Pennsylvania’s recent decision to legalize online gambling is exciting for poker players in the US, those living in Pennsylvania in particular, naturally. But these aren’t the chaotic boom years, and with legalization inevitably brings with it convoluted regulation, different in each state which makes the move. That means that the average poker fan has little idea of what to expect and when, and much is uncertain even for those of us who’ve been following the situation quite closely.

To make an educated guess at what the situation in Pennsylvania is going to look like in six months or a year, there are three components which much be understood: The regulation itself and characteristics of the Pennsylvania market; the existing live gambling scene in the state; and which online gambling companies are certain, likely, or unlikely to wish to establish a presence there.

A fast track to entry

One aspect of the situation which will come as good news to any poker fans in the state is that all signs point to the first sites starting to appear sooner rather than later. Legislatively, the way the door to legal online poker was finally opened was through a budget bill; the state needs additional tax revenue quite urgently, and therefore has a strong incentive to give operators what they need to get their product to market as quickly as possible. Specifically, the state’s current fiscal year will end in June, and it will want to ensure that it has something to show for its efforts by then.

Indeed, the state’s regulators have already begun communicating with their counterparts in New Jersey for advice to help them do their jobs quickly. The legislation itself also contains provisions to streamline the process for companies which have already obtained a license in one of the existing regulated states – Nevada, Delaware and New Jersey. That means PokerStars, WSOP.com (and by extension, its partner 888poker), PartyPoker, and, most recently, the fledgling PalaPoker.

Likewise, there are strong indications that both regulators and legislators understand the value of having a larger liquidity pool, a lesson which New Jersey was a bit slower to learn. It’s very likely that Pennsylvania will still be a segregated market at the time the first sites go live, but New Jersey will soon begin sharing its player pool with Nevada and Delaware and Pennsylvania will be eager to follow suit as soon as practical.

Taking all of this together, it’s probably not too optimistic to hope for sites to begin going live early in 2018 and for liquidity-sharing with the other US jurisdictions to then go into effect before the year is out. New Jersey’s potential player pool will increase by roughly 50% once Nevada and Delaware are added, and Pennsylvania itself is almost exactly the size of the other three combined; traffic for a site serving all four could be triple or more what we’ve seen in the legal US market to date.

Partnerships

As with the other states, Pennsylvania has tied its online gaming licensing policies to its land-based casinos, of which there are twelve. Outside companies like PokerStars et al can operate in the state, but only in partnership with at least one of the live venues. The casinos, on the other hand, can potentially decide to go their own route, but most or all will likely partner with established companies in order to avoid the large up-front costs involved in developing their own software.

This is why any guess at the picture which will develop requires understanding of both the twelve casinos and the online companies interested in US markets, as well as the existing relationships between them. The picture is complicated and much remains uncertain, but fortunately a few of the casinos have made their intentions clear.

Parx Casino, for instance, is the biggest in the state, and plans to develop its services with the help of GameAccount Network (GAN). This company doesn’t currently operate its own poker network, but it provides online casino services to BetFair and PaddyPower, both of which also offer poker on the iPoker Network, so there are any number of business deals that could emerge out of these partnerships.

On the other hand, partnering with GAN rather than a poker-focused company may mean that Parx is less interested in online poker than in slots and table games, despite being a popular live poker venue.

Piecemeal licenses

This brings us to one of the unique aspects of Pennsylvania’s regulatory legislation, which is that it employs a three-pronged approach to licensing. Separate licenses will be issued for online poker, casino table games, and slots at a cost of $4 million apiece. For the first 90 days that licenses are available, casinos will be able to purchase all three as a discounted package, for $10 million.

The discount is clearly intended to encourage casinos to obtain their licenses sooner rather than later, and thereby start producing tax revenues for the state. The split licensing does create the possibility, however, that some casinos – particularly the smaller ones and those not positioned to get to market quickly – will elect to purchase only one or two of the licenses and defer or decline to offer a full slate of products.

That could be either good or bad news for online poker. In New Jersey, online poker accounts for only about 10% of gross gaming revenue, and at $4 million a pop (or $3.3 million with the discount), it may not seem like a worthwhile investment for casinos not partnering up with a major platform like PokerStars or PartyPoker.

On the other hand, although having some degree of choice is important for consumers, too much competition in a small market can create liquidity issues. Even sharing liquidity with the other three states, there simply aren’t enough potential players to sustain twelve online poker sites. If some of the potential license-holders opt out of competing on that front and focus on table games or slots, it may be better for everyone.

High taxation?

Most pundits have remarked on how high the taxation is going to be in Pennsylvania, but they’re looking at the aggregate taxation on all three types of license and assuming that the revenue breakdown for the state will resemble that in New Jersey. Under those assumptions, the effective combined tax rate on online gaming with be a whopping 42%, much higher than any of the other states, including Delaware, where high tax rates and low population have had a distinct cooling effect on companies’ interest in entering the market or marketing in the state.

However, that high figure is entirely due to the fact that online slots will be taxed at 54% and make up the bulk of online gaming revenue in New Jersey. But New Jersey taxes all online gaming at the same 17.5% rate, while Pennsylvania will tax poker and table games at just 16%, less than a third of its rate for slots.

Of course, recreational gamblers tend to love slots and don’t care at all about how much their casinos are being taxed. But marketing plays a huge role in how consumers spend their money, and the huge tax differential creates an incentive for license-holders to focus on table games and, to a lesser extent, poker.

Elsewhere, the desires of the consumer and the business interests of the gaming company are aligned, in that a casino would rather have people playing slots than almost anything else, since the house edge on slots tends to run so high. A tax rate as high as Pennsylvania’s on slots, specifically, artificially reduces that edge and encourages operators to market their other products to a greater extent.

Ecosystem issues

Crucially, the tax disparity may also mean that some casinos elect to forego a slots license and focus on the lower-taxed options. Even at the lower tax rate, these may be less lucrative than slots in the short term, but these days, poker sites in particular are acutely aware of so-called “ecosystem” issues related to the life expectancy of a recreational player’s deposit.

House edge is important in conventional gambling because recreational gamblers are likely only in the casino for a fixed length of time, after which they’ll leave with whatever profits they’ve made or money they have left. Online, players will of course withdraw occasionally, but most will keep their balance on a site until they’ve either turned a large profit or gone broke.

That means that for online gambling, net deposits are really the key consideration; if most dollars deposited will end up being claimed by the site eventually, house edge really only determines how quickly a given deposit is converted into revenue. In fact, a lower house edge may even be desirable in some cases, as allowing a user more play for their dollar increases the entertainment value to them and makes it more likely that they will subsequently redeposit.

In other words, it’s quite possible that some operators in Pennsylvania will take a deposit-oriented view rather than an edge-oriented one. If a given $100 deposit is going to be lost one way or another, then if it’s lost at table games, the site will get $84 and the state $16, whereas if it’s lost at slots, the site will get just $46 and the state $54. At poker, it will depend on whether the money is subsequently withdrawn by a winning player or put back into play to be raked again.

It’s therefore possible that slots will be a much smaller part of gaming revenue in Pennsylvania than elsewhere, and that the actual effective combined tax rate will be lower than some are assuming. It’s also possible that the high tax on slots will prove to be a boon rather than an obstacle to poker, if it means that sites push players to lose their money at poker and table games rather than slots.

A complicated picture

As should be apparent by now, the decisions facing Pennsylvania casinos and the sites interested in partnering with them are quite complex. The incentives structure created by the legislation hasn’t been tried anywhere else, so it’s hard to predict what strategies will emerge as a result.

Chances are that we’ll see several different approaches being tried, and that in turn adds complexities to the partnership issue. Casinos will have to find online partners who share their view of the situation and have a compatible strategy in mind. Next time, we’ll look at the state’s twelve casinos and what, if anything, each has signaled so far about its intentions as regards this new opportunity.

Alex Weldon (@benefactumgames) is a freelance writer, game designer and semipro poker player from Dartmouth, Nova Scotia, Canada.