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Wednesday, May 29, 2013

How Will The Legalization Of US Internet Gambling Impact US Land Based Casinos?

This is a very good question and one that has been  debated in the board rooms and in executive staff meetings at the premier US land based casinos.  Now that the prospect of  legalizing US online gambling is getting closer to some form of ratification the debate has intensified forcing US land based casino operators to position themselves in a world where US Internet gambling is a reality.

Opinions range from the “cannibalization” argument where  proponents  believe that legalized Internet gambling will take players away from  land based casinos negatively impacting their bottom line. The other extreme sees only blue sky with US casinos establishing online Internet monopolies.

These extreme arguments are not necessarily based on any real evidence or research. To get to the truth of the matter we need to look at the history of US land based casino attempts to launch online gaming venues, social/casual gaming operations and the European Internet gaming experience.

MGM Prize Site: In 2001 MGM launched an Internet prize gaming site for US players. The goal of the site was to test the waters to determine if MGM should launch a for cash site in Europe and to get some operational experience with online gambling operations. The site and platform was launched by Wagerworks and included standard slot games as well as a range of casual for fun games. Players were rewarded with prizes that could be redeemed in MGM casino properties.

Much to the surprise of Wagerworks and MGM this site was very successful attracting large numbers of visitors without any sophisticated online marketing and before the advent of social networks and social media. For reasons of confidentiality I can not reveal the exact numbers. However, we where all impressed by the organic traffic the site was receiving.

The Internet players were rewarded with hotel room discounts, free buffet passes, etc. resulting in Internet gamblers visiting MGM land based casinos to redeem the prizes. The exact coin-in upside was not completely calculated because MGM failed to provide the players  a code number that they could use to track  the entire range of player/visitor  land based activities and purchases. This seems silly now with all the casinos providing a card and player loyalty identity to track transactions. However, at that time the notion of providing a single player ID for offline and online activity was not widely implemented and certainly not considered when the prize site was launched.

Although the actual revenue numbers where unknown the Internet traffic that the site generated convinced MGM that Internet gambling was for real.  They quickly switched their emphasis to creating a for cash gambling site and launched it in 2002 in the Isle of Man.

The Wagerworks executive team strongly recommended that MGM keep the prize size running with the addition of the ID code to track total revenue. It was clear that there was a tie between the offline and online gambling sites that could be exploited. For resource and team resource reasons  MGM decided to shift all of their emphasis to the cash site.

The moral of the story is that a simple Internet prize site demonstrated that if a land based casino did its job properly the online and offline world could complement each other and bring value to both forms of gambling.

Online Poker And The World Series Of Poker(WSOP) - WSOP was the first real online gambling brand that proved to the world that online gambling was a force to be reckoned with. I was fortunate to be with Harrahs when Harrahs bought Binion’s Casino in old Las Vegas and coincidentally acquired the WSOP brand and poker tournament. Prior to the sale the online poker sites had already determined that qualifying poker players online for the offline WSOP tournament event was good business.  They were making serious money attracting players to qualify in a series of online tournaments leading up to the land based tournament. After Harrahs bought Binions they had to build out an entirely new venue in the Rio to accommodate the foot traffic to Las Vegas. Eventually Party Poker went public on the back of WSOP.

Although Harrahs was making what was considered good money hosting the WSOP tournament this revenue was insignificant relative to what the online poker operators were making by leveraging the WSOP brand. Harrahs certainly realized this and looked for ways to legally leverage the WSOP brand online.

The enactment of anti US Internet gambling in October 2006 frustrated the effort to truly leverage the WSOP brand. The legislation did  reinforced the power of the Internet/land poker based casino combo. Immediately after the enactment of legislation the popularity of WSOP dwindled.

During the WSOP internet/casino peak other land based casinos also benefited from the popularity of online poker. Other tournaments were spawned in other casinos and once retired poker rooms where revived and filled to capacity. The anti gambling bill has had a negative impact on the poker rooms in all of the casinos.

Clearly, the WSOP phenomenon made a  good case for a good marriage between online and offline gambling.

 Consolidation And Size - On a less positive note the Internet inherently leads to monopoly very quickly. Look at Google, Facebook, Zynga, etc. and you  realize that the winners on the net are quickly determined freezing out competitors in a matter of a few years. Certainly, there are many European Internet gambling sites. There are niche markets and the online gambling revenue per player can justify rather small successful online gaming operators. Eventually,  the smaller operators have to  close or work around the big names.

This is a real concern for  land based casinos that are familiar with a slower pace(helped by regulation) and a protected(non-free market) position. Internet gambling will certainly follow a similar regulated path. However, if the new legislation allows gambling across state lines we could see a few operators dominate the online space making it difficult for smaller operators to compete.

European Internet/Land Based Gambling - It is bit difficult to draw corollaries between US and European online gambling in respect to land based operators because Europe has a distinct aversion to large land based casinos. European casinos are usually very small and “intimate” having a small clientele. Some of these casinos (The Ritz) have launched online properties. However, they very seldom last and are sold to larger online only operators. Europe is dominated by purely online gambling brands with the exception of well know bookmakers such as Ladbrokes.

The US is different.  US casinos(Vegas and Atlantic City) are gigantic compared to European operators and frequently part of a collection of large casino properties. The gambling mind share and the investment capital that the large casinos garner could result in a very different outcome in the US if the land  based casinos embrace online gambling and execute properly.

Impact of Regulation - Regulation inherently removes competitive elements from the free market system. Therefore the degree and nature of US Internet gambling law will have a profound impact on Internet gambling as it relates to  land based casinos.  If only a few land based casinos are issued licenses or  first mover advantage these few casinos could gain an advantage that will be hard to challenge even if the land based casinos do not do a very good job at launching online gambling properties. If regulation encourages a more democratic distribution of licenses and traffic land based casinos may not have an advantage resulting in online only brands effectively consolidating the online space.

Joint Ventures And Partnerships - There is a belief that US land based casinos will partner with  or purchase experienced online European gambling operators allowing them to leverage their “regulated” status and  offline brands. This idea is to offload the online operations to someone else and still maintain control.

This could be a dangerous assumption. Joint ventures and purchases of companies with different business models and cultures  very seldom workout. A number of UK land based operators tried this with less than positive results. In addition, an experienced online operator knows the online business. They may not know how to get traffic to Las Vegas and than back to an Internet gambling site.

In conclusion, the history of Internet gaming, casual(prize) gaming and the role of land based casinos in launching these  efforts gives us some clue as to how legalized Internet gambling will impact US land based casinos. History certainly implies that land based casino will benefit from Internet gambling if the casinos execute a proper online gambling strategy. It could be that land based traffic could increase with the legalization of online gambling with the caveat that the regulatory environment may prove to be a wild card that could have a significant impact on the outcome.   “Buying” online expertise may not be a magic solution for the land based casinos. They will have to quickly adopt an online gambling operations mode if they want to successfully marry their online and land based businesses.

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.

How Will The Legalization Of US Internet Gambling Impact US Land Based Casinos?

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