Interest in internet gaming has caught investor imagination, leading to a big run-up in gaming stocks thought likely to benefit, with Caesars more than doubling and other companies jumping double digits.
That response might be hasty.
There are plenty of reasons to look for investment opportunities in online gaming, but few, or none, for jumping on trains that haven’t even been built yet, no less have left the station.
The unknowns about internet gaming in the U.S. are greater than the knowns. For example:
• Size of the market. Lots of guesses, but no one really knows.
Thomas Allen of Morgan Stanley took a stab at estimating New Jersey.
He figures i-gaming in the Garden State could produce $500 million to $1.1 billion in revenues, and add $1.10 to the stock price of Boyd and 30 cents to MGM Resorts.
Based on other markets, Allen assumes i-gaming can be 13 percent of New Jersey’s current market and achieve 25 percent EBTIDA. That would be a base revenue of $640 million.
He expects that Borgata could achieve 30 percent of i-gaming share, with a third of that revenue going to the Boyd-MGM joint venture and two thirds to i-gaming operator bwin.party.
He then values it at 14 times EBITDA, which he says is on the high side for European operators.
• Timing. An investor could wait a long time before meaningful internet revenues are generated in the U.S. Delaware hopes to be online by September 30, but officials there admit that is aggressive.
Nevada is thought to be at least six months away, and that’s just internet poker.
Estimates for New Jersey run from six months to a year and a half.
And we don’t know if or when other states will jump in.
• Beneficiaries. The names that first come to mind are Boyd, MGM Resorts and Caesars in the U.S., and London-listed 888 Holdings and bwin.party.
BYD and MGM own the Borgata, which, it is assumed, will capture a big market share in New Jersey. Bwin.party has the contracts to serve BYD and MGM.
Caesars owns the World Series of Poker, and 888 has the contract to serve Caesars (for a limited time).
And, as nearly all profess, internet gaming, regardless of how it plays out, will be a multibillion-dollar business.
But automobiles were destined to be a multibillion-dollar business at the dawn of the 20th century when there were 300 carmakers. Who in 1910 could have predicted which three would survive?
• Off-shore operators. Nor should investors dismiss the potential for unlicensed off-shore gaming operators to continue to take big chunks of business.
European countries such as the United Kingdom and France are finding out how difficult it is to profit from i-gaming in a global, and often illegal or non-legal, world.
The U.K., for example, broadly legalized i-gaming some years ago assuming it would have a homegrown industry with the likes of 888 offering poker and sports betting shops like William Hill going online.
And so they did.
The problem, however, was that tiny markets with big internet ambitions such as Gibraltar, Malta and Alderney began luring British companies with low tax rates.
Today, almost all the significant British-based gaming companies have headquartered their i-gaming operations elsewhere, leaving the government to threaten a tax at the point of consumption to capture some of the treasure they had planned on.
In France, unlicensed off-shore i-gamers are beating the pants off the law-abiding, tax-paying competitors who must pay high French taxes.
Our caution: take time to understand the players and dynamics of internet gaming before jumping in.
Bricks And Mortar In An i-Gaming World
One of the most frequently asked questions is how internet gaming will affect brick-and-mortar casinos.
Many industries have been disrupted by online competitors. And the leaders of those industries, despite investing billions of dollars in the aggregate, are behind new giants like Amazon, eBay and Craigslist.
So, the assumption is that will happen to casinos. It makes superficial sense that a dollar lost in a virtual slot machine is a dollar not available for a tangible slot machine, after all.
We don’t think so.
Casinos are an experience. And, unless human nature changes, people will continue to crave experience. Indeed, the more technology removes people from experience, the more they will crave it.
One example of the powerful attraction of human interaction and experience is business travel.
For decades, each new communications device has been heralded as a tool for long-distance meetings, making in-person meetings unnecessary.
Yet business travel continues. Hotels proliferate. Convention business grows.
Or consider entertainment. Movies didn’t kill live theater. TV didn’t kill movies. The internet hasn’t killed TV.
But we don’t need analogies. We can look at Britain, where the number of casinos grows and companies like Paddy Power continue to add betting shops even as internet gaming has had years to develop.
In brief, the arrival of internet gaming doesn’t mean the end of one world in order to welcome a new one. It means a world enriched with more choices.