Fitch: 2014 NJ Online Gaming Revenue Forecast Reaffirmed

On Feb 18, 2014

Fitch Ratings: Fitch reaffirms its 2014 forecast for New Jersey online gaming revenues in the $200-$300 million range as it expects meaningful sequential growth to continue throughout the year.

The New Jersey gaming regulator reported $9.5 million in gross gaming revenue for the month of January, a 28 percent improvement from December’s $7.4 million. Although the January figure annualizes to only $114 million, it thinks the 10 percent sequential growth rate needed to reach achieve the low end of its estimated range is achievable.

Several factors will drive sequential growth. The primary driver will be the ramp-up in players’ awareness of online gaming as a result of operators’ marketing efforts. Online operators’ executives have been open about the importance of marketing aggressively early on, which is at least partially driven by the industry’s tendency to consolidate around two or three major operators. In New Jersey, top two online license holders – Borgata and Caesar’s – already control 73 percent of the online market. Success in capturing market share in New Jersey could also be perceived as crucial for platform providers and operators to have a “foot in the door” as online gaming expands in US.

Online gaming advertising is abundant as one drives through New Jersey’s highways or listens/watches radio/television in the state. Advertisements are often buttressed with promotions featuring bonuses and deposit matching offers. The number of online gaming accounts increased by 57 percent in January (197,782) from December (126,231), which attests to the swift ramp-up in customer awareness.

Other factors driving growth include technology improvements, users’ adaption to the available payment methods and rollout of mobile products. One issue reported early on was instances of false negatives when identifying the location of the players (a player needs to be within New Jersey’s borders; the location is primarily verified through WiFi signals). GeoComply, a provider of geolocation services for 10 of the 11 sites in New Jersey, recently stated that their false negative rate declined to 3 percent to 5 percent from around 10 percent when online gaming launched in November.

The adaption to the available payment methods by players could be a longer-term and more serious issue than the early geolocation hiccups. Certain banks affiliated with Visa, MasterCard and American Express are not processing online gaming payments (reportedly MasterCard transactions are more widely accepted due to how the company codes gambling related transactions). All sites offer direct deposit as a payment method although deposits/withdrawals may take two days or longer to process. Alternative methods offered by several sites include payments at 7-Eleven locations and/or the use of Skrill, a payment processor site that can be funded with paysafecards available at select convenient stores and supermarkets.

The lack of convenient payment options will slow the adoption rate of online gaming as potential players are turned off by waiting for a deposit or withdrawal to process or by having to find a nearby store that facilitates payments. Longer-term people will adapt to the available payment methods and some banks will find increased comfort with the legal framework around processing gambling related payments.

In the near-term, operators also have levers to increase trials, such as ramping up promotional spending. Europe-based online casinos return about 15 percent to 25 percent of gross win to players based on the reported results of the public operators. However, the adaption process may take time and will hinder ramp up in the initial months.

The roll-out of online gaming on mobile devices can also speed up the ramp-up process in New Jersey. A few operators such as Betfair and Borgata have mobile products while others plan to launch mobile apps in the near future (e.g. Caesars). Some online operators offer only Android-based apps while others only OS-based apps. New Jersey allows online gaming on mobile devices; however, GeoComply warns that New Jersey regulations do not permit geolocation verification from users connected via mobile connections.”