High five: What have we learned from five years of New Jersey egaming?

Words by Julian Rogers

 When Malta-based consultant Mario Galea was hired by New Jersey’s Division of Gaming Enforcement (DGE) to assist with the rollout of regulated online gaming, trudging across the Delaware Memorial Bridge in sub-zero temperatures wasn’t exactly in the job description. Yet Galea’s role quickly evolved organically due to the tight timeframe and he eventually found himself criss-crossing New Jersey and beyond to try to trick geolocation purposes into believing he was within state lines. Any leaks in the system had to be identified and plugged. “For example, by using high-gain antennas you could shift your position a few hundred meters, which is enough if you are standing on the west side of New York and the GPS thinks you are in Hoboken, New Jersey,” he explains.

Galea – the former CEO of Malta’s Lotteries and Gaming Authority – began work on May 28 2013, although he harbored serious doubts about regulated egaming being up and running in under six months. “I initially thought it was an impossibility to achieve the deadline, given that the regulations were still be finalized and adopted,” he says. They were finally completed at the end of June.” Then there was the task of vetting license applicants and rigorously testing gaming software ahead of the November launch. But rather than relying upon external labs, the DGE has its own technical division that undertakes internal testing and game certification. The gaming authority was also aiming to introduce some of the strictest and most robust online gaming regulation protocols in the world.

“That period between being given a green light and flipping the switch was exciting, chaotic, challenging, and satisfying all rolled together,” recalls Bill Rini, head of online poker for Caesars Interactive Entertainment (CIE). It was also challenging and chaotic at times for the DGE after attracting 72 applicants on the very first day of license submissions. Indeed, so much documentation had to be submitted that some applicants had filled 20 banker boxes with paper documents. “For two months, the DGE offices looked like a warehouse,” Galea recalls. It was all hands to the pump as failure to meet the deadline for an initial soft launch in late November was simply not considered an option, he stresses. “I just put on my crash helmet and went to work. We still launched on the appointed date without missing a single critical function.”

Under starter’s orders

New Jersey was the third state to regulate egaming after Nevada and Delaware. But being the 11^th most populous state with nine million inhabitants (around six million of gambling age), not to mention being home to land-based gambling hub Atlantic City, expectation was high. Almost 110,000 online gaming accounts were created in the first month, yet Rini says the biggest challenge at the time was simply not knowing what to expect. “Everybody was launching at the same time so nobody knew how big the market would be or how much the competition would be spending on advertising – everything was basically educated guesses.  It probably took a year for things to settle down a bit where we finally had enough data and intelligence to make informed decisions.”

Despite all the pre-launch testing and checks, things did get off to a somewhat shaky start, mainly due to the cell phone geolocation system incorrectly blocking players located in New Jersey and certain financial institutions rejecting gambling deposits. This included PayPal. Furthermore, the KYC requirement that players had to divulge their Social Security Number (SSN) deterred some people, although Gamesys-powered Tropicana and Virgin Casino were the first sites to switch to requiring just the final four digits of the nine-digit SSN. Even so, the player conversion funnel and overall user experience across the board was far from frictionless in those early days.

Sites were also hamstrung by a dearth of game content and the fact play was restricted to desktop computers and laptops. CIE’s head of online casino, Melanie Gross, says: “When we first launched we didn’t have mobile apps live yet, nor third-party casino game content, which is amazing to think about considering how important both are to continued growth in the market today.” Another challenge for operators was getting the message out there that online gambling was now legal, regulated and safe. After UIGEA in 2006 and Black Friday in 2011, many New Jerseyans automatically saw internet gambling as a nefarious activity facilitated by shady offshore sites in far-flung destinations. It is still a problem today. “I can’t tell you how many times I hear from New Jersey residents that they had ‘no idea’ you could legally play online for real-money,” Gross says.

Atlantic City, New Jersey

Despite the sticky start, which resulted in distinctly underwhelming total gross gaming revenue (GGR) of $122.9m for the first full year (2014), the market eventually began to gather momentum. Revenue for 2016 was $196.7m – a 32% jump over 2015 ($148.9m) – while total revenue for 2017 climbed 25% YoY to $245.6m. This was more than double 2014’s figures. Furthermore, the market surpassed $700m in lifetime revenue ($596m from casino and $104.9m from poker) last November after nine consecutive months of industry-wide revenue topping $20m. This was extended to 10 months after revenue of $20.8m was recorded in December. At this pace, the state is expected to eclipse $1bn in lifetime revenue by the end of 2018. “The market continues to grow almost every month and I do believe there is still more room to grow,” says iGaming Capital’s Melissa Blau. She adds: “The market may have been slow out of the gate, but Rome wasn’t built in a day.”

Back in early 2013, though, there had been sky-high predictions for year one as industry observers wildly overestimated egaming’s potential in the Garden State. For example, Wells Fargo Securities anticipated the space would be worth as much as $650-850m in the first year based on a per-player annual spend of $111-149. Forecasts from RBC Capital Markets and H2 Gambling Capital were lower at $500-630m and $410m respectively, although these still turned out to be overly ambitious. Governor Chris Christie then compounded matters by declaring that he expected the sector to generate $1bn in revenue by the middle of 2014. Other industry observers were far more skeptical with their projections, including Isle of Man-based consultancy GBGC, which suggested combined revenues for 2014 would be $246m. “We took the view that large volumes of citizens from other states would not visit New Jersey to gamble online,” GBGC director Lorien Pilling tells EGR NA. “Other analysts presumably assumed that there would be an influx of visitors from other neighboring states.”

While Borgata took an early lead, it was Golden Nugget that eventually assumed pole position in late 2016 – and hasn’t looked back since. Golden Nugget’s revenue, which also includes license partners Betfair and SugarHouse, hit $6m in December. Instead of breaking down revenue for each brand, the DGE releases numbers relating to each license holder, of which there are five: Golden Nugget, Borgata, Caesars, Tropicana and Resorts. Borgata and Caesars are Golden Nugget’s nearest challengers with $4.3m and $3.8m revenue in December respectively. Blau says Tropicana punched above its weight in year one, yet she suggests Borgata and Caesars have largely underperformed to date. She is also puzzled by the sluggish adoption of new products. “With the exception of Golden Nugget with live dealer and SugarHouse with the recent launch of virtual sports, no other operators are offering these important verticals. Only Tropicana, Virgin and Pala are offering bingo – and only 90-ball bingo at that. No one has launched 75-ball bingo. Why? In Europe, when a casino launches a new product, the others are fast to follow.”

A busted flush?

One big disappointment in New Jersey continues to be poker. In the early days, it accounted for 20-25% of the market. Now, the peer-to-peer game’s share has been eroded to around 10%. The average monthly poker revenue across the board for 2017 was $2m, compared with $2.4m in 2014. Poker’s lackluster performance is understandable in some ways, especially when you take into account New Jersey’s population is slightly less than that of Portugal and there are now seven sites on four networks. “The combination of New Jersey’s small population and several brands competing for players, always suggested poker would struggle to achieve the forecasts made by some firms,” Pilling states. Yet The Stars Group (previously known as Amaya) believed its iconic PokerStars brand would double the size of the market, Blau notes.

As of December 2017, poker revenue was down around 10% to $1.9m since PokerStars NJ’s entrance in March 2016 via its partnership with Resorts. According to traffic tracking site PokerScout, PokerStars NJ has a seven-day average of 110 cash game players. Over at WSOP/888 and Borgata/partypoker, it is just 95 and 75 players respectively. Hopes are being pinned on interstate compacting being the defibrillator to stun the flatlining vertical back into life in New Jersey. “If Pennsylvania and other states come aboard, there’s really a chance for online poker to pick up some real steam and hit the kinds of prize pools that become compelling for poker players,” Rini remarks.

With poker struggling, casino has picked up the slack and helped carry egaming revenue above $20m a month since last February. Total casino revenue in December was $18.8m. In fact, casino’s popularity and sustained performance is even more impressive because New Jersey was predominantly a sports-betting state pre-UIGEA, according to Galea. “Given the restricted market offer, the online gaming market actually did very well in New Jersey – just not relative to the arguably over-reaching initial projections. If one compares New Jersey with Sweden, which have approximately the same population size, demographics and most likely the same sports betting to casino games market ratio, New Jersey currently generates a similar level of revenue just from having the gaming vertical as Sweden does.” He continues: “I believe New Jersey, given time, has the potential to become one of the predominant markets, globally.”

Of course, future growth will be heavily influenced by whether PASPA is repealed so that the state can offer unfettered sports betting like Nevada. Blau estimates that the New Jersey market (without sports betting) could hit $300m in 2019. With sports betting – assuming players are able to wager using mobile devices like in Nevada – she believes this number could grow by another 30-50%. Meanwhile, Thomas Winter, SVP and general manager of online gaming at Golden Nugget, believes casino and poker should top $400m five years from now. “That’s if sports betting is not legalized,” he stresses. “If it is, it’s a totally different story as sports could generate between $300m and $500m by itself within five years.” Regarding the more immediate future, he’s less bullish with his forecasts. “For 2018, we expect whole market growth to slow down to about 15%, half the 2017 growth. Player acquisition remains strong but as the market matures, the value of new players is going down, perhaps 20% below what it was in the early days.”

Overall, though, online gaming has largely been a success, accounting for 10% of all casino revenue in the state. Those early hiccups have been mostly rectified, although the payment issue hasn’t been fully eradicated, and it hasn’t cannibalised brick-and-mortar revenue. Nor has there been incidents of under-21s wagering online. Moreover, North America’s first online gaming trade body – the iDevelopment & Economics Association (iDEA) – suggested that by the end of 2016, New Jersey’s regulated egaming industry had created 3,374 jobs, $218.9m million in wages and $124.4m in tax revenue to state and local governments. “It is generating tax revenue, adding jobs, and spurring technological innovation, all without the negative impact once anticipated by opponents,” says chairman Jeff Ifrah. And by establishing the ‘gold standard’ in online regulation and licensing, New Jersey has also become a blueprint for other states to follow and learn from. Here’s to the next five years…