Author: Steve Ruddock

This week’s joint online gambling hearing in front of Pennsylvania’s House Gaming Oversight Committee and the Senate CERD Committee was long and often contentious. A live blog of the entire hearing can be found here.

Clocking in at over four hours, the hearing featured 15 witnesses broken up into seven separate panels. Each panel fielded multiple questions from lawmakers in the two committees.

During the proceedings, a second joint hearing was announced between the two committees. The second hearing will take place March 20 at 10 a.m.

Here are the key takeaways from the hearing:

Political sausage-making was on full display

There was little effort made by some lawmakers to hide their allegiances to certain casinos. Sens. Lisa Boscola and Robert Tomlinson made it clear from the outset that they were going to carry water for Sands Bethlehem and Parx respectively.

At times, it felt like the two senators, along with the representatives who testified on behalf of Parx and the Coalition to Stop Internet Gambling, were reading from the same crib sheet. (CSIG is widely believed to be primarily funded by Sands Bethlehem owner Sheldon Adelson.)

Of course, this cuts both ways. But by and large the lawmakers representing districts where the casinos are in favor of online gambling were more reserved in their cheerleading, at least compared to the cantankerous opposition of Tomlinson and Boscola.

Takeaway: The opposition to online gambling is outnumbered. But it’s a powerful, vocal minority willing to go to the mat. Online gambling is expected to get done this year, but expect to travel down a long, perhaps frustrating path before legalization is realized.

Tax rate still needs to be ironed out

Finding a tax rate that works for the state and the online operators has always been a challenge. Based on yesterday’s hearing, it would seem that the 14 percent tax rate in the current gaming reform bill is going to be raised, but not to the levels some of the lawmakers were calling for.

Proponents of online gambling said around 15 percent is the sweet spot, so I suspect the final version of the bill will come in toward the top end of the 15-20 percent range.

Takeaway: From a policy perspective, the debate going forward will center around this issue.

Cannibalization concerns remain, despite contradictory evidence

After three years of New Jersey online gambling, you’d think the cannibalization question would have been put to rest. It hasn’t.

Online gambing opponents are unwilling to let go of the idea that online will cannibalize land-based casinos. Throughout the hearing, they raised the specter of online gambling damaging land-based gaming. They painted it as a net-loser for the state and the casinos. (That’s despite the fact that we have real-world information to use.)

However, as David Satz of Caesars noted during the hearing, “avoid the scare-mongering.”

There is no evidence online cannibalizes land-based gambling. In fact, all available evidence points to it being beneficial.

Takeaway: It’s unclear how lawmakers will receive these bombastic arguments, if they don’t represent a particular casino. But it’s abundantly clear that casinos against online gambling are going to cling to this argument to the bitter end, even if all the evidence points to the contrary.

Facts don’t matter on PA online gambling

Data can be boring, so lawmakers love to make points with anecdotes. They’ll be damned if they’re going to let facts get in the way of spinning a good yarn.

The poker playing bot beat humans!

For example, several lawmakers brought up Libratus during the course of the hearing. That’s the poker-playing bot developed by Carnegie Mellon University, which recently bested four elite poker players at Rivers Casino in Pittsburgh.

These references to Libratus indicate they read local newspapers. The match was a big story in Pennsylvania papers. But their absolute butchering of the story exposed them as only reading the headline and skimming the text. They kept declaring the bot beat the pros in a “tournament for $1.8 million.”

What actually happened: The four pros faced Libratus one at a time in heads-up cash games (which barely exist anymore), and the games were not for real money. The pros didn’t lose a dollar, much less 1.8 million of them.

If state politicians are ignorant to this fairly simple detail, what else are they ignorant about? Cannibalization? Potential revenue?

The tax rate and online gambling

There was also an ongoing and altogether strange assertion that land-based casinos would focus on online gambling rather than physical gambling if the tax rate was demonstrably lower. To paraphrase a familiar refrain at the hearing: “You’re trying to make money, and you’d make more money selling the games with the lower tax rate!”

This might sound reasonable, but setting aside the fact that people don’t go to the casino just to gamble and would do so online if given the opportunity, there’s something called profit margins to think about. Tax rates are only one part of the equation when it comes to profit.

This argument is a lot like saying, if we tax beer at 14 percent and wine at 59 percent, grocery stores will focus on selling beer and there will be no wine for anyone! This isn’t true. If the store is making $1 ($0.86 after tax) on every case of beer they sell and $3 ($1.77 after tax) on every bottle of wine, they’re going to still sell wine. Wine drinkers are not necessarily beer drinkers even though there is some crossover.

The same holds true in the gaming industry. Online and live gamblers different customers (with some crossover). Also, land-based gaming has higher profit margins so the industry can handle higher tax rates.

Takeaway: If lawmakers are going to testify, they should make sure their talking points are crystal clear. The other side is going to fire off salvos of word salad, misrepresented numbers, apples-to-oranges comparisons and anecdotal evidence that might seem plausible but actually contradicts the actual situation on the ground.

Making the case for online gambling

John Pappas’ closing remarks really hit the nail on the head, cutting through all the talk of revenue, tax rates and cannibalization.

“I would like to reiterate that this committee is not deciding whether Pennsylvania citizens will gamble on the internet – today, thousands of Pennsylvanians already gamble on offshore sites that provide absolutely no local oversight or protection,” Pappas began, adding that internet gambling (lottery, casino, poker, sports betting, and horse racing) is successfully regulated all over the globe, including in the US.

“The only question before this committee is, will you support legislation to provide Pennsylvania players and taxpayers with a safe and well-regulated place to play poker and other games on the internet, or will you leave them with an unprotected market vulnerable to fraud?”

Takeaway: It’s imperative that legislators’ eyes be on the prize and not become distracted by refuting every false claim. Or, as Chris Grove noted in his Grove Report email newsletter:

“It’s difficult to separate the steak from the sizzle in high-profile hearings such as these.”

Other interesting tidbits

• “CIE’s NJ experience: 80 percent of online players are new customers; 42 percent who were TR customers were inactive customers who re-activated after signing up online.” — David Satz, Senior Vice President of Government Relations and Development, Caesars Entertainment.
• Question: “Before New Jersey legalized online gambling, were you able to gamble online in New Jersey?” Answer: “Yes.” Question: “And how much did the state collect in revenue from that?” Answer: “Zero.” — An exchange between Rep. George Dunbar and Caesars’ David Satz.
• Parx CEO Anthony Ricci may have unwittingly explained the casino’s somewhat mind-boggling opposition to online gambling in his testimony. He noted the company’s concerns that it puts smaller casinos on a level playing field with access to all players statewide. Ricci is implying that small casinos in far-flung areas of the state would be on a level playing field in the online arena. Right now, Parx has the biggest piece of the gaming pie. It doesn’t want to introduce a new pie where its slice might be smaller.
• Noting the casino’s strong revenue numbers, CERD Chairman Mario Scavello intimated that Valley Forge might be considering filing for a Category 2 license, thereby ending its run as a Category 3 “resort” casino and lifting many of the restrictions that come with the more affordable license.
• The tiny Lady Luck Casino came out in favor of online gambling at the hearing. That ended any speculation it may sit on the sidelines. Because of its size and lack of capital, it would likely need a high-profile partner with a strong independent brand, such as a PokerStars.