Emboldened by a 2011 Justice Department opinion by the Office of Legal Counsel (OLC) that limited the scope of the 1961 Wire Act to sports betting, the United States was finally able to dip its toes in the legal online gambling pool. In 2013, a trio of states, Nevada, Delaware and New Jersey, launched regulated online gaming sites, by copying the playbooks of several European countries.
In many respects, these states copied the models already in place in Italy and France, but for all the similarities between the European and U.S. online gaming markets (such as ring-fencing, taxation and licensing fees), the legal U.S. markets diverge from their European brethren in several key ways, beginning with the level of government where legalization occurred.
National vs. State
In France and Italy, the national government legalized online gaming, and it’s the national government that provides the regulation and oversight for their online gaming sites.
In the U.S., the federal government isn’t involved in the legalization or regulation process. The OLC opinion was the federal government’s way of saying it will stay out of a state’s way if they decide to legalize online gambling within their borders.
Because of this, each U.S. state has the capability to legalize online gambling, if they so desire, and determine how they will regulate it within their borders. So far only three states have done so, but this has already created a hodgepodge of licensing and regulatory models among the three early-adopter states. For example, online poker is legal in all three states but online casino games are only legal in New Jersey and Delaware. Operators in multiple jurisdictions are required to possess licenses in each locale and must deal with separate regulatory agencies. And the tax rate imposed on operators is different in all three locales.
State-level legalization also means online gambling is still more or less illegal in 47 states.
These inconsistencies, which are not present in legal European markets, only serve to further confuse the general public.
In segregated European markets like France and Italy, online gaming has never been implicitly or explicitly banned, and if it’s legal in Paris it’s also legal in Calais or Toulouse. Because of this, it’s much easier for Europeans to wrap their heads around the government legalizing online gambling.
These inconsistencies and state of confusion have led to several existential problems in U.S. online gaming markets.
First, the cloud of the 2006 Unlawful Internet Gaming Enforcement Act continues to swirl above the industry, causing consternation among banks and potential payment processors, many of whom continue to prohibit online gambling transactions in legal markets. Second, the oft-questioned legal status of online gaming among the general population has led to failed marketing campaigns.
It Looks Like A Duck But Moos Like A Cow
For the most part, the licensed U.S. online gaming sites that sprang into being looked like the products in place in Europe and previously seen in the unregulated U.S. market, but it quickly became apparent that these weren’t your older sibling’s online poker rooms and online casinos.
According to Matt Davey, the CEO of NYX Gaming Group, “The U.S. iGaming regulations were initially based upon those that were drafted outside of the U.S. Though they were then filtered through the lenses of the various land-based regulations and became more conservative in their application, much of the original intent, definition and levers remain the same.”
“There are more similarities than differences between international and U.S. markets when it comes to online real-money gambling,” says Thomas Winter, vice president of online gaming for Golden Nugget. Winter, who has experience in Europe and the U.S. iGaming markets, lists user experience, new and quality content and superior customer service and VIP management as key similarities, and the “recipe for success” in any market.
Winter says the main differences are in player acquisition and, to some degree, promotions. He describes New Jersey players as “more sensitive to promotions,” but with a willingness to “spend more and show more loyalty if you provide them with a reliable product and good customer service.”
Another difference Winter cites is marketing.
“Marketing in New Jersey is very challenging when compared to regulated international markets,” Winter says. “All operators have learned to play with these constraints, but the cost of acquisition remains very high compared to international standards. A higher revenue per player partly offsets that, but at some point we’ll see diminishing returns and tier-two operators are likely to struggle.”
Winter goes on to explain how this added cost is compounded by the logistics of marketing in New Jersey.
“In terms of digital marketing, Google still prevents operators from buying adwords, and there are only a limited number of affiliates,” Winter says, adding, “Facebook offers an alternative to Google but only to a certain extent. Above the line, broadcast TV forces you to buy New York and Philadelphia, where customers can’t play. Same for radio in North Jersey.”
Another key difference between the U.S. and Europe are the far stricter regulations imposed by U.S. regulators.
The newly implemented regulations, put in place to protect customers and to ensure the sites were not being frequented by minors, problem gamblers or residents from other states, fundamentally changed the online gaming experience for U.S. players. Potential customers are now required to divulge their Social Security numbers during the registration process and accept the issuance of W2-G tax forms for slot wins over $1,200 and table game wins over $5,000.
Furthermore, because of the nascency of the industry and the strict regulations, technical difficulties were rampant in the early days. Standard website features, from online poker waiting lists to mobile technology, were still unapproved at launch. The multi-layered geolocation technology being used was untested in a real-world setting. And complicating matters was the decision by state regulators and operators to err on the side of caution on every front, as widespread breaches were believed to have the potential to bring the whole thing crashing down.
“As New Jersey was the first to take the risk for real-money casino iGaming in the U.S., it is not surprising that in its inception they took a very conservative approach, as it’s better to prevent 100 percent of who shouldn’t be playing, versus making it more difficult for some who should be allowed to play,” Davey says. “Thus, the extensive KYC (know your customer) process, the requirement for full federal tax ID for each patron during registration and geolocation software downloads as part of the experience are all contributing factors to ensure New Jersey starts off on the right foot.”
As Davey explains, because of these challenges, many operators are now re-evaluating their early business models.
“New Jersey was a perfect storm,” Davey says. “In a positive fashion, it was the first U.S. state to give us all the opportunity to enter the market. On the other hand are the barriers associated with the registration, KYC and payments processes, combined with the facts that geographic state borders limit player pool sizes and the land-based operators (who hold the required licenses) were all holding out for exclusive relationships.
“As the land-based operators are now learning, due to the New Jersey market results (or lack thereof) and corporate primary objectives, most of the B2C partners available in the market are not heavily focusing on their own needs in the New Jersey market, let alone their land-based license partners whose business they’re also responsible for operating.”
Davey says his company, which provides the online casino platform for both Resorts Casino and Golden Nugget, has taken a different approach.
“With a couple of years under their belt, many land-based casinos are now re-evaluating their decisions and looking for ways to retake control of their brand and online initiatives,” Davey says. “As this process starts, NYX has benefited from its commitment to offer a completely open and agnostic B2B solution, offering land-based casinos the most flexible and competitive platform option. In addition, NYX’s commitment to mobile-first content has seen positive results, as each month, more and more of the market is being exposed to iGaming via that channel.”
After a nearly flawless two-year track record, the New Jersey Division of Gaming Enforcement has been working hand in hand with the state’s online gaming operators to simplify the registration and verification processes, and make a new customer’s experience as smooth as possible, without relaxing their highly effective consumer protections.
As Winter says, “We saw a nice uptick when we started to ask for only the last four digits of the Social Security number.”
And Winter believes these improvements in New Jersey will pay off in spades in other states. “When Pennsylvania or other states regulate, they’ll benefit from the New Jersey learning curve, on registration but also geolocation, where the technology has vastly improved. Both are still limiting factors in the market growth, but probably no more than 5-15 percent.”
By 2020, Davey envisions a vastly changed iGaming landscape.
“Though still not at a revenue level that warrants the attention of Europe, the U.S. market will have finally matured to a level of public awareness of its existence (due to a tipping point of enough states opening open up regulation),” Davey forecasts.
“The suppliers and banks will have resolved the critical initial barriers associated with sign-up, KYC and payments; the social and moral opponents will have lost interest and focused their efforts on the next newsworthy target; mobile will be the dominant patron interface; land-based casinos will still be in the driver’s seat with regards to market share and will be building internal teams to take on more of the responsibility and control; and multi-state poker network compacts will be in deep negotiation.”
Despite the continued improvements, in some respects the damage was already done, and re-engaging with disillusioned players will be a heavy and expensive lift, made all the more difficult by the lack of a strong affiliate presence.
Are Affiliates the Missing Link?
Affiliates have been a vital driver of traffic to online gaming sites since the industry’s earliest days, but the strict regulations in the three legal U.S. states also extend to affiliates.
Affiliates in regulated U.S. markets must be licensed, or operate under a licensed affiliate, which means handing over a percentage of your revenue to the licensed affiliate in most cases.
Jeremy Enke, a longtime affiliate in the online gaming industry who now works for Pala Interactive, notes that the procedure to receive an affiliate license in New Jersey includes a non-refundable $2,000 up-front fee for an elevated license application as well as a deep background check, including fingerprints and several years of past tax returns.
Couple this cost and invasive vetting process with the relatively small size of these markets, and it’s unsurprising that many affiliates continue to promote offshore unregulated sites in lieu of the legal U.S. markets.
This creates two problems. There are not only fewer affiliates for licensed online gaming sites, but affiliates marketing offshore sites are siphoning players from the legal industry. Winter says that while it’s difficult to quantify, the impact offshore sites are having on the U.S. market “could account for 30 percent of the current legal market, if not more.”
Adam Small, cofounder of PocketFives.com, sees the legal U.S. affiliate market as a tough but not impossible undertaking, but one probably not suited for many affiliates. “In fenced-in markets like an individual U.S. state, you’ve got to have content that creates loyalty among a local audience,” Small says. “That can be expensive for affiliates, particularly when talking about smaller markets like the currently available U.S. states. But if you can find a formula that’s cost-effective and has sustainable local appeal, you can make these markets work.”
Income Access CEO Nicky Senyard indicates that the lack of affiliates in New Jersey, coupled with the newness of the market, has created a void in “digital real estate,” and partially explains why consumer awareness has lagged.
However, like most of the market’s early barriers, this is a situation that also seems to be improving, according to Winter.
On the affiliate front, “we see small and slow progress here but still progress,” Winter says, indicating that affiliates now account for 10 percent to 15 percent of player acquisitions, compared to about 5 percent 18 months ago. Winter adds, “It will be difficult to get to the 25 percent-to-30 percent ratios typical in Europe, until you have many more states regulating. For most affiliates, the market is still too small.”