Many in the industry believed that Pennsylvania would expand gaming in the near to medium term for several reasons; the legislature had floated bills for some time and the hurdles to passage seemed to be relatively known sticking points which were addressed (for better or for worse depending on which lobbyist you speak to), and the state has a multi-billion-dollar budget deficit gap to close: every several hundred million dollars helps.

At the point of publishing of this article, the Pennsylvania Gaming Control Board is codifying the framework of regulations which will enable the state's casinos to enter the market under a license structure which will allow them, or an operator working on their behalf, to bring casino, table, and or poker games online.

The yet-to-be launched online gaming market's current tenor is not one of jubilance, but one of game-theory strategizing and spreadsheets working through just how, with a headline casino tax rate of 54 percent, operators and vendors alike will be profitable. As defined, game theory is "...the analysis of strategies for dealing with competitive situations where the outcome of a participant's choice of action depends critically on the actions of other participants." The return on the $10 million upfront license fee, headcount, marketing, technology infrastructure, and numerous other requirements will be materially impacted by the total number of players in the market as well as which key players choose to enter versus sit on the sidelines. Will we see off-shore players operating in gray markets enter the space? Will any of the major land-based entities sit out (likely)?

While the decision on whether to enter the New Jersey market was still a strategic and financial one, the choice wasn't as complicated as entry into Pennsylvania. Onlinepokerreport.com provided the below breakdown of any given operator's New Jersey vs. Pennsylvania cost structures and where variable costs would need to be adjusted to land at a 5 percent profit margin. Based on their assumptions, the axe will come down the hardest on player promotions and advertising: each category taking a 50 percent shaving from their current percent of revenue allocations in the New Jersey market.

In the opening year of the online gaming market in New Jersey, polls were deployed to pulse New Jersey residents’ awareness of the new legal online gaming offerings in the state. Awareness, despite millions of dollars being poured into marketing campaigns, was abysmally low. With an anticipated material downscaling of marketing in Pennsylvania due to the tax rate, the growth of the market year on year will be questionable. Operators in the Philadelphia metropolitan area will have an advantage in that the television and radio advertising market boundaries include New Jersey, meaning residents of the city and surrounding area have been exposed to commercials advertising online gaming over the last four years. For operators spread across Pennsylvania beyond the greater Philly area, the lift will be significantly greater in exposing players to the newly legal framework of online gaming.

The "double whammy" comes in with the reduced allocation for player bonusing. With an estimated fifty percent reduction in available resources for bonusing, analysts and gaming news publishers alike are questioning how robust the legal online gaming market will ever become in the state. Players who are already engaged in play in offshore sites will likely see very healthy give-back programs emerging in the early part of 2018 (pre-legal market launch) to retain those patrons; knowing that licensed in-state operators simply can't compete with the same return to player thresholds which untaxed offshore operators will gratuitously leverage. That being said, brick and mortar operators are able to provide a unique brand experience via online and offline engagement which offshore operators simply cannot. The licensed market in Pennsylvania will need to exploit that difference and focus on the tangible elements of service and experience that only they can provide.

Gaming general needs and staff are estimated to see a 20 percent reduction, moving from general figures of 12.5 percent of gaming revenues to 10 percent of gaming revenues. With the aforementioned cuts to marketing and bonusing, it seems natural for subsequent cuts to staffing to follow. What many in the industry may not be aware of is that these teams are already incredibly small- in some cases ranging from four to six people. Downsizing teams of this size changes the operational risk paradigm; with only 3-5 people running the entire business – even a flu bug which takes two of them out of the office for a week can create a business risk.

Coming to the end of this piece, you may be feeling this was scribed by the infamously glum Eeyore of Winnie the Pooh's tales; despite high taxes and compressed margins the Pennsylvania market won't be all doldrums. In speaking with the top operators in the state, the sentiment is that Pennsylvania will be an ongoing defensive war with online gaming being a platform to keep existing brick and mortar shares, decrease offline churn, and further extend their brands. Casino operators entering a market in a defensive mode are having all sorts of game theory discussions around competitors' deal structures, partnerships, which operators will enter and which won't, and how to leverage the choices of those parties along the way.

Many of the world's top operators have been partnering and staffing up over the last several years in preparation for successful operations in New Jersey and beyond. Parx, Penn National, Mohegan, Caesars, and Rush Street have all hired incredible talent in the space and either are already operational in New Jersey or at the very least have well invested in social gaming experiences online (with many parallels which can be brought into online gaming.) For others in the market, the scramble to secure the go-live green light is in full swing. In seeking to get their "fair share" of the estimated $150 million year-one market, many of these operators are looking at joint venture structures with experienced operators and or suppliers. Others are seeking top talent to spear-head the initiatives from within. On the day of go-live, few are anticipated to be sitting on the sidelines during this unique moment in the advancement of online gaming in the US market.