Online Betting and Off Track Betting are Both Remote Propositions

G2E 2013 was huge; nearly 30,000 people attended. In attendance and in expo space being used, G2E 2013 approached pre-recession levels.  The attendees did what people have been doing at G2E and its predecessors for years; G2E is an annual industry tradition, it has its rhythms that everyone acknowledges and follows.  In the mornings they listen to discussions on the industry, in the afternoons they look at the products of the industry and in the evenings they get together with their friends and peers to discuss what they have seen and heard.

G2E always provides a glimpse of the coming year – not a crystal clear picture, but a glimpse.  This year two clear themes emerged.  Slot machines are getting yet bigger and more technically advanced providing the perfect format and canvas for the franchise-themed games they display.  The second major theme at G2E 2013 was online gaming.  The slot machines dominated the expo floor and to a lesser degree, the morning discussions.  But the dominant theme of morning discussion was online gaming.  As everyone knows by now, online gaming in America is moving forward, not at the federal level, but at the state level.  There was general agreement that congress was too busy fighting over budgets, healthcare and next year’s election to give much thought or time to online gaming in the foreseeable future.

Without federal legislation, Nevada and New Jersey are moving forward with online gaming within their state borders.  Delaware should join them with a month or so and everyone expects that some agreements between states to share players is certain to follow.  If there is any visible success for the individual states in generating significant new revenues, other states are certain to follow suit and legalize online gambling.

While there is general agreement on what to expect from the feds in the near-term and on the steady progression at the state level, there is absolutely no agreement on the revenues that will be generated.  The enthusiasts are predicting billions of dollars in taxable revenues; the critics and doubting Thomases are predicting very little new tax revenue.  So far, no one has had much to say about the impact on the bricks and mortar casinos.

In fact, most of the people commenting seem to believe it is possible to add billions of dollars of new tax revenue with online gaming without having any impact on the billions of dollars of tax revenues that come from the bricks and mortar casinos.  They may be right, but I doubt it.  That is no more likely than it was likely in 2006 when casino operators in Atlantic City said casinos in Pennsylvania would have no impact on Atlantic City.  They could not have been more wrong. Like most observers, the Atlantic City casino bosses failed to consider a basic principle of economics.  A friend of mine called it displacement, but by any name its impact is the same. The principle is simple: consumers have a limited and fixed amount of disposable income to spend.  When that is spent whether on ice cream cones, new clothes, giant television sets, movies or playing slot machines, it is spent. Money spent playing casino games online is money that cannot be spent in casinos.

I have thought about the limits of disposable income since the early 1990s when I was doing market research for a small Indian casino on the Kitsap Peninsula in Washington.  I had access to all of the demographic information in the region.  Kitsap had a small population base and a meager per-capita income – the amount of disposable income available was meager indeed. Also there were few tourists for the majority of the year.  It was clear to me that when the casino opened some other businesses were going to suffer.

However, until recently I have not seen any hard facts on the impact of displacement; that is when the disposable income is spent on something other than its traditional activities.  The Washington Post has a great story on horse racing.  The story, like all stories on racing, describes the struggles of the racing industry to remain relevant in an era of multiple gaming choices.  But it adds an interesting twist – the impact of off-track betting options on the on-track attendance.  It is an analogy that I think is going to be applicable to casino betting.  Isn’t online betting the same thing as off-track betting or any form of remote betting?  Well, if it is, this article will give all of us some insight into the future of casinos once online gaming is fully operational nationally.

Horse racing still draws fans, just not to the track.  Walking through Belmont Park is an unsettling experience, especially for anyone who remembers America’s most imposing racetrack in its glory days. The grandstand that stretches nearly a quarter of a mile used to be packed with tens of thousands of fans, even on weekdays. Last Saturday’s attendance of 5,628 made the cavernous facility feel like a mausoleum, and on weekdays the crowds are half that size.  Near-empty grandstands are, of course, a familiar sight for the modern-day U.S. racing industry… The sport underwent a profound change in the 1990s, when horseplayers got the chance to watch races on a computer or home TV and to bet by computer or phone. The vast majority of them saw that playing the races from home is a better experience than going to the track. They don’t have to take a slow-moving train to Belmont Park or crawl along the Capital Beltway to Laurel Park. They don’t have to pay for admissions, parking or overpriced food…The few tracks that still offer a vital live product are all beneficiaries of special situations. Saratoga, Del Mar and Oaklawn Park are resort/spa destinations with long histories and a special ambience that lures a broad spectrum of fans. Keeneland and Churchill Downs are in a state where horse racing is ingrained in the culture.  Andrew Beyer, Washington Post, 9-28-13



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