Happy Thanksgiving from GGB; Newsletter Returns December 4

FANTINI’S FINANCE: NJ Numbers Not Inspiring

Analysts missed the mark by a wide margin when the New Jersey Division of Gaming Enforcement posted the first revenue numbers for the state’s nascent iGaming industry. So what’s the problem?

Sobriety hit online gaming bulls several days ago.

New Jersey revealed internet gaming revenues for December, and the first month of online gambling fell short of forecasts.

Rather than the $10 million, $15 million and $20 million predicted by a number of analysts and observers, revenues came in at $7.388 million.

That annualizes to less than $90 million, a long way from the $300 million to $1.2 billion being predicted.

Further, there might not be a rush to follow the Garden State into the Garden of Eden of online gambling.

The very day New Jersey numbers were released, news reports out of Iowa and California are that online gaming legislation will go nowhere this year in those states. Nor should it be expected that legislators in other states considering iGaming—Illinois, Pennsylvania, Mississippi, as examples—will be in a rush to act this election year.

The New Jersey experience is not unique. The number of poker players online at any one time in Nevada and Delaware are what the lawyers would call de minimis or, in more common financial parlance, immaterial.

Neither Nevada nor Delaware have released revenue figures. Nevada says it’s because they have only two operators—Station Casino-controlled Ultimate Gaming and Caesars Interactive. But if things were chugging along, a third or fourth operator would be online by now. And Delaware apparently doesn’t feel it has anything to crow about so it hasn’t been in a hurry.

But New Jersey was supposed to light the fuse of the online gaming explosion.

It didn’t. Or at least, hasn’t.

As many know, we have long cautioned that iGaming would be an evolution, not a revolution, in the U.S., and that stocks that doubled and tripled in anticipation of online gaming are set up to disappoint.

And the issue isn’t just the number of persons online or how much they play.

It is underestimating the costs.

It is easy to say that once the costs of software and platforms are covered that margins will be sky high.

But player acquisition is a major cost. Just in its early stages, several New Jersey casinos have bought expensive metropolitan area TV time to plug their services.

And that’s just the start. British online gamer 32 Red just released preliminary numbers for 2013. 32 Red spent £156 to acquire players on average, which is 32.2 percent of the £485 average player yield, so, obviously, software and hardware aren’t the only expenses.

Suppliers might look at margins might be higher, but total dollars might be modest.

Janney Capital analyst Brian McGill did an exercise showing that, even if New Jersey becomes a $300 million online casino market and IGT gets 50 percent share at a 10 percent participation basis, revenue would be only $6 million.

Now, we expect New Jersey to ramp up as more players register, those expensive player acquisition programs kick in, as technology glitches are resolved, geolocation services improve are and as more banks and credit card companies agree to process transactions.

And no doubt other states will legalize and the US market will reach into the billions of dollars.

At that point, there will be some nice profits.

Our point: This is no gold rush and investors looking at brick-and-mortar companies entering this space would serve themselves well with cautious expectations.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.