Changing channels: bridging the gap between B&M and online casinos post-Covid-19

Penn National Gaming (PNG) CEO Jay Snowden set an oddly optimistic tone this month after confirming a significant revenue loss of $608.6m that the firm had endured since all US casinos temporarily shut their doors from mid-March.

During its Q1 earning call, PNG CFO David Williams skimmed through sobering figures, including possible monthly losses of $83m if properties remain closed to the end of the year. Passing back to Snowden, listeners were quickly redirected to Penn Interactive’s positive Pennsylvania results during the three-month period.

Snowden said PNG’s digital arm had delivered impressive results in the first quarter, beating revenue and EBITDA expectations through most of March. According to the Pennsylvania Gaming Control Board’s official monthly figures, PNG was the third-largest igaming earner in the first three months of the year, securing $7,338,985 in revenue.

“That momentum has carried into the second quarter with Penn Interactive experiencing strong growth for our social [casino], which experienced month over month 24% growth from March to April and real money in Pennsylvania has grown 60% [75% according to PA regulator figures] from March to April,” he added.

Moving forward, Snowden insisted the firm would tap into its online success of the last three months to help mitigate potentially long-term land-based losses. He hinted at new features both online and offline that would consolidate gaming across both channels and change the future of its brick-and-mortar operations forever. And to do so, PNG would be leveraging its casino loyalty program to convert brick-and-mortar customers online in igaming states.

“We are exploring new technologies and innovations that could help reimagine our casinos and enhance the guest experience,” Snowden said. “We are also in the process of making meaningful upgrades to expand the reach of our industry-leading mychoice loyalty program.

“We expect this program to be a powerful tool for our omni-channel strategy, and we are taking steps to connect our land-based casinos to our sports betting and icasino products to offer customers a compelling incentive to consolidate play across our various platforms,” the CEO continued.

For a company like PNG whose brick-and-mortar casinos account for an estimated 90% or more of its business, the pivot to omni-channel to mitigate some of the long-term impact from coronavirus is a necessary one. And considering its significant investment in the upcoming Barstool Sportsbook product, there is much room for innovation in bringing its betting audience online and cross-selling these customers into online gaming.

The consensus among industry players is that businesses should, and likely will, use this trying time to diversify and digitize their product suites. Speaking during a recent webinar with payments processor Sightline Payments, 888 SVP and head of commercial development Yaniv Sherman suggested the virus was “accelerating the future.”

“I think [land-based operators] were looking to address new demographics and that should be accelerated. I also think the consolidation direction we’ve seen over the last two or three years will persist.” Sherman also hinted that major land-based groups are likely eyeing up smaller, tech-focused digital companies to present new opportunities to engage players online.

“Some of the companies out there have very interesting retail or land-based products that could definitely be bolstered with online assets and online DNA that could supercharge a traditional gaming organization,” Sherman said.

For 888, an entirely digital operation, Sherman says diversification and a strong online offering have leant themselves to coping well through the pandemic. In a Q1 trading update, the operator said both its casino and sport verticals experienced a revenue uptick of 24% on the previous year’s first quarter. However, the London-listed business expected the pandemic to impact sports betting revenue in the long term.

Like PNG, 888 is experiencing increased customer activity in its casino and poker products in the US. And while it anticipates this will help compensate for the disruption to sports betting, 888 suggests a prolonged period of economic instability could see a fall in consumer spending.

Flash in the pan

So exactly how long is igaming in the US likely to continue on this upward trajectory considering unemployment in the country has jumped to 14.7% in April from 3.6% in January? “I think it remains to be seen,” says SVP and MD for online gaming and betting at Hard Rock International Kresimir Spajic. “We still see a strong performance in May, but I am sensing a bit of a slowdown.

“It’s normal for the growth to slow down after you [saw] a big spike in April, and May will probably be even better. I think June will be the first test to see if we can continue growing the revenue because usually that month, July and August are dependent on the influx of people that come to the Jersey Shore. But we are not sure how many will visit this year considering the Covid-19 situation,” Spajic continues.

Chris Krafcik, MD of sports betting and emerging verticals at Eilers & Krejcik Gaming (EKG), also believes the growth will slow in May as warm weather and lockdown restrictions are eased. “Worsening macroeconomic conditions should bite, and the return of NASCAR (and even the Bundesliga) should push some sub-spend back to sports,” he tweeted.

Hard Rock has encountered a similar spike in igaming performance in recent months, particularly in first-time depositors as well as re-activated lapsed players returning to its online platform in New Jersey. Spajic says there has also been a 50%-70% increase in registrations from brick-and-mortar players.

Hard Rock Casino Resort in Atlantic City on the New Jersey coast

Official April figures for igaming in New Jersey confirmed the industry’s suspicions, with internet gaming win coming in at almost $80m and surging 23% on a month-by-month basis and 119% on the previous year. The state’s seven online operators hit record numbers during the month, with poker revenue almost tripling since February to $5.15m in April. In a pre-Covid-19 world, EKG had estimated April online casino revenue would reach around $52m, up 42% on 2019’s figures.

Meanwhile, sports betting numbers cast a bleak image of coronavirus’ impact on the industry as handle crashed 83% year over year, and 70% on the previous month to $314m as revenue fell to $2.6m. Catena Media’s PlayNJ analysts estimate the Garden State would have generated approximately $500m in handle under normal circumstances.
Catena Media MD Eric Ramsey believes the “dramatic shift” to online gaming could “permanently alter the market, even after land-based casinos open.” Meanwhile, brick-and-mortar casino revenue sank 69% on the previous year as venues remained shut for the entire month.

BettingUSA analyst and content director Steven Ruddock considers the figures a wake-up call to operators. He compares igaming’s awakening to the evolution of Blockbuster as Netflix surfaced in the 90s with its premium postal video renting service. “Why didn’t Blockbuster invent Netflix?” Ruddock questions. “You know it’s coming, so don’t fight against it; go with it.”

World of opportunity

The US casino industry presents a unique proposition for the world of gambling. Larger hubs like Las Vegas and Atlantic City package their casinos as a destination experience for players giving them the opportunity to tap into other hospitality perks like restaurants and entertainment, while regional casinos like many of those in igaming state Pennsylvania largely attract local gamblers with a penchant for gaming and less interest in the wider experience.

With such a thriving land-based industry in the US, the potential for omni-channel igaming solutions is much bigger than the UK, for example, where the brick-and-mortar casino sector has been in steady decline for some years and online is the channel of choice.

But steady growth in New Jersey, brought about by the launch of online betting in 2018, has seen the Garden State move successfully from a casino destination to a widespread digital gaming sector. “In New Jersey, where they’ve had online casino for so long, you’re still seeing very solid growth in the 15%-25% range, year over year, every month. And then, in August 2018, when sports came along, that growth just skyrocketed and you’ve seen growth that’s over 50% almost every month, sometimes 60%-70%,” Ruddock highlights.

However, Nevada’s sector could be facing significant struggles as new social distancing rules will likely cut occupancy to 50% of what the current fire code allows, with poker and craps tables to permit a maximum of four players each. Gaming groups will have to consider investing their energy elsewhere.

Pennsylvania presents a great opportunity for the likes of PNG and land-based group Rush Street Gaming, which recorded a 103% month over month jump in online GGR in the state in April. PNG’s Snowden was impressed by the uptick in igaming registrations in Q1 and expressed belief that the firm’s experience in Pennsylvania could be replicated in other states should they open up to igaming. And with 40-plus brick-and-mortar properties across the country, PNG will certainly be at an advantage if the vertical does become more widespread.

“Some 40,000 customers have registered for our icasino product thus far, with roughly 66% of those players being new to our ecosystem or reconnected former patrons,” he told investors during the Q1 earnings call. “Our experience in Pennsylvania has reinforced our view that our casino operating prowess and database will be a significant competitive advantage as additional states authorize icasino over the coming years, particularly when combined with the potential for significant icasino cross-sell from the Barstool Sportsbook.”

Although Snowden’s positive expectations for PNG’s digital future was likely a deflection tool for its land-based downturn, his point is valid and has been repeated by others across the industry. For Hard Rock, the casino omni-channel opportunity has been a long-term strategy headed by Spajic, whose experience in igaming spans some of the most crucial growth years for poker and casino in Europe, which he spent at bwin and one-time major poker force Full Tilt Poker.

“My colleagues and I have been saying this for years,” Spajic rightfully admits. “Brick-and-mortar operators [now] realize this is how they will derisk their business and diversify their revenue. I am definitely seeing more interest from brick-and-mortar leadership.”

Hard Rock drove its strategy home in February with the launch of its live slots product, enabling users to play live slot machines based in its Atlantic City venue via the Hard Rock casino app. Arguably, it marked the biggest innovation in New Jersey’s igaming scene since the introduction of live casino at Golden Nugget back in 2016.

“Live slots helped a lot because it transitions brick-and-mortar players into online gaming players in a format that is very familiar for them, a slot machine on our casino floor,” Spajic nods. The wider sector’s newfound interest in omni-channel has also built some sense of unity between land-based and online operations within gaming companies, Spajic says.

“Often we see each other as competitors, and there is always a sense that our players are ours and your players are yours; there is no deep cross-over. It’s an interesting notion that many players are now rethinking their engagement into online casino.”

Making moves

With PNG having laid out some of its plans for bridging the gap between brick-and-mortar and online casino, the question remains what other, less integrated and less online-savvy operators will do. As Sherman suggested, some will likely eye up small gaming start-ups and tech-heavy game providers to provide them with necessary talent and technology.

But there is some risk in exposing an entire brick-and-mortar player database to online activity, as they are an operator’s greatest asset. A fully integrated offering will provide players with a single account and loyalty scheme across both channels, and a single wallet for users to seamlessly transition between the app and the tables or slots within a casino. Hard Rock is working to launch its single-wallet solution as soon as it can.

Often the challenge with implementing such deep integrations between two opposite arms of the business is having staff completely align with ideas and expectations and working through the inevitable friction. Spajic says the move has to be implemented from the top down, with execs relaying the decision to local property presidents, casino general managers and regional and local VPs.

For a firm like PNG, whose entire land-based staff count was furloughed in March, the implementation of omni-channel measures will be a major disruption and likely take months to implement, while a smaller and more agile business such as Hard Rock can make the transition much sooner.

However, Ruddock considers the shift may be less of a challenge to big gaming groups that have diversified their products in the past from gambling-only to having a heavy-entertainment focus. And despite hesitation from the majority of industry stakeholders to dive into the world of online casino, a lack of sports might be the main motivation.

The UK is an example of a hit-or-miss push for omni-channel, with some verticals merging retail and online products more seamlessly than others. Rank Group pivoted its bingo and casino strategy under the leadership of former CEO Henry Birch in 2016. With casino and bingo venue revenue on a downward trajectory, he moved to digitize the business and implement single accounts and wallets across its brands.

What Rank exposed to the rest of the industry was the difficulty in establishing a long-term omni-channel strategy, particularly with so much else happening within the business and wider sector. In 2018, the operator made way for new CEO John O’Reilly, who retracted many of the measures implemented by Birch to cut costs and streamline the business. But one area Rank and many betting operators succeeded in was offering withdrawal opportunities in retail venues, meaning players could receive winnings much quicker than they would online, a feature that could become popular at brick-and-mortar casinos in New Jersey and Pennsylvania.

In Nevada’s case, casinos will have to get creative to appeal to their holidaying audience. Although William Hill proved this month it was innovating in the state when it opened a series of drive-thru betting parlors to enable first-time-depositors to pass KYC checks in person, while still adhering to Covid-19 social distancing rules. The move turned heads and proved operators are considering what the new normal might be.

In the face of coronavirus adversity, online businesses are thriving as the world is quick to adapt to changing consumer habits. The seismic rise of video conferencing platform Zoom and its almost $4bn in earnings in the last three months is a testament to the global transition to online we’re experiencing.

“I don’t think these big online businesses that suddenly have a huge uptick, like Zoom, online grocery companies and online gaming will go away,” Spajic concludes. “People understand this is convenient and they’re going to continue consuming all of these things. They will be cautious over retail products. Until the pandemic is completely gone, there is no going back to normal.”