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Monday, November 29, 2010

Lessons To Be Learned From The First Attempts By US Land Based Casinos Launch Of Internet Gambling Sites

With the debate over the legalization of US internet gambling  intensifying and the realization that US online  gambling may become legal  many US land based casino operators are pondering how best to take advantage of this opportunity.  In speaking to journalist, casino operators and gambling industry experts I have been surprised at the lack of  knowledge they have regarding the history of US casino operators  launching  online gambling operators. This experience reveals some valuable lessons that can be useful when US online gambling is legalized.

Harrahs, MGM, and Kerzner International  all launched internet gambling sites and they  failed in their first attempts to operate successful  operations. These sites were launched between 2002 and 2004 in British protectorate locations such as Alderney and Isle of Man. They were targeted at UK online gamblers with the hopes of expanding the focus to other European communities.  
                                                                                                                       
So what happened? Why did they all close and what can we learn from the experience that will help the American casino brands and other gambling businesses become successful when US internet gambling is legalized?

Brand Awareness - The original group of US land based casino operators that launched sites in Europe assumed that online consumers would know and respect  the Harrahs (Luckyme.com), MGM, Kerzner (Atlantis.com) brands. In point of fact the UK online gaming community had little or no knowledge of these brands. The American casinos were shocked at the anemic traffic the brands attracted and the cost  of building an online marketable brand.  Their business models never anticipated this cost. European offline sports book and casino brands such as Ladbrooks, William Hill, Coral, Paddy Power and Ritz plus consumer brands such as BSkyB etc. had already spend time and money reinforcing their offline brands in cyberspace. This coupled with new emerging European online gambling brands made the online UK space very crowded and hard to break into.

Obviously, the American casino brands such as Wynn, MGM, Caesars and Venetian all have strong offline brand awareness and databases of American land based gamblers making the case for easy and successful online gambling marketing. However, one should think twice about making this assumption. Do these casinos have any online brand awareness? The answer is they have very little or no online brand awareness outside of the World Series Of Poker brand owned by Harrahs.

So what companies have consumer online gaming/gambling  brand awareness in the US and a pool of online gamers to tap into. Zynga,  Electronic Arts (Pogo game site),  Playdom (now Disney) and Party Poker to name a few. These are the companies that have large numbers of players gambling style games and very good online brand awareness.

The US land based casinos will have to determine how they are going to compete or partner with these online brands if they expect to capture the mind share of US online gamblers.

Age/Identity/Location - The biggest fear that American casino operators had when they first launched online gambling operations was that a US player would gamble on  an online American casino  property.  State gambling boards and the federal government threatened the casino operators with pulling their land based licenses if even one US player played on their sites.

This threat resulted in the creation of very sophisticated age/identity/location detection systems to assure that US casino operators they would not be penalized for taking US wagers.

The use of these detection systems resulted in an interesting problem for the US casino operators.  The constraints on these systems were so tight that they began to reject legitimate UK online gamblers from gambling on the sites. Once a legitimate player is rejected it is unlikely they will return.

There is no perfect way to absolutely determine the identity and location of everyone using the internet  A good detection system can get you very close to this goal. However, in the end it is a risk based exercise and a balance between driving traffic and staying compliant. The risk management approach that the American casino sites took put them at a  disadvantage to the other non-US online gambling sites. In some cases the other sites did not care if they took US players. They were concerned about letting a player under 18 play. However, they recognized that there was a more important goal of balancing the risk of  accepting an under age person and acquiring customers. In reality, the instances of under age people gambling on European sites is and was very small.

So what happens if online gambling in the US is on a state by state and not a federal level. Will casino operators be so afraid of getting their land based operators shut down by state authorities that they will launch sites that can not compete with online only brands or more aggressive European brands that are willing to take the risk of accepting a few people from another site or an occasional under age player? The reality is that an online gambling site can do a better job of screening underage and non-resident players then a land based casino. Have you ever been carded when you entered the Bellagio, Venetian or Ceasers Palace? An operator will have more information about a player then a land based casino.  Regulator will have to acknowledge that there is an acceptable margin of error in online identity to allow American casino brands to compete in the online gambling marketplace.

Online Gaming Operations - Running an online gaming operation has its similarities and differences relative to operating a land based casino. The obvious difference is that one is virtual and the other has physical attributes. You can not see, feel, touch an online gambler. Other gaming sites are a click away, reaching them through marketing programs is different and revenue per player differs. The cost of maintaining a land based presence is considerably more expensive than running an online property.  Things change quickly online and reaction time to changes have to be quick. If an online gambling site is run properly the amount of people playing at anyone time can be much higher then the number of people playing games at a land based casino.

The first attempt by US land based casinos to launch online properties indicated that they did a good job from the technical and online security perspective by using third party game and platform providers to supplement their own technical staff and to provide an inventory of games. They did struggle marketing to the online community. They were accustomed to a land based monopoly model where demand usually exceeded supply and competition was limited to a very well known group of casino operators. Online gaming in Europe was different from a cost perspective and the ability to attract and maintain eyeballs to their properties. It is difficult to say how the US will legalize gambling. If they only allow a few businesses to open online gambling properties the casino businesses may do fine. If it is open to a broad array of operators things could be different and casino operators will have to learn how to cost effectively market their properties online.

The Regulatory Environment - The one thing that US casino operators did very well when launching their European online properties was managing in a regulated environment. They contacted the right legal and government officials to determine the proper laws governing online gambling and they put in place strong internal legal teams to make sure they where in complete compliance with local online gambling law.

This focus on operating in a regulated environment may prove very important in the US. The casinos are well connected and well respected by state gaming governing organizations.  Conversely, social gaming operators and non-US online gaming operators that attempt to launch sites in the US may find themselves completely locked out of the market if regulators decide to go with organizations that have a history of regulatory compliance.

Even if the regulators decide to open up the field to include anyone that is willing to pay the license fee the casino operators will still be at an advantage over operators that are not familiar with functioning in a regulated environment. For example, I can't image what an auditor will find looking into the Zynga poker room code. I sincerely doubt that most social and casual gaming operators with have platforms and a code base that will pass a regulatory scrutiny.

European online gambling operators will fare better because the are accustomed to operating in a regulated environment.  With the caveat that they do not have a relationship with US regulatory organizations.  This subtle difference could prove to be significant.

In conclusion, US land based casinos have experience launching and managing internet gambling operations.  Will they learn from the lessons learned in their initial efforts to improve the likelihood of success in the US? Popular social and casual gaming sites should start planning on how they would operate in a "regulated" environment and European online gaming brands should start introducing their companies to US consumers and regulators.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.




2 comments:

Steven Kane said...

:)

jborgbarthet said...

It would be very interesting to see what compliance framework the US will adopt, and whether exclusive agreements will be implemented to secure another monopoly for online technical compliance testing as it is now for the land-based industry.