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Brave New World

How will New Jersey change the iGaming market?

Brave New World

So internet gaming is off and running in New Jersey.

And, despite what can be called expected start-up glitches, the new industry seems to be doing well.

As of this writing just a week into New Jersey’s new world, more than 50,000 players had signed up, several of the larger websites had been averaging 200 cash poker players at a time and growing, and about 5,000 new players were being added every day.

New Jersey already had more poker play than Delaware, which began several weeks earlier, and Nevada, which has been live since April.

New Jersey’s numbers are no surprise given that it has more than three times Nevada’s population and 10 times Delaware’s. Poker requires big numbers to succeed because there always has to be a game of the skill and denomination and type that appeals to enough players to put successful tables together.

Indeed, it’s likely that Nevada and Delaware might never succeed at poker unless they can pool players with other states, something that a New Jersey or California might not be eager to do for competitive reasons. Why, for example, would New Jersey want to help neighboring Delaware casinos compete against those in Atlantic City? Likewise, why would California want to help Nevada at a cost to itself?

New Jersey could benefit from an expanded pool of poker players, but might choose to be selective with whom it allies.

The New Jersey casinos also have brand names and deep databases from which to draw players as advantages over Delaware.

For example, as of this writing, only 17 players were in poker games in Delaware compared to 139 at World Series of Poker New Jersey and 282 at Borgata.

Still, growing pains and glitches aside, New Jersey appears headed for success readily enough that other states may soon follow.

Indeed, just one week after New Jersey launched, the Pennsylvania Senate voted overwhelmingly to study legalizing online gaming. The motivation? Fear that gambling revenue is flattening, and could start to diminish because of the new online competition next door.

It’s worth noting that attention to date is focused on poker because player figures are available.

There is no estimate yet of online casino play, and population size isn’t nearly as important because each slot game is played by a population of one, no matter how big a state. Slot play also is more profitable.

An illustration of just how small Delaware is came in its first full month—2,800 signed up, but only $3.8 million was bet, of which just a fraction is revenue.

However, it is just the start and should grow from here.

So, with all of that said, it’s time to try to get a handle on the size of the iGaming market and who the winners and losers might be.

Along those lines, Morgan Stanley analyst Thomas Allen issued an interesting research note.

Internet gaming in the U.S. will be a $670 million business next year, growing to $7 billion in 2017 when 17 states are likely to legalize, Allen says.

Estimates of the size of the market for just New Jersey have ranged from $300 million to $1.8 bllion.

The biggest winners are likely to be Boyd as an operator and 888 Holdings among European online companies, Allen thinks.

Internet gaming might not be profitable initially, Allen said quoting entertainment (BPTY), which expects to lose $5 million to $10 million next year in New Jersey and $5 million in 2015. However, margins will grow over time, Allen said.

He notes that online margins usually run 20 percent to 30 percent and that even in high-tax jurisdictions such as Australia, they run 25 percent.

Allen expects BYD to generate $75 million in EBITDA from online gaming in 2017, which translates into $5 of share value to BYD discounted back. Allen noted that BYD already is getting 50 percent share in New Jersey through its Borgata brand.

Borgata’s online partner is BPTY, but 888 is the best positioned among European companies given its alliances with World Series of Poker and its All American Poker Network that serves Caesars and Wynn, Allen said.

Allen’s assumptions are based on the average American player spending $50 a year, which compares to $75 in the U.K. and $100 in Sweden.

The U.S. is limited by the lack of sports betting, but Americans overall spend more on gambling, $385 each compared to $350 in the U.K. and $375 in Sweden, he notes.

There are 15 online sites in New Jersey right now, but iGaming tends to consolidate, Allen observes.

The top four operators control 30 percent of the British market, 79 percent of Australia, 80 percent of Spain, and 70 percent of Italian poker, Allen cited as examples.

And, while attention is focused on New Jersey, state lotteries are slowly starting to go online.

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