Cause & Effect

Will the legalization of sports betting spur states to also legalize iGaming?

When iGaming was legalized in Nevada (poker only) and then New Jersey and Delaware in 2013 (poker and casino), it was expected that other states would soon follow. But the relatively small markets in each of those states, combined with the technical and legal challenges of geolocation, payment processing, know-your-customer and more didn’t offer lots of guidance for other states to follow suit.

However, the legalization of iGaming in Pennsylvania in 2018, followed by its near-legalization in Michigan (see sidebar with Dave Waddell), now portends a bright future for online gaming and poker.

While the veto of the iGaming bill in Michigan might be only temporary, iGaming is on the upswing. There are now five years of scandal-free operations in the three states. It’s fairly clear what works and what doesn’t as pertains to technology regulations and taxation. Pennsylvania’s much higher tax rate might provide more data about whether the industry can be profitable with that rate.

And many believe the catalyst for quicker growth of iGaming is the legalization of sports betting. It’s quickly been proven that mobile wagering is the main driver of sports betting revenue. In Nevada, it accounts for more than 50 percent of sports wagers. In New Jersey, fully 72 percent of sports bets were taken from mobile or online sources.

iGaming pioneer Sue Schneider believes that the legalization effort in Michigan was a result of the legalization of sports betting.

“There’s been some speculation that the overturning of PASPA may have a positive effect on iGaming in general,” she says. “Michigan’s experience shows that this may, indeed, be the case. As more states realize that online and mobile gaming is a product that people want (and that the controls for concerns like underage gaming and other issues are often more easily achieved than in a terrestrial environment, in most cases), I expect a comfort level to set in. And as revenues come to the states, it will finally catch on… something many of us have been awaiting for well over 20 years.”

Steve Ruddock, an iGaming analyst for several websites, including LegalSportsReport.com, says the next year will be interesting.

“How sports betting and online gambling will intersect in statehouses is the question of 2019,” he says. “It could go so many different ways, and precisely how the two issues mix will vary by jurisdiction. Sports betting could push online gaming to the side, which seems to be the case in New York. Online gaming could ride sports betting coattails in states looking to maximize tax revenue. Or, either issue could be used as a bargaining chip to gain support in states where neither measure could pass on its own accord.”

 

States Looking

The legal iGaming industry in Pennsylvania is still not up and running. Ten casinos have been conditionally approved by the state for iGaming and two out-of-state casinos—MGM and Golden Nugget—have applications pending.

But Pennsylvania’s high licensing fees—$10 million—and even higher tax rate on iGaming—an effective rate of 42 percent—make observers question whether the industry will be successful. A sports betting tax rate of 36 percent didn’t deter operators from setting up sports books, but it has yet to be determined if those operations will be profitable.

Ruddock says the unfavorable aspects of the law will make it difficult to make money in Pennsylvania.

“Those burdens have also turned off platform providers and outside entities that would have jumped at the opportunity to enter what is currently the largest legal online gambling market in the U.S., if its law was structured more like New Jersey or Michigan,” he says.

The vetoed Michigan bill had a much more reasonable tax rate and licensing fees, with a $200,000 application fee and an 8 percent tax rate (even lower than the tax rate for land-based gaming at 24 percent). Proponents of the bill said they set the tax rate low in order to allow the state’s online casinos to make a decent profit.

“At first blush, Michigan’s legislation looked to be well-crafted and ticks off three boxes every gambling expansion/reform measure should possess: provide strong regulations and consumer protections; support the state’s existing land-based gaming industry; and send revenue to the state,” says Schneider.

“With a modest licensing fee, a single-digit tax-rate, and no tax on free-play, companies will be beating down the door to gain access to the Michigan market. Those operators will have plenty of wiggle room to advertise and innovate.”

While the Michigan bill will likely be re-introduced into the next legislature featuring a more sympathetic governor, other states are already in line. Schneider says Michigan could still be the catalyst.

“There are a number of states that have dabbled with legalization for a number of years but haven’t brought it to fruition,” she says. “California is a perfect example of this. We’ve been watching efforts in Michigan for a number of years. Perhaps the successful launch (online and mobile) of the Michigan Lottery finally gave a comfort level to state legislators so that they could expand the offerings to other games. And, presumably, the industry must have come together to support these efforts.”

Ruddock says there are a few possibilities for legalization in 2019.

“The top candidates for online gambling legalization in 2019 are Illinois and West Virginia,” he says. “And there’s always the possibility of New York’s online poker efforts jumping back into the fray.

“Illinois and West Virginia are both looking for revenue and trying to figure out ways to bolster their land-based gaming industries.”

Schneider adds Connecticut to that list of states interested in legalizing iGaming, but adds that successful states legalizing sports betting must include mobile, which could lead to full iGaming.

“It seems that, given New Jersey’s experience where some 70 percent of revenues are coming via mobile, state legislators should take heed and move forward with adding mobile from the outset,” she says. “Mississippi is probably the only state which has exempted mobile, and I would think that they may fix that in the near future. And also, looking at the experiences of other states that have passed iGaming, it’s pretty clear that it has not cannibalized the clientele coming into the casino. In fact, some of the facts show that those new online clients may now be attracted to the land-based facilities.”

 

Looking at Lotteries

While there are only a few states that have legalized the sale of online lottery tickets, there is a definite interest from state lotteries in iGaming. Ruddock says there’s a good reason for this.

“Online lotteries in states like Pennsylvania and Michigan already offer pseudo-online slots in the form of instant win games,” he says. In Pennsylvania, state casinos tried to shut down these games without success.

But Ruddock says in states where lotteries and casinos co-exist, there is bound to be some conflict if lotteries stray into the world of casino games.

“It would create vast regulatory issues,” he says, “the most obvious being, if both casinos and the state lottery are able to offer traditional online casino games, would gaming control oversee all of the operators, or would the lottery be omitted from gaming control’s oversight?

“As such, I would expect state lotteries to leave online casino games to the casinos and focus on online lottery products and sports betting.”

In fact, in Rhode Island, the state lottery operates sports betting at parlors located in the state’s two casinos. The lottery also operates mobile sports betting on systems provided by supplier IGT.

Schneider says there is no “one size fits all” model when it comes to lottery involvement in iGaming.

“The lottery involvement in iGaming will vary greatly state by state,” she says. “In some states, they may operate, in some regulate. We’ll probably see a lot of permutations. But, given the pressure to produce more revenues that most state lottery directors are under, we’ll see more states exploring this… especially those that may not have much in the way of a commercial or tribal casino infrastructure.”


Michigan Miss

Dave Waddell is a veteran gaming attorney in Michigan and a partner in Regulatory Management Counselors, based in East Lansing.

Waddell gives some behind-the-scenes observations about the passage of a bill legalizing iGaming by the legislature and the veto by outgoing Governor Rick Snyder, as well as the possible future of a revived iGaming bill.

GGB: Michigan has been considering iGaming for a few years, but the legislature finally pulled the trigger. Did that surprise you?

Waddell: It was not a huge surprise that a legislative compromise came together, as support had been slowly growing over time. The Michigan Lottery had moved pretty aggressively in adding online games with success, which eliminated some of the fear of the concept within the state. Additionally, there were multiple interests involved, each of which wanted different types of gaming legislation to pass (ADW for horse racing, charity gaming law amendments, and fantasy sports operators).

During the course of discussion on all these bills, it became clear that to get the needed votes, all the bills would need to be addressed at the same time. The “lame duck” legislative session (after the election) provided a good window to seek to finally get these bills passed. Thus, it was not a big surprise that the legislature acted during this year-end period to seek to address the concerns of all these various members of the gaming industry in Michigan. To us, the bigger surprise was that outgoing Governor Snyder vetoed the legislation in an apparent effort to protect the lottery from competition online.

It also appears that the proposed regulations are very favorable to companies that will offer the wager. The tax rate is even lower than in the physical casinos. How would that have impacted the companies and tribes that would have been eligible to offer iGaming in Michigan?

The lawmakers in Michigan did a very good job with regard to learning the dynamics involved with sports wagering and online gaming. They realized that to be competitive, a realistic tax rate needed to be utilized for these activities. The bill that passed both houses but was vetoed limited the eligible companies that can seek a license to offer iGaming to the three Detroit casinos and any Indian tribes located in Michigan that currently conduct Class III gaming. It also built in a 15-month period for the Michigan Gaming Control Board to develop and promulgate regulations governing the iGaming.

Under the bill, the operators would all have been able to offer iGaming throughout the entire state. Thus, there would have been a healthy level of competition between operators to try to establish brand-name recognition either by partnering with companies that have well-established brand recognition or by using their own brand.

We would think that companies offering iGaming in Michigan would likely be looking to partner with those that can help them win over the largest customer base, and the tax rate was set at a rational level to allow for this to be done in a way that would lead to success to both the operators and their partners. All of the operators were also hopeful that through cross marketing, they would have been able to generate additional casino visits to their brick-and-mortar casinos.

Do you believe Michigan will add mobile and online sports betting to its gaming options if the bill is considered again?

Despite the outgoing governor’s veto, there seems to be a widespread consensus that mobile and online sports wagering will be coming to Michigan. The iGaming bill that passed in Michigan but was vetoed provided, in part: “The division may permit internet gaming operators licensed by the division to accept internet wagers under this act on any amateur or professional sporting event or contest.”

In addition to the iGaming bill, the Michigan legislature passed another bill (also vetoed by the governor) that amended the Michigan Gaming Control Act stating that the 8 percent wagering tax imposed on iGaming will also be imposed on sports betting (presumably either at the casino or online). State Rep. Brandt Iden, who previously sponsored a bill that expressly authorized sports wagering, has gone on record saying he will reintroduce the bill in the next legislative session to provide a statutory framework for the sports wagering activity.

What does the potential future legalization of iGaming in Michigan mean for the legalization of iGaming in more states?

If the legislature takes action to re-introduce and pass the legislation that the governor just vetoed, Michigan could become a model state for other states to emulate when it comes to iGaming. With a new governor just taking office, and with a new crop of legislators also coming into office, it likely will take several months for the bills to be reintroduced and passed.

In developing the bills that were just vetoed, Michigan took a realistic approach in setting its tax rate to allow operators to be successful while generating additional revenue for state and local interests. Based on prior history, the Michigan regulators would be likely to make sure they use best practices when it comes to developing a practical, yet robust regulatory environment. Once other states see that iGaming can be introduced in a way that enhances the gaming experience and provides additional streams of revenue, it is easy to envision that other states will want to follow suit. Thus, we believe that the legalization of iGaming in Michigan would likely lead to further expansion into other states.

Roger Gros
Roger Gros is publisher of Global Gaming Business, the industry's leading gaming trade publication, and all its related publications. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its fourth edition. Gros was named "Businessman of the Year" for 1998 by the Greater Atlantic City Chamber of Commerce, and received the Lifetime Achievement Award from the American Gaming Association in 2012.