Legal Internet Gambling’s Lackluster Profits

Avatar Updated on January 2, 2016

borgata-slotsThe enthusiasm over the profits of internet gambling appears to be quickly dying off as expected revenues have fallen short of expectations. Legalization of online gambling in Las Vegas, Delaware, and now New Jersey came with the hopeful promise of a large payoff for the states and taxpayers. However, the fiscal balloon appears to be collapsing under the lack of interest and political skirmishing.

In October 2014, Atlantic City, New Jersey’s Tropicana Casino produced revenues of $2,228,556 and paid state taxes of $291,437. In October 2015, they reported $2,850,154 in profit, a slight difference of $621,598, and paid taxes of $427, 523. The Bogata, which also collected profits from online poker play, generated $3,239,955 in October 2014, providing $486,702 in taxes for the state, but only $3,498,988 in October 2015 with $525,431 in taxes. (3)

New Jersey, as the third and largest state to authorize online gambling, presented figures that hike tax revenues by $180 million in fiscal 2014. However, at the signing of Gov. Chris Christie’s budget in June 2014, the amount had already been modified to $160 million.  The state actually took in only $9.3 million in revenue from online gambling as of May 2014.  The smaller populated states of Nevada and Delaware also collected only unexciting profits from online gambling.

Delaware wagered on $7.5 million in additional tax revenue in fiscal year 2014, but inadequate gambling installations and investment startup costs derailed their plans. Internet gaming added no net contributions to the state budget that year.  Nevada decided not to count on internet gambling monies for its 2014 budget. They did generate about $700,000 from interactive poker for tax revenue, with about $10.2 million in gaming wins from May 2013 through April of 2014.

Transitioning

cards-1030852_640The expectation that gamblers would flock to legal Internet gaming may have been completely unrealistic. The concept of legalized online play would not only seem unfamiliar, but also illegal. Casinos would take time to educate consumers, in addition to developing useful instruction and rules and regulations for such play. Convincing players that they were not doing something wrong would be a task spread over multiple years.  The fact that each state: Nevada, New Jersey and Delaware, approached the internet gaming business in different ways has not initiated any joint operating rules. For example, in Nevada, the casinos take their cut from consumers off the top of their winnings, and they pay the state their percentage of the take.

  • In Delaware, after expenses are paid, revenues for online slots are divided three ways: the state receives 43.5 percent, the horse racing industry receives 10 percent and the casinos receive 46.5 percent. For table games, the distribution is the same as for land-based casinos: casinos receive 66.1 percent, the state, 29.4 percent and the horse breeders, 4.5 percent.
  • Nevada taxes Internet gaming up to 6.75 percent, the same tax rate it uses for other gross gaming revenue. New Jersey taxes Internet gambling at 15 percent, nearly double the 8 percent tax on gross gambling revenue at its casinos.
  • New Jersey’s revenue estimates were unrealistic from the start, Grove said, because they relied on the most optimistic projections and counted on 12 months’ worth of revenue even though online gambling did not go live until late November, nearly halfway into the fiscal year. Grove said the state’s initial revenue estimates for online gambling were “driven far more by political need and budgetary magic math than by sober, rational analysis of the market.” (1)

Consumer Concerns

tropicana-casinoNumerous problems have obstructed the legal online gambling market.  Some of these issues have been blamed on the slow start of technology, computer glitches, and payment processing. Also startup costs, which include the designing of appropriate software and the installation of data servers to host the gambling.

    • Geolocation technology (GPS) must be used in the state of New Jersey to verify that online gamblers are playing within state borders, in accordance with state laws. Many potential gamblers have hit barriers because their banks block their attempts to gamble online. A lot of the banks were not yet aware that gambling was legal in the state, while many credit card companies refused to participate altogether.
  • Morgan Stanley published a report in March 2015 that determined about 60 percent of online gaming transactions in New Jersey were rejected. At least 50% did not make a second attempt. A random survey of possible players found that they have a strong distrust of the odds of winning online. In a physical casino setting, all the card games are played with an actual deck of cards and dealt by a human dealer right in front of the players’ eyes. One responder said this is the only way they play card games. (2)
  • Some players stay away because of the number generators that use randomly drawn numbers to create virtual hands. They fear that the “house” will program the game to favor the dealer and give them an additional advantage. They prefer to watch the cards being dealt right in front of them. Currently, this is the way slot machines are programmed. They are set to payout at specific spin intervals, which is why the most serious of gamblers favor blackjack or poker tables over slots.
  • New Jersey online casinos, because they are affiliated with physical casinos in Atlantic City, are held to the same standards and are regulated by the New Jersey Casino Control Commission, which ensures that all games are held to a standard level of fairness.
  • Convenience is the complaint of some gamblers who fear it’s just too easy. Lack of travel to a casino makes it much too easy-going, and they might find themselves playing more out of habit than fun.
  • The casino experience, which includes the sounds, sights, and drinks, are all part of the gambling atmosphere, creating a matchless experience that no website can duplicate.

Clearly, transitioning from physical to virtual has not gone as smoothly as the three states had predicted. There are still a number of issues that have to be addressed to satisfy state and consumer requirements before the expected profits will begin to pour in. However, enthusiasm has not lessened on the part of the groups betting that online gambling will eventual be a winner.

Image sources: expedia.com, nydailynews.com, pixabay.com

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