Paul Girvan tracks the progress of online gaming in Pennsylvania, to stress test claims that igaming erodes land-based casino revenue.
Pennsylvania is one of three states that has legal, live igaming, and provides the opportunity to assess the impact on land-based gaming from the channel’s growth.
This is a critical issue in that many Tribes have resisted igaming, on the grounds that it could impact the bricks and mortar casinos that provide the lion’s share of Tribal funding, in turn supporting the array of social services.
It would be significant if no – or a negligible – impact was to be found. Nothing is, however, simple.
Igaming arrived in Pennsylvania on 15 July 2019. By March 2020, however, the impact of the novel coronavirus (Covid-19) on the Keystone State’s gaming facilities was clear to see.
We can look at the impact of igaming on land-based gaming monthly as online has steadily ramped up from its launch date, to April 2020 (the first full month of casino closures).
This analysis looks both at the impact of igaming on land-based casinos, and assess the changes wrought in this new post-Covid-19 world, as well as the potential implications for Pennsylvania and Tribal gaming development.
Pennsylvania gaming growth
Pennsylvania is generally considered a success story when it comes to the development of gaming. Original projections prior to the development of gambling legislation had projected a market of over $3bn, with tax returns in excess of $1bn. These projections have largely been borne out.
By FY 2014-15 revenue had exceeded $3bn, then growing at a more modest pace of 1.2% per annum, as shown in the chart below. If we extrapolate this trend, it is reasonable to assume that for the 2019-20 fiscal year, revenue would be expected to reach $3.2bn.
In short, casino gaming reached a plateau. However, legislators’ appetite for additional tax revenue was undiminished. This motivation, coupled with concerns about competitive advantages in other states, led to a gambling expansion package being passed in October 2017.
This saw the following products launched:
| FY 2017/2018 | Fantasy sports |
| FY 2018/2019 | Sports betting |
| FY 2019/2020 | iGaming, VLTs |
For FY2019-20 to date, fantasy sports have generated $19.9m statewide, compared to $23.6m in FY2018-19 (after launching in March 2018). Video lottery terminals generated about $5.7m in gross revenue in FY 2019-20 to date, but the system is ramping up.
Sports betting began in November of 2018 and by the end of 2019 it was averaging about $14m a month in gross revenue.
iGaming started in July of 2019 and by December 2019 monthly gross revenues exceeded $10m, or about 5% of total gaming revenues.
FY 2018-19 compared to FY 2019-20
The following table presents the sum of total revenue FY 2018-19 and FY 2019-20, with each year running from July 1 through February 28. Land-based revenue declined by 1.1% or by approximately $17m.
| YTD July-January | |
| 2018-19 | $1,543,566,505 |
| 2019-20 | $1,526,571,825 |
| Change | -1.1% |
During the same period in 2019-20 online gaming generated in excess of $47.6m.
This would suggest that there may be some decline from land-based revenue to online gaming. Two factors merit consideration in this respect. First, FY 2019-20 land-based revenue to date excludes the peak season of May through June, and even a slight increase in this period could result in either no change in revenues or even a small year-on-year increase (assuming the absence of the current pandemic).
Second, land-based revenue declined by $17m, while online gaming generated $47m. Third, while the compound annual growth from FY 2014-15 through FY2018-19 approximates 1.2% but the revenue growth between FY 2017-819 and FY 2018-19 was only 0.5%.
Given this decline in growth rate over time, we would expect that FY2019-20 revenues would at best be flat. Finally, the increasing competition in the region and the much-ballyhooed saturation of the market also argues for a flattening or even small decline in revenue. Land-based gaming revenue was going to be flat, or even in decline, regardless of the introduction of online gaming.
Given these considerations it becomes hard to identify a real negative impact on land-based that can be attributed to the launch of online. For example, in February of 2020, before the Covid -19 issues came to the fore, both land-based and online revenue increased from January to February. That would infer there is no strong substitution effect between the two channels.
That online gaming generated $30m more than land-based lost also suggests that there is not a simple or direct one for one relationship, and indeed the evidence for even a partial impact is weak.
Based on this analysis there appears to be no significant substitution effect between land-based and online gaming revenues in Pennsylvania. While there are some variations among the properties, in general property specific data tends to support this conclusion.
January 2020 through April 2020
Governor Wolf issued the state’s stay-at-home order on April 1 though cases of Covid-19 were first reported in early March. As a result, land-based gaming revenue dropped to zero in April while online flourished.
With the notable exception of Valley Forge (which launched the FanDuel online casino in late January), revenue as a percentage of total gaming revenue per property was relatively steady in January and February.
In total, online as a percentage of total revenue increased from 6.3% in January to 8.9% in February. In March, the impact of Covid-19 closures was clearly seen as online revenues as a percent of total gaming revenues increased to 21%. By April, just 6.5% of gaming revenue did not come from igaming.
Online revenue by property
Not all igaming efforts are equal. Three properties have dominated the market: Rush Street’s Rivers Philadelphia (formerly SugarHouse), Mount Airy and Valley Forge accounted for 59% of total online revenue in March.
As the tables and chart below show, this dominance increased in April with these three properties accounting for almost 75% of online gross revenue. Parx and Penn National collectively accounted for almost 20% of remaining revenue.
Mount Airy, as the only operator providing poker online, has seen is market share grow largely as a result of that vertical. Partnered with PokerStars, it accounted for approximately 50% of its online total.
Rivers Philadelphia – which the Pennsylvania Gaming Control Board still refers to as SugarHouse – benefited from early efforts by Rush Street Interactive in the urban Philadelphia market.
Valley Forge’s performance can be partially attributable to their partnership with FanDuel and popularity of its sports betting offerings, which exceed those of any other property by a significant margin. DraftKings provides sports betting at The Meadows, and combined with FanDuel, accounts for 67% of statewide online sports betting.
Current online revenue as percent of land-based revenue volumes
Overall, in April online generated 22% of the land-based revenue that was generated in February. Three properties stand out that have attained online revenue in April that approach their February land-based totals: Mount Airy, Valley Forge and Sugarhouse.
The efforts at these three properties has provided them with a revenue stream almost equal to what they were generating in their land-based properties in February.
Online April revenue as % of February land-based revenue
| Property | April online rev. as % of February land-based rev. |
| Mohegan Sun | 10.8% |
| Parx | 11.1% |
| Presque Isle | 2.4% |
| Mount Airy | 84.8% |
| Penn National | 26.2% |
| The Rivers | 0.0% |
| SugarHouse | 90.7% |
| Valley Forge | 85.6% |
| Total | 21.9% |
Implications
Tribal gaming has been reticent to fully embrace online gaming fearing a negative impact on precious land-based revenue] that supports so much of tribal services across the country. This initial data from Pennsylvania suggests that there has been no negative impact on land-based revenue as consumer surveys have consistently suggested, at least in the pre-Covid-19 world.
Furthermore, the closures resulting from Covid-19 have exposed this as a weakness of tribal gaming which have been left bereft of any gaming revenue stream. It is obviously too early to assess whether or not these changes in the Pennsylvania gaming market will endure beyond the current pandemic, it must be noted.
I will continue to monitor developments in Pennsylvania as casino reopenings occur. There are several questions that must be addressed going forward. These include:
- What happens with online and land-based gaming revenues when the casinos open back up?
- Is there a substitution effect between land-based and online after reopening or is online growth going to continue to be incremental?
- Not all online operations are created equal, but what is it that has made some operators more successful than others?
- Will a new closer relationship develop between online and land-based casinos post-Covid-19?
- If there is revenue substitution post-Covid-19 what does it mean for casino operators in terms of profit margins?
- What are the implications for state legislators given differential tax rates?
- What are the implications for Tribal-state compacts?
Paul Girvan is chief executive of PKC Gaming & Leisure Consultancy. He has been involved in the US gaming industry since its development beyond Atlantic City and Las Vegas, conducting project-specific and statewide analyses for governments, tribes and commercial casino operators. Girvan has conducted numerous nationwide and state level analyses on igaming and its legislative development.