Opinion: Separating fact from fiction

Golden Nugget head of online Thomas Winter dispels some of the myths from the first two years of regulated internet gaming in the US

Over the past two years, Nevada, New Jersey and Delaware have pioneered US regulated online gambling. But as the first sizeable market, New Jersey, which is 10 times larger than the other two combined, has been under the highest scrutiny, mostly attracting negative comments from outsiders. A quick search in Google News will more likely return links to articles with the phrases “commercial failure”, “sub-standard user experience” and “ineffective marketing” than “regulatory success”, “new responsible gaming standards” or “additional revenues for Atlantic City”. [private]

With that in mind I think it’s about time to separate some of the facts from fiction.

Online gaming is cannibalizing bricks-and-mortar casinos
Fiction

All bricks-and-mortar casinos have reported the same thing: 75%-85% of their online players are new to them or were long lapsed customers.

At Golden Nugget, only 20% of online players were clients of our Atlantic City casino. Conversely, 15% of new online players have since signed up for a loyalty card at Golden Nugget Atlantic City. Customers playing both at the casino and online spend 11% more at the casino after they registered online.

Online casino is not for all casino players. Players go to bricks-and-mortar casinos for a comprehensive and social entertainment experience, which includes drinks, dining, music and shows. Online gaming focuses on the gambling element and offers convenience.

Online gaming also helps driving traffic to Atlantic City casinos by exposing the brand through additional marketing investments. Golden Nugget AC revenues grew more than 40% since online gaming was launched.

User experience is below par
Fact, but quickly improving

Operators have faced a lot of hurdles since the get-go, which largely explains the slow ramp-up. The first has been the stringent Know Your Customer (KYC) process. Some players will refuse to give their social security number, while others will not pass KYC checks because of a recent change of address. At the end of the day, a number of players won’t complete the sign-up process.

Then comes geolocation. Usually newly regulated markets want to make sure residents don’t play on websites hosted out of state. For the first time we had the opposite situation, making sure no one located outside the state borders would be able to play. The technology doing that needed fine-tuning and to make sure no operator would be out of compliance, overly strict settings were implemented at the start. This prevented approximately 5% of players located in New Jersey from playing, let alone customers unwilling to install a plug-in on their computer.

Fortunately the technology has constantly improved and is very sophisticated now, particularly on mobile applications. Still, lots of players who signed up at the early stage of market opening had a bad experience and gave up, with many yet to return.

Then there are the well-documented problems with payment processing, especially Visa credit card transactions. Because banks struggled to separate transactions coming from legal, licensed operators from offshore, illegal operators, they simply refused to process credit card transactions for online gambling in New Jersey altogether. Around 90% of new players will first try to fund their account with their credit card, but only 15% will do that eventually. The most motivated players will use alternate methods – ACH, prepaid cards, cash, online banking – but up to 40% of new players will just give up. Without such showstoppers, the number of online real-money players – and revenues – could be at least 50% higher by now.

The product itself has also vastly improved since the market went live. Some operators started with only 30 games and no mobile application. Now most operators offer 100 games or more – Golden Nugget offers more than 160 games – making the experience much more compelling for demanding players.

Marketing failed
Fact… and fiction

Online gaming is a marketing led business. More than half of players who sign up will churn after one month, and New Jersey is no exception. Operators constantly need to acquire new players to grow. The most established operators outside of the US keep investing 25%-35% of their revenues in advertising, even when they make $500m or more in annual revenues. And new operators will typically spend 70% of their GGR in marketing in year one, 50% in year two, 35% in year three.

In New Jersey, operators were willing to make such investments but faced specific challenges. First, they needed to build awareness, not only for their brand but for online gaming as a whole. Some taxi drivers I spoke to 18 months ago had heard about online poker but most wouldn’t believe it was even possible to play slots or table games online. Operators needed to explain what games were available, on what devices, and that it was for New Jersey residents only. They also needed to build trust, but that takes time.

Operators have also had to manage without some of the usual marketing channels. PPC, mostly Google AdWords, will typically account for 30% of your marketing investments. But Google is yet to accept online gambling ads in the US. Affiliates account for 15%-20%, but because New Jersey is a small business opportunity, few affiliates will make the effort. This means operators have lost 50% of their typical marketing plan. But what about TV? If you look to broadcast TV, you’ll have to accept wasting 70% of your marketing dollars to out of state residents, because North and South Jersey DMAs include New York and Philadelphia.

Add the user experience hurdles aforementioned and you’ll end up with a very high Cost per Acquired player. The few operators who spent $1m per month or more in marketing in the launch period were soon to realize that their ROI would not be what they expected it to be. This led them to drastically reduce their marketing spend and this is the main explanation for the market flatlining in the second semester last year. To illustrate this trend, let’s take TV advertising. Benchmarks show that all operators combined spent $20m on TV in 2014. 57% of that was spent in Q1, 8% in Q4. Across all marketing channels it’s safe to say that operators spent approximately $60m in 2014. That is 50% of their revenues. Not enough in a launch year to maximize the market revenue potential.

All in all, the market suffered less from bad or inadequate marketing campaigns than from limited investments and lack of efficient marketing channels.