How online gaming has quietly flourished in the shadows of sports betting mania

Somehow the now almost $470m online gaming industry in the US has become an afterthought to the betting boom. Over the course of several months, online casino has broken new ground in the US, with states like Pennsylvania and West Virginia opening their doors to the seemingly forgotten vertical and New Jersey recording its highest ever online casino revenues in a traditionally fallow period for operators.

The World Series of Poker boasted the highest number of online players in its history and the Wire Act opinion was deemed only applicable to sports betting by a New Hampshire district court, potentially opening the door to the likes of widespread poker in the States.

But all the while, the industry’s eyes have remained fixed on the ongoing expansion of sports wagering. It is thought the country’s divided opinion of traditional gambling, and the lobbying power of the deep-rooted retail casino industry have played a part in the US’ general disinterest in igaming, particularly with respect to lawmakers and SCOTUS.

“I think politicians find online sports betting a lot more palatable than online casino. I also think the gambling industry is far less cohesive around the question of online casino than it has shown to be about sports betting. Our rule of thumb is 20-25% of states that pass sports betting end up trailing along with online casino in maybe three or four years,” MD for sports and emerging verticals at boutique research firm Eilers & Krejcik Chris Grove explains.

“I think sports betting is the order of the day today but once we get through that wave there will be more states that will regulate igaming,” Penn National SVP for interactive gaming Jon Kaplowitz says optimistically.

Second wind

Of course, the novelty has worn off slightly in states like New Jersey where igaming has been legal for upwards of five years now.

Admittedly, the vertical has been limited in its technical progression, with live casino only allowed in New Jersey last year.

And while the state’s earnings were nothing to shout home about in the past few years (steady growth, but nothing major), the introduction of sports betting generated a significant surge in gambling earnings, as bettors discovered they too enjoyed the thrill of table games and digital slots.

“There is tremendous crossover between betting and live casino,” DraftKings’ head of gaming Jason March confirms. Perhaps unsurprisingly, the majority of DraftKings’ casino players are loyal bettors of the brand. And although the firm has no retail casino legacy supporting it, it is dominating the New Jersey casino space. The company’s revenue split is not public knowledge, but Bloomberg recently estimated that almost 40% of the company’s NJ revenues stemmed from igaming.

According to Thomas Winter, SVP online gaming at Golden Nugget (GN), the introduction of online betting in the Garden State last summer boosted casino revenues by at least 20-30%. “Next year it could be around 55% thanks to the cross-selling between betting,” says Winter.

DraftKings has launched its own branded live casino in New Jersey

“70% of [igaming] growth is coming from sports bettors who didn’t see themselves as casino players but are becoming casino players. I’m still bullish on the New Jersey market and we think online casino revenues will be over $650m and sports probably over $400m within five years,” he adds.

The secret to succeeding in both verticals, Winter says, is to maintain a delicate marketing and product investment balance between the two. “Most operators in mainland Europe that spend 95% of their marketing budget on promoting a sports brand end up with gaming revenues across casino and poker as big as betting revenues. Big betting operators will get 30-50% of their revenues from igaming.

“Let’s say the biggest sports betting brands in New Jersey are spending probably three or four times more on advertising than the biggest online casino brands, and that can work for a period of time to build the business and they can cross-sell well to online casino but if you don’t have casino on top of your sportsbook, the economics are pretty tough.”

Grove agrees: “The biggest winners in the market are those that are doing both sports betting well and are doing casino well simultaneously. Having top products in both categories is working.” DraftKings is one example, but the latest Eilers & Krejcik Gaming estimates show FanDuel’s Betfair casino is beating longstanding top igaming performer Golden Nugget in NJ.

It’s a two-vertical race

The intrinsic link between betting and igaming is undeniable and in Europe, particularly during large sporting events like the World Cup tournament, major product investment is made to cross-sell bettors to igaming. During the 2018 tournament, NetEnt partnered with Greek online operator Stoiximan to develop a live casino room with an integrated betting widget to let players use both products at once.

Similarly, Swedish operator LeoVegas introduced a sports-themed live casino offering last year to appeal to English soccer fans. Across the pond, US operators are moving in a similar direction. DraftKings’ in-house live casino studio, housed at the Hard Rock Casino in Atlantic City, is also catering to its betting audience by having dealers sport different team jerseys and video walls behind them that will project games once the necessary licensing deals are in place.

Although the likes of DraftKings and FanDuel are leveraging their betting and DFS communities, there is a wider opinion that getting casino right first can be an advantage for operators offering both products.

It’s a sentiment that 888’s Yaniv Sherman, SVP, head of commercial development, has echoed before: “We’ve been clear with lawmakers that casino has a dramatic effect on revenues and returns. New Jersey is a perfect example of a market that continues to grow, although sports, which is seasonal right now, is in a hiatus.”

“You can see the sports market contracting on a month-by-month basis, but the overall market is continuing to grow because the bettors are playing more casino games, which is the whole purpose of multi-product,” he explained in a previous interview with EGR.

“The biggest winners in the market are those that are doing both sports betting and casino well and simultaneously” – Chris Grove, Eilers & Krejcik Gaming

With this in mind, 888 has invested significantly in modernizing its casino platform Orbit while 888sport has taken a back seat and will continue to do so until the group fully integrates its BetBright back-end platform and trading component. And since relaunching in July, the casino product has experienced a 31% uplift in first-time depositors.

With his extensive experience and understanding of performance in Europe, Sherman is reluctant to rush into the US market until 888’s entire product suite is fit to cater to the North American market.

On the flip side, many sportsbook-first operators have been eager to get an early entry into states as betting laws are rolled out and igaming has not been given the attention it deserves.

“There is a lot more value coming from the casino side and adding to sports as opposed to sports before casino,” says Grove. “I’d much rather have a casino without a sportsbook than a sportsbook without a casino.”

Golden Nugget’s (GN) success in New Jersey appears to have proved both Sherman and Grove right, as it only launched its betting product five months ago but has made no effort to market it yet. GN has since been at a slight disadvantage over others in not being able to offer NBA bets due to a law prohibiting Golden Nugget and NBA team owner Tilman Ferttita from taking bets on the basketball in case of a conflict of interest.

But the law is in the process of being reversed and once it is signed off by Governor Phil Murphy, efforts to improve the GN sportsbook will commence. “We will start investing in marketing for sports towards the end of the year, although our intention is to be sensible in the way we do that because we are aiming for profitable growth,” says Winter.

A Golden opportunity

So, if not from cross-selling efforts, how has GN’s igaming offering grown into one of the most sought-after products in the Garden State? As others have juggled expanding into new states, building out their betting apps, signing market-access and media deals, developing retail betting estates, and growing their retail casino businesses, GN has put all its efforts into perfecting its interactive casino.

“Some of the really big US-based casino groups have considered online gaming a tiny drop in their overall business but that is changing since the introduction of betting because we know it’s a huge nationwide opportunity and the roll-out in the US is fairly rapid,” says Winter.

Reflecting on the past five years of service, he notes: “We were efficient in our investment across marketing and user experience. The first year in New Jersey came as a bit of a disappointment to some operators because they expected the market to grow quicker. We were confident that this was a normal course of action, and although we spent less than most during the first year, we maintained and even increased our marketing investment in the following years while others reduced theirs.”

It certainly helped that GN was the first operator to launch a live dealer product in the US. Winter recalls most suppliers were worried the market would not be big enough to support the costs of the technology, so in the summer of 2016 the operator launched its own in-house studio using rented technology and Winter’s hunch that it would be a game changer was right.

Golden Nugget was the first NJ casino site to launch live casino last year

Before live dealer games were allowed, it was difficult to gain the trust of the loyal retail casino player base, Winter says, because they were largely skeptical of the security of online casinos. “When we surveyed land-based casino players, among the key concerns was the product being untrustworthy and we thought that offering live dealer would help change that perception. We built a product that was as consistent as possible with the land-based casino experience and what our brand stood for,” he nods.

“We really believed that part of the growth of igaming in New Jersey and the US would be a matter of convincing traditional casino players they could play online and trust the product.”

However, only a small percentage of the operator’s land-based player base has been converted online and the majority of those users are an average of 15 years younger than their bricks-and-mortar visiting counterparts.

According to Winter, the average online casino user at GN is 40 years old with a 60/40 gender split across the player base. Meanwhile DraftKings’ player base is made up almost entirely of sports bettors and DFS users, which are considered a younger and more tech-savvy demographic than the traditional casino crowd.

“There are definitely areas where there is overlap and all you have to do to see that proven is to look at DraftKings’ casino performance,” Grove explains.

“It didn’t come at the expense of any of its casino competitors, which suggests there were a lot of customers in the New Jersey market that were interested in online casino but didn’t take the plunge until DraftKings or FanDuel offered it.”

Catering to the right crowd

The US’ biggest regional casino owner Penn National is taking a seemingly different approach to customer acquisition and is directly targeting its five million strong national database of bricks-and-mortar casino customers.

“We think we have some competitive advantage in that we already have a demographic that plays casino games in our retail casinos and that translates pretty well, in that if folks leave the casino and they want to continue playing online or on their phone they can continue to do so with us,” Kaplowitz says.

“We have the right demographic and the fact we’re the largest regional casino in America means we have relationships with games developers and can leverage those relationships to offer more exclusive content on our igaming site.”

Penn National is also appealing to its betting customers and claims to be the first operator to have its casino loyalty program integrated into the betting kiosks at its retail sportsbooks in Iowa and Indiana.

Grove says that while operators might be taking different avenues to score customers, the market is still small and they are largely competing for the same group of potential players. “Everyone is going to have a different approach because they have different assets, but the markets are small enough that I think it is inevitable that most operators still end up competing head on for a big chunk of customers.”

The operator has been live in Pennsylvania with desktop and mobile versions of its Hollywood Casino brand for three months. Powered by IGT, the brand is one of a handful of igaming products in the state, and uniquely has its app featured on the Apple App Store, a move that was no easy feat.

Penn National product director Rich Criado admits having the app listed on the App Store is integral to “finding the right balance in the combined offering.”

Like DraftKings and GN, Penn National is also leveraging its unique casino content to differentiate its offering and with a vast legacy casino estate behind it, the operator has secured close ties with many casino games suppliers in the business.

He comments: “We’ve been able to strike a really unique deal with some of our content providers. Our players love Game King Poker and Wheel of Fortune, which are titles only we are offering right now. Because of those relationships with content providers we will always be able to, for the foreseeable future, have exclusive content on our igaming sites.”

Kaplowitz also believes igaming is crucial in the success of a sports betting product and a group’s overall performance in the US market. And despite the firm pivoting towards sports and investing a great deal into a proprietary front-end for its Kambi-powered product, Kaplowitz says the group is putting equal investment into igaming.

“Typically, the lifetime value of casino customers is higher than sports customers and if you can cross-sell from one to the other your lifetime value goes up even more because you’re saving on marketing costs. In general, these things will be inextricably linked,” Kaplowitz comments.

Penn National plans to leverage its bricks-and-mortar loyalty program, My Choice, to entice players online. The system is also integrated into the retail sportsbook and will give users an opportunity to win prizes and earn points. Kaplowitz insists that a seamless UX across all platforms is necessary to maintain customer loyalty and all products will use the same wallet and verification pages, state laws permitting.

The tax-is-too-high party

Another reason for the industry’s hesitation over going all in with igaming is its limited reach with each of the three legal states, providing unique challenges for operators. One major concern over Pennsylvania, the most populous of the three states, is the tax rate. Kaplowitz admits tax rates play a role in determining whether it is economical for the group to invest in innovation in igaming.

“Right now in Pennsylvania, the effective tax rates on slot machine play is 54% on the top line and 16% for table games and I think innovation will get a jump-start in states that have a better economic environment with lower tax rates so operators can make more money and re-invest in innovation to provide a better UX,” he explains.

Differences in regulation are limiting an operator’s ability to truly streamline its UX between states. One example Kaplowitz gives is player verification and operating a single wallet across multiple applications.

Then there is responsible gambling and the non-existent multi-state standardization of RG legislation. With each state enforcing different safer gambling requirements, it can be difficult to keep up and go the extra mile to keep players safe. To remedy this, Penn National operates a single self-exclusion scheme across all its brands and product channels.

“We know those are things that if operators get them wrong it can really slow down the industry, so we want to get them right and invest in those issues,” Kaplowitz confirms.

The argument for igaming is certainly a strong one, and if the demand is high enough to convince an operator like DraftKings to invest in an entirely new product vertical to please its players, it seems likely that igaming will be hugely successful across the US. Just as the industry has worked tirelessly to educate lawmakers and bricks-and-mortar casino owners of the benefits of widespread sports betting, so should it explain to these stakeholders that igaming holds the key to an untapped player base that is unlikely to be convinced by wagering alone.

On this point, Winter concludes: “Most sports bettors had never played online casino before. The cross-selling from sports to casino is strong but from casino to sports is really limited. We are really talking about two different demographics.”