Regulating Online Gaming - A Central Component in Putting Atlantic City "Back on Track”

7/29/2019 Regulating Online Gaming - A Central Component in Putting Atlantic City "Back on Track

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Regulating Online Gaming - A Central Component in Putting Atlantic City "Back on Track

Executive Summary

The Economist recently noted that "innovative thinking is needed in the City by the Sea" if Atlantic City

wishes to become once again the gaming capital of the Northeast. 0F1 This innovative thinking will need to

comprise of several components, sports betting being one of them. However, the key component which

can make Atlantic City the World capital of gaming is the introduction of a regulatory licensing regime for

online gaming which will take Atlantic City into the 21st Century.

The current situation is clear:

Atlantic Citys gaming revenues fell 8 percent year-on-year in 2012 to $3.05bn.

The market continues its downward spiral as competition from neighboring states expands. New

Jersey is no longer the second largest gaming market in the U.S. (after Nevada) following the growth

of Pennsylvania's 11 casinos1F2.

Governor Sandoval of Nevada (where online poker licenses can already be obtained), is working tomake Nevada the hub of online gaming in the U.S. through his initiative for interstate compacts2F3.

The solution is also clear a regulatory regime for online gaming which will not only increase the State's

revenue from taxes and bring thousands ofhigh tech jobs, but also enable Atlantic City and its casinos toattract new visitors and compete with Nevada on equal terms. According to a January 2013 Wells Fargo's

analysis:

The online gaming industry in New Jersey could grow to $1.5 billion over the next five years,providing up to $150 million in annual tax revenue to the state.

This will have a significant positive economic impact on the land-based casinos themselves. They statethat .BORGAT and CZR could capture up to a 50% market share on a combined basis.. gross online

gaming revenue could range between $162.5 million and $212.5 million for each of the two

companies.

In addition, according to a 2010 fiscal study submitted to the Interactive Media Entertainment and Gaming

Association, the additional direct and indirect jobs which an online gaming regime would bring to the state

could exceed 3,700.

There is strong evidence from the European experience of Poker tourism, that cooperation between

online operations and bricks and mortar casinos is likely to attract new audiences to Atlantic City

hotels. Residents of states which do not currently regulate online gaming will come to Atlantic City for the

joint experience of tourism as well as offline and online gaming.

1http://www.economist.com/news/united-states/21570757-innovative-thinking-needed-city-sea-changing-game.

2http://www.nj.com/news/index.ssf/2013/01/total_gaming_revenue_up_44_per.html

3http://www.lvrj.com/news/sandoval-calls-for-135-million-in-new-spending-in-state-of-the-state-address-187222811.html
http://www.economist.com/news/united-states/21570757-innovative-thinking-needed-city-sea-changing-gamehttp://www.economist.com/news/united-states/21570757-innovative-thinking-needed-city-sea-changing-gamehttp://www.economist.com/news/united-states/21570757-innovative-thinking-needed-city-sea-changing-gamehttp://www.nj.com/news/index.ssf/2013/01/total_gaming_revenue_up_44_per.htmlhttp://www.nj.com/news/index.ssf/2013/01/total_gaming_revenue_up_44_per.htmlhttp://www.nj.com/news/index.ssf/2013/01/total_gaming_revenue_up_44_per.htmlhttp://www.lvrj.com/news/sandoval-calls-for-135-million-in-new-spending-in-state-of-the-state-address-187222811.htmlhttp://www.lvrj.com/news/sandoval-calls-for-135-million-in-new-spending-in-state-of-the-state-address-187222811.htmlhttp://www.lvrj.com/news/sandoval-calls-for-135-million-in-new-spending-in-state-of-the-state-address-187222811.htmlhttp://www.lvrj.com/news/sandoval-calls-for-135-million-in-new-spending-in-state-of-the-state-address-187222811.htmlhttp://www.lvrj.com/news/sandoval-calls-for-135-million-in-new-spending-in-state-of-the-state-address-187222811.htmlhttp://www.nj.com/news/index.ssf/2013/01/total_gaming_revenue_up_44_per.htmlhttp://www.economist.com/news/united-states/21570757-innovative-thinking-needed-city-sea-changing-gamehttp://www.economist.com/news/united-states/21570757-innovative-thinking-needed-city-sea-changing-gamehttp://www.pokerplayersalliance.org/index.htm


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2Moreover, there is no evidence whatsoever that the introduction of online gaming negatively affects the

casino industry. In fact, the experience in Europe shows the opposite: in the UK, where online gaming is

nottied to the land-based industry and has become a multi-billion dollar industry, the bricks and mortar

industry has still shown strong year on year growth. This is also the case in Belgium, where online gaming is

tied to the land-based industry, and since the regulation of online gaming in the country there has been a

77% increase in turnover of the total gaming market.


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How Regulating the Online Gaming Market in New Jersey will benefit both the State and Atlantic City

General

Establishing a regulatory regime for online gaming in New Jersey will result in an open and competitive

licensed market which would be attractive to both local casino licensees and worldwide operators,minimize unlicensed activities, generate significant tax revenue for the State and bring New Jersey

thousands of high tech jobs.

Under AB 2578, online gaming would only be offered in New Jersey by Atlantic City casinos. For this reason

the new licensing regime will attract new investors to Atlantic City and will allow the current casinos to

renovate the old facilities which desperately need investment in order to appeal to new audiences;

international online gaming operators will come to Atlantic City and will create high tech jobs and improve

the city IT infrastructure to support their activities; residents of states which do not currently regulate

online gaming will come to Atlantic City for the joint experience of tourism, offline gaming and online

gaming; cooperation between the online operations and the bricks and mortar casinos would attract new

audiences to Atlantic City hotels - strong online poker brands will be able to run offline poker tournamentsand attract thousands of people to spend a weekend in Atlantic City; international online gaming operators

will be able to bring to the city people from abroad leveraging their international database; and in addition

to the 10% gaming duty at least 2.5% of online gaming revenue will be invested back in Atlantic City

through the Atlantic City Casino Reinvestment Development Authority.

The Problematic Financial State of Atlantic City

Looking into figures published by the New Jersey Division of Gaming Enforcement earlier this month,

Atlantic City gaming revenues fell 8% year-on-year in 2012 to $3.05bn despite an 8 month contribution

from the states twelfth casino, Revel, and the market has continued its downward spiral as casinos bore

the continued impact of expanded competition from neighboring states, including Pennsylvania andMaryland.

Meanwhile, Governor Sandoval of Nevada, which is already granting online poker licenses, is working to

make Nevada the hub of online gaming in the U.S. through its initiative for interstate compacts.

The Positive Economic Impact of the Online Industry

AB 2578 which was recently passed by the New Jersey legislature could change this negative trend.

Various financial research and analysis made in the course of the last 3 years were consistent with their

estimations regarding the positive impact of regulated online gaming regime, both for the existing andfuture gaming industry in Atlantic City and for the State itself.

A financial study from 2010 estimated that regulating online gaming in New Jersey will bring to the state up

to 3,700 new jobs. According to this study, approximately 1,300 new jobs will be directly created due to the

new licensing regime which will also indirectly generate more than 1,400 additional jobs. 3F4

According to a financial analysis published by Wells Fargo this month (January 2013), the positive impact of

the new proposed online gaming licensing regime would include the following:

4Econsult Corporation, Potential Economic and Fiscal Impacts of the Proposed New Jersey Intrastate iGaming Bill,

Report Submitted to the Interactive Media Entertainment and Gaming Association(June 2010).


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4"Companies should be able to cross market their online offerings with their gaming and

non-gaming amenities, providing a significant advantage over Delaware, Pennsylvania

and New York gaming facilities.

Potential Market Size - According to our estimates, we believe the online gaming

industry in New Jersey could grow to $1.5 billion over the next five years, providing up

to $150 million in annual tax revenue to the state. In the near term, we believe theNew Jersey online market could generate between $650 million and $850 million. Our

near-term analysis assumes 5.8 million adult players and a per-capita annual online

spend of $111-$149 million.

Who stands to benefit? We believe all New Jersey license holders will benefit, but

properties with strong brands and gaming facilities will likely see the most upside... In

our investment universe, we believe Borgata (owned by BYD/MGM) and Caesars

Entertainment Corp have the most to gain if this online legislation would come to

fruition. We believe BORGAT and CZR could capture up to a 50% market share on a

combined basis. Under these assumptions, we believe gross online gaming revenue

could range between $162.5 million and $212.5 million for each of the two companies.

We believe EBITDA margin could run around 50%. Therefore, we estimate potential

EBITDA generation of $81.3 million to $106.3 million for both CZR and BORGAT. LTM

EBITDA at BORGAT was $140.8 million and $1.8 billion at CZR HoldCo".4F

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Another recent financial analysis by Union Gaming estimated that a New Jersey online casino and poker

market could generate revenues of$534 million in its first full year of operation and grow at a compound

annual growth rate of 9.3 percent to reach $844 million after a five year ramp-up.5F6 A similar estimation,

which was published by H2 Gambling Capital in May 2012, predicted revenue of$142.5 million from online

poker alonein the first year of licensed operations, which will reach $908.8 million after five years.6F7

The abovementioned financial analysis is based on the current U.S. regulatory environment with respect to

online gaming. However, the U.S. regulatory map will be very different in a year from now. By then Nevada

(and presumably other states) will start to attract all the major online gaming operators and be entering

into compacts with other states, leaving Atlantic City behind for good.

Online Gaming will Positively Affect the Offline Industry

Moreover, there is no evidence whatsoever that the introduction of an online gaming regime would

negatively affect the offline casino industry. The financial data shows quite the opposite.

In the United Kingdom, where online gaming is not tied to the land-based industry and has become a

multi-billion dollar industry, the bricks and mortar industry has still shown strong year on year growthand the gross gaming yield of the offline casino industry has risen from 597.7m in 2001 to 803.4m in

2011.7F8

The Belgium online gaming regime, which is based on a partnership between online service providers and

terrestrial local operators, provides another good example (especially since the population of Belgium is not

much higher than New Jerseys approximately 10.8 million). According to the H2 Gambling Capital

analysis, in 2011 (when regulated online gaming was launched in Belgium) a 77% increase in turnover of

5Available at: http://www.gambling911.com/gambling-news/wells-fargo-analysts-online-gaming-bill-could-save-atlantic-

city-012413.html(reviewed on January 25, 2013).6 http://www.gamblingdata.com/node/50759.7

H2 Gambling Capital, US Regulated Internet Gaming Model Years 1-5(May 22, 2012).8

H2 Gambling Capita, UK Gambling Turnover(April 4, 2012).
http://www.gambling911.com/gambling-news/wells-fargo-analysts-online-gaming-bill-could-save-atlantic-city-012413.htmlhttp://www.gambling911.com/gambling-news/wells-fargo-analysts-online-gaming-bill-could-save-atlantic-city-012413.htmlhttp://www.gambling911.com/gambling-news/wells-fargo-analysts-online-gaming-bill-could-save-atlantic-city-012413.htmlhttp://www.gamblingdata.com/node/50759http://www.gamblingdata.com/node/50759http://www.gamblingdata.com/node/50759http://www.gamblingdata.com/node/50759http://www.gamblingdata.com/node/50759http://www.gambling911.com/gambling-news/wells-fargo-analysts-online-gaming-bill-could-save-atlantic-city-012413.htmlhttp://www.gambling911.com/gambling-news/wells-fargo-analysts-online-gaming-bill-could-save-atlantic-city-012413.html


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the total gaming market was seen (from 835.8m to 1,481.7m). In 2012 when interactive sports betting

was added, the market saw another increase of 60% in the total betting market (from 391.9m to

642.1m). Two years after introducing a regulatory regime for online gaming in Belgium, a 44% increase is

predicted in gross gaming revenue from the total betting market and a 25% increase in gross gaming

revenue from the total gaming market.

8F

9 It is worth mentioning that these numbers should be seen against

the backdrop of a significant economic crisis in Europe and a smoking ban, both of which have a significant

effect on casinos.

9H2 Gambling Capita, Belgium Gross Gambling Turnover(January 1, 2013).

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Regulating Online Gaming - A Central Component in Putting Atlantic City "Back on Track”