Every year there’s a new hot-button issue for gaming investors to obsess about.
This year it’s what might be called alternative gaming, whether it be prediction markets, sweepstakes or skill-based games, which have become almost quaint.
Gray gaming, to use another appropriate word, is not new. Just ask the local governments of Florida that have played whack-a-mole for years with so-called arcade operators that have managed to stay one step ahead of the law by finding new ways to offer slot machine gambling seemingly moments after police shut down the old ways.
The difference now is how widespread the alternatives have become, and whether the Trump administration will allow gambling on predicting the outcome of events, clearing the way for companies like online brokerage firm Robinhood to offer those markets.
The spread of alternatives has been helped by the uncertainty and inability of regulators and legislators to, in many cases, even define gambling. Legislators don’t know whether to regulate and tax alternatives or to outlaw them.
These arguments are not only in states where gambling is illegal, but even in states where it is allowed. In those states, casinos warn that allowing alternatives will undermine their businesses, thus reducing taxes they pay and jeopardizing the jobs they provide, while advocates say outlawing alternatives will just abandon the field to illegal operators that don’t pay taxes or offer consumer safeguards.
Further muddying the outlook are various moves to rein in or even end online gaming, even where it is now legal. So, what do investors do in such an uncertain environment?
First, barring some sort of national prohibition, online gaming and slots in bars and arcades are here to stay. They may take different forms in different jurisdictions, and they might not be legal everywhere, but they are a reality and likely a growing, even proliferating, one.
The next question is, who are the winners and losers?
Winners are 1) those online operators who will jump into alternatives and 2) games and technology companies likely to buy their way in by acquiring the privately held pioneering companies.
Among online operators, DraftKings has already made it clear that prediction markets are a big opportunity. There’s no reason to believe other operators will see it differently. Certainly, a Caesars or BetMGM will offer wagers on who will win an election just as readily as they offer bets on who will win a ball game. The difference is that predictions market should be much simpler, thus less expensive to operate, and perhaps draw in a huge number of new participants who just want to bet that Senator X will be reelected or that such-and-such movie will win the Oscar for Best Picture.
Betting on sweeps and skill games in bars and arcades plays naturally to the strengths of route operators such as Accel. They are already in the business, just on different games from different manufacturers. Legalizing alternatives would simply hand them a natural extension of their businesses.
As for gaming technology companies, Light & Wonder has shown the way with its agreement to purchase pull-tab supplier Grover Gaming. Expect other big companies to enter alternatives, on their own or through acquisitions.
That leaves casino operators. Companies such as Monarch Casino, Red Rock Resorts and privately held Cordish have organized to oppose online gaming. The reasons are as clear as the latest monthly gaming revenue reports. In states where online gaming has been legalized, that form of gambling is increasing by double-digits while legacy gaming is declining, though unevenly and by lesser amounts.
Certainly, individual companies can grow by opening new casinos as Cordish has just done in Louisiana, or by upgrading properties, such as converting the last of the riverboats to land-based casinos.
But the reality is that online gaming and other alternatives are here and, with their much lower operating costs and convenience, they weaken the business models of legacy casinos.
Thus, casino companies will have to decide whether they are in the gambling business or the casino business. In that case, don’t be surprised to see the emergence of hybrid gaming operators, especially in regional markets.
