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Turning the Tide

Can online gaming save Atlantic City?

Turning the Tide

New Jersey, through its 12 Atlantic City casinos, is preparing to go live with full online casino gaming on November 26. Nobody is clear on where the initiative will take America’s second casino city, but one bet has been made. Online gambling is being asked to stop a five-year losing streak in the resort.

Atlantic City has been in the business of looking for saviors, both big and small, for better than 35 years.

The first savior was the big one, coming in the late 1970s, when casino gambling was seen as the only way to save a crumbling and nearly forgotten seaside resort decades removed from its glory days. When Resorts International opened on May 26, 1978, the hope in casino gambling seemed well-placed, as lines of gamblers snaked along its once-again-famous Boardwalk just trying to get in.

But since then, Atlantic City has always seemed to need more, smaller saviors—something to save the neighborhoods, something to get the players, bussed in daily, to stay for more than a few hours, something to change the city’s public image as dirty and unsafe.

Some of these saviors appeared, even if their success was limited. A new glossy mega-resort would open. A new agency to funnel casino money into the neighborhoods was created. The public image? Well, that’s been a tough one.

The Perfect Storm Then, after a 29-year winning streak, something happened to the original savior. Casino gaming started to falter as Atlantic City lost its East Coast monopoly on roulette and blackjack. Timed perfectly with the rise of casinos in Pennsylvania and Maryland, a severe recession hit the country. The city’s casinos have been losing revenue and market share ever since, and are approaching lows not seen since the first casinos came online. The 29-year winning streak has been replaced by a five-year losing streak.

Atlantic City needs a big savior again.

For many, it arrives November 26 when New Jersey is scheduled to begin online gambling.

It’s the same old savior, of course—casino gaming—but now it’s a more evolved creature steeped in new technology, social media and mobile apps.

The sky could be the limit. Estimates vary greatly, but analysts feel online gambling revenue for New Jersey could be anywhere from $200 million to $1 billion. The state estimates (very optimistically) it will make $180 million in taxes—taxing online revenue at 15 percent—which means the casinos would have to win about $1.2 billion.

Atlantic City’s total yearly casino revenue is currently about $3 billion.

It’s a lot to ask of internet betting. But if it does nothing else, online gaming has already done just what casino gambling first did in 1978. It’s injected some hope into a fading town, and people are once again lining up to get in.

“I think online gaming has brought a real excitement to the city,” says Joe Lupo, senior vice president of operations for Borgata Hotel Casino & Spa. “This market has been depressed. So to now be at the forefront of new technology and new gaming is a tremendous boost.”

Still, there is an air of uncertainty to the whole thing. Lupo, for example, was the only casino executive contacted for this story willing to speculate on what is coming.

It’s really not clear how the whole thing will work, but the most important unknown—when will it all start—was answered early in October when the New Jersey Division of Gaming Enforcement announced that the state will meet its target date of November 26. Casinos must complete a five-day “soft-play” or test period before launching.

The next step is the publication of 106 pages of online regulations, due October 21 (too late for this issue). Their adoption was scheduled for October 28.

Quick Like a Fox The DGE’s announcement was a surprise to some, especially those watching New Jersey’s actions from other states who have questioned how quickly New Jersey has been moving to implement online gaming. New Jersey is trying to do in about nine months what Nevada—which has already gone live with online poker—took a few years to implement.

DGE officials say they are not ready to discuss the state’s plan before the regulations are released, but David Rebuck, director of the DGE, has told reporters in the past that New Jersey began studying online gaming right after the U.S. Department of Justice issued an opinion in 2011 that federal law does not block online gaming if it is limited to within a state’s borders.

The opinion was released even as the DOJ was continuing to shut down illegal online gambling sites operating in the U.S. from international companies operating outside the country’s borders.

And it was music to New Jersey’s ears. Legislators from both southern and northern New Jersey have been trying to change federal law to increase gambling in Atlantic City (and other parts of the state, but that’s another story) and turn around its falling revenue stream.

One plan is to move for legal sports betting in the state, even though it is not allowed under federal law. New Jersey voters have even approved a referendum allowing sports betting should federal law change. But New Jersey’s challenge to federal law that limits sports betting to four states where it was grandfathered—Nevada having the only true sports books—has failed so far in the courts. An appeal to the U.S. Supreme Court is now planned.

But that’s sports betting. Online gambling won quick approval in the state legislature after the DOJ opinion and a plan was launched to offer online gambling through Atlantic City’s 12 casinos. The law requires all computer servers and software to be housed in Atlantic City, and gamblers must be within New Jersey’s borders to play.

Ten of the city’s casinos have already announced partnerships with online gaming providers running well-known poker sites such as PokerStars, PartyPoker and Caesars Entertainment’s World Series of Poker.

But New Jersey’s law is much more than poker. All casino games will be offered, including slots—an equally popular online game as poker. Lupo says he thinks the regular casino games will have the same popularity as online poker.

So what’s it all mean? Nobody’s sure, but it is clear Atlantic City is heading into new territory.

“I think one of the ways to look at this is to consider the big-box retail stores,” says Cory Morowitz, managing member and CEO of Morowitz Gaming Advisors LLC, a gaming analysis firm in Atlantic City. “A store like Macy’s has multiple outlets that they use for distribution. They have an online component. They have their actual stores and they have their catalog sales. This legislation gives Atlantic City casinos some of that—a new outlet and another distribution channel. That’s a factor that makes an Atlantic City casino more attractive to operate.”

For Atlantic City, in a single swoop one of its most intractable problems seems to have been answered, or at least mitigated. City leaders have longed to make Atlantic City a destination resort and more than a simple drive-in market. And though the city has made great strides in recent years bringing in entertainment, dining and attractions, the city’s visitors still mostly live in driving distance.

With the advent of casinos in New York, Connecticut and Pennsylvania, however, more and more gamblers have chosen to frequent casinos much closer to home. Atlantic City’s drive-in market has been shrinking.

But the reach of the internet could change that.

“It allows us to extend our brand,” says Borgata’s Lupo. “It allows us to reach out to new players, say in North Jersey, that maybe don’t know us all that well, and bring a little of Atlantic City to them whether they’re in a coffee shop, or on a train or at home.

“We’re going to be advertising and offering rewards and other exciting offers to drive people to our brick-and-mortar casino,” Lupo says. “We’re the leading brand in this market, and it’s very exciting to be able to reach new people and to bring them to the city.”

New Jersey’s demographics also play an important role. New Jersey has a population of just under 9 million, compared to Nevada’s 2.75 million. Delaware, the third state planning to introduce online gaming, has a population of just under 1 million.

Like Nevada, New Jersey also sees a significant tourist trade, especially in the summer when tens of thousands flock to the Jersey shore. Many of those tourists rent or own summer homes.

New Jersey is also in the center of the East Coast megalopolis, with New York City and Philadelphia on its borders. Under New Jersey law, players simply have to be in New Jersey to play (GPS systems will verify their location) and don’t have to be official residents.

That conjures up images of parking lots in New Jersey towns such as Hoboken filled with cars with New York license plates and players on their iPads.

But few analysts see that happening.

“I don’t think the number of players who just pop over the border is going to be gigantic,” Morowitz says. “I mean, you’d have to find some sort of venue. Maybe a bar or a restaurant, but I don’t really see that happening too much. Understand, New Jersey’s base is huge to begin with, and then consider the people who commute to New Jersey for work. And another area is the summer visitors who rent and own at the shore. It’s already a very large base.” Market Forces So the new market for Atlantic City is—New Jersey.

“In eastern Pennsylvania and now into New York, gamblers already live within driving distance of other casinos,” says Israel Posner, executive director of the Lloyd D. Levenson Institute of Gaming Hospitality & Tourism at the Richard Stockton College of New Jersey. “It wouldn’t make much sense for them to drive to play online. The real market is the convenience gambler in northern New Jersey and parts of central New Jersey.

“That’s who this will serve best—people who are just looking to gamble and are less interested in the amenities,” Posner says. “It’s much easier to just play in the comfort of your home than to drive to the Poconos. Online gaming is about comfort, and I think this will siphon off players from those markets.”

In other words, Atlantic City has a chance to win back some of the players the city has lost to new competition. And once in the online door, Atlantic City casinos will work to get them in the real door down the Garden State Parkway. But it’s not clear if all Atlantic City casinos will use their customer databases—at least their current customers. One casino executive told GGB that only players who hadn’t visited in at least two years would be included in online gaming marketing efforts.

“We don’t want to risk our existing players staying home instead of coming to the casino,” said the executive, who commented privately.

Still, most casinos will do what is necessary to make it a success.

“The key to all this is the databases,” says Posner. “The casinos that thrive will be the ones with the best databases of players. That’s who you offer loyalty and promotions, too. The casinos through online gaming are going to be able to significantly grow those databases.”

Lupo sees the casino brand Borgata has already built as a major factor.

“This is a brick-and-mortar casino market,” Lupo says. “Players in this area—and that includes other markets like Delaware and Maryland—are very familiar with all casino games and the rewards programs. We have the strongest brick-and-mortar brand in this market, and that will be a big factor.”

Brand Awareness One of the more intriguing aspects of the New Jersey plan is the combinations of brands that will be seen.

Borgata, for example, has partnered with bwin.party entertainment to run both bwin’s PartyPoker brand and the new brand Borgata.com. Borgata, which runs far and away the most successful live poker room in Atlantic City, has already moved to further its alliance with bwin.party’s World Poker Tour. The casino hosts the Borgata Poker Open in September. The championship event of the Open is the most well-attended poker event on the WPT.

Lupo says the casino will cross-promote its live poker events with online poker.

Other partnerships are also becoming clearer.

Caesars Entertainment, for example, owns four Atlantic City casinos—Caesars Atlantic City, Harrah’s Resort, Showboat and Bally’s casino hotels—and runs the popular World Series of Poker brand online in Nevada. The company has partnered with 888 Holdings to operate its Nevada and New Jersey online operations. In addition to the WSOP and Caesars brands, 888 will operate its All-American Poker Network, as well as an internet casino branded as a Wynn site. Because all brands under one license will pool players, it makes sense to have as many powerful brands as possible.

A spokesman for PokerStars, which has partnered with Resorts, recently told local Atlantic City media that the company wants to build a $10 million live poker room at the casino as soon as it is licensed for online gaming. Resorts currently does not have a live poker room.

It should be noted, however, that PokerStars being licensed is no sure thing, as the company has had troubles with the U.S. Department of Justice in the past. PokerStars agreed to pay $731 million last year to settle a U.S. Department of Justice lawsuit stemming from its online operations. The company admitted no guilt or wrongdoing in the settlement, allowing it to seek a license in legal U.S. markets that lacked a “bad actor” clause, as New Jersey does. PokerStars is barred by such a clause in Nevada, however. While partnerships have been announced, the real online players won’t be known until the DGE begins approving licenses. Golden Nugget, one of Atlantic City’s newest casino operators, runs its own online brand currently offering free poker play in New Jersey, and has signed with Bally Technologies to provide services. The Tropicana has aligned itself with Gamesys. Trump Taj Mahal has an agreement with Nevada’s Ultimate Gaming, a subsidiary of Station Casinos, which operates one of the two legal online poker sites in Nevada. And Trump Plaza has reportedly signed with Betfair, a company also involved in online horse-race betting in New Jersey, which may speed the licensing process.

It’s also important to note that each casino company in New Jersey can operate up to five “skins”—separate brands—under each license. This gives each casino the opportunity to diversify its appeal and broaden its revenue stream. City Scape But what does online gaming mean for Atlantic City’s struggling casinos? So far, some other things are becoming apparent. Online poker does seem to be bringing jobs to the city. There are already some reports of tech jobs being staffed, and analysts say marketing and clerical jobs may also open up.

And for the first time in five years, people are talking about investing in the city, not getting out. Some Atlantic City casinos are clearly up for sale, and any number of internet operators have been rumored to be interested in buying.

Still, the field will be crowded.

“The amount of casinos planning to go online will certainly fragment the market,” says Morowitz. “There are going to be winners and losers in this. The casinos are partnering with providers, but they bring their own brands to this, and I think those properties that have the best brands and already have a strong player base will thrive.”

Most importantly, though it is just a promise of success, online gambling has created a positive buzz in the city.

“It’s very exciting to come in on the ground floor of a whole new industry,” says Stockton’s Posner. “Yes, people have been gambling online since the ’90s, but this is legal online gaming in the U.S., and this is really the first batter. We’re not even into the first inning. The first batter is on deck. And that creates a real excitement.”

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