with only several hundred slot machines and table games. Perhaps the purchasing of these licenses by casino operators were made as a defensive strategy, which translates to as a very expensive one.

The only business channel that appears to be sustainable is fantasy sport betting. The $50,000 licensing fee, is a fair start up fee. If these operators are clever enough in their marketing, they may be able to take market share from the sports betting book makers, especially given how absurdly high the tax rate is in PA.

Time will tell

The launch of a new gambling framework will undoubtedly inject much needed revenue to Pennsylvania’s finances. However, it’s money grab through licensing fees and taxes may lead to killing the goose that lays the golden eggs. I predict that there will be a consolidation of players in the industry in the next five years and that there will be a need to reduce the tax rate imposed by the state. The current costs of running a gambling operation in PA, on the back of the envelope calc is simply too high, especially for the small players.

The question of sustainability remains definitively unanswered but on face value it looks challenging to say the least. Only time will tell.

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