Pennsylvania recently became the fourth state in the US to regulate online gambling, after Nevada, New Jersey and Delaware. Following the news, we spoke to Chris Grove, a consultant to Catena Media who also oversees the US-facing affiliate sites PlayNJ.com and PlayPennsylvania.com.
Grove shared his insights on how the Keystone State’s regulated market could evolve in the short term as well as the role that affiliate marketing could play.
Income Access (IA): What will be the timeframe for Pennsylvania’s iGaming market going live?
Chris Grove (CG): The big question at this point is when regulators will start accepting licence applications. That's the key step that starts some other clocks ticking down in the state.Broadly, we're expecting Pennsylvania to launch in the second half of 2018. But it's important to remember that Pennsylvania passed a significant amount of other expansions along with online gambling, so there will be multiple things competing for attention from regulators, which could delay things.
With that said, Pennsylvania's online gambling bill does seem to be built to facilitate a relatively rapid path to market, so once regulators get the ball rolling it could be a situation that progresses faster than some are expecting.
IA: How do you see the regulated Pennsylvanian iGaming market evolving over its first year and then the next five years?CG: In terms of the highlight numbers, we're expecting a market that will be significantly constrained by the tax rates and licence fees lawmakers settled on. Our projections call for only $154 million in year one revenue, growing to $275 million by the fifth year. With a more reasonable tax rate, we believe Pennsylvania would be closer to $400 million by year five.
We recently published a white paper at PlayPennsylvania.com that tackles this in a bit more depth.
The number of brands remains an open question, as the bill is a bit ambiguous on the matter of how many unique brands can operate under a single license.
IA: At a vertical level, how do you see the market evolving over the first 12 months and beyond?CG: Casino will be most impacted by the tax rate, which will probably land at about 45% blended, if you're just talking about casino products. That's going to cut down on the ability of operators to spend on marketing and promotions, bottom line. Marketing and promotions drive player activity, so there's going to be a negative impact on revenue. The only question is how much.
Poker has a chance to do well, relatively speaking, but Pennsylvania regulators will need to be aggressive about their timeline for establishing shared player pools with other state-based markets. The longer the state stays an island, the worse it is for all states. We saw in New Jersey how quickly an online poker market can peak and drop off if the player base is limited.
Online lottery is another "it depends" answer. Michigan has seen a lot of success with their online lottery programme, but they've also been smart about providing players with a nice line-up of games, solid promotions and supporting the endeavour with solid marketing efforts. Until we get a better sense of how effective Pennsylvania is going to be on those fronts, it's going to be tough to project how well online will perform for the lottery.
In terms of daily fantasy sports (DFS), the status quo will basically persist. Nothing about the bill really changes the landscape there.
Sports-betting will also be hampered by an astronomical tax rate. I have a hard time seeing how the industry will actually get off of the ground with the current rate. I believe we'll see that number adjusted before sports-betting becomes a reality.
IA: What role will affiliates play in the Pennsylvania iGaming space, and how closely will this follow the New Jersey model?CG: I think you'll see quite a bit of an overlap between how the two states approach the question of regulating affiliates. New Jersey's approach has been effective, and the two states have a longstanding open dialogue on the broader question of how to regulate online gambling, so there's little reason to think Pennsylvania will take a markedly different approach.
IA: What will be the biggest challenge for affiliates promoting PA-facing iGaming brands?CG: Again, it's the tax rate. If you look at the regulated online casinos we promote over at NJOnlineCasino.com, you'll see that New Jersey operators are pretty generous about sign-up bonuses. That makes life a lot easier for affiliates, especially when you're trying to convince customers to go through what is a cumbersome KYC process that requires them to hand over a lot of personal information.
I don't think the offers will be nearly as generous in Pennsylvania, which will definitely hurt conversion rates for affiliates.
IA: How do you see the affiliate marketing channel evolving in the PA iGaming market?CG: I think Pennsylvania is going to be a far more competitive market than New Jersey was during the first few years. You'll see more affiliates of various shapes and sizes entering, and you'll definitely see significant margin pressures due to what are almost certainly going to be lower rates.
IA: What will be the impact on affiliate marketing in the broader US market – will PA be ‘a tipping point’ for US and overseas affiliates promoting US iGaming brands?CG: With each market that gets added, the level of interest from both existing and new affiliates in the regulated US market will grow. I don't know that Pennsylvania will be a tipping point in the sense that it will open any floodgates, but it will definitely drive incremental interest in the regulated US online gambling market.
IA: Talking of ‘tipping points’, what do you see as the impact of PA’s regulation on other states’ regulation of iGaming?CG: It will be difficult for other states to ignore the fact that Pennsylvania stands to book over $100 million in revenue upfront from license fees, let alone what the state might realise in tax revenue.
I'm not sure that Pennsylvania alone would be enough for a state that wasn't considering online gambling to suddenly wake up and pass a bill, but it will definitely start the conversation in some states and advance it in others. The closer a state is to Pennsylvania in terms of location, stakeholder makeup, and economic need, the more of an impact Pennsylvania's move is likely to have.
About Chris GroveChris Grove is a gambling industry analyst. A managing director at Eilers &KrejcikGaming, Grove is also a consultant to Catena Media, overseeing various publications covering the regulated U.S. online gambling market, including OnlinePokerReport.com and PlayNJ.com