It’s only a matter of time before Atlantic City’s casinos are playing second fiddle to igaming, said Deutsche Bank analyst Carlo Santarelli in an investor note published Friday. The operative question, he said, is when it will happen.
Santarelli began by noting that November 2024 will mark 11 years of igaming in New Jersey, with the state on pace to record $2 billion in internet casino revenue for the first time, “an impressive feat, considering icasino GGR [gross gaming revenue] was just $483 million in 2019.”
Contributing factors for this sharp rise include the pandemic, when customers flocked to online casinos, as well as the launch of online sports betting. Significant marketing initiatives and improved operator platforms were also cited as adding to the runup.
Last year, igaming receipts tallied slightly over $1.9 billion and terrestrial casinos logged almost $2.85 billion. “While the gap between land-based and digital casino gaming still stood at over $900 million for 2023, it has tightened meaningfully from the $2.2 billion GGR outperformance of the land-based operations in 2019,” Santarelli noted.
The analyst concluded from available data (on a skin-by-skin basis) that igaming isn’t only here to stay, but certain to keep improving its financial performance. He also found that the majority of market share was concentrated among the top three operators.
Promotional activity continues to outpace the expansion of the market itself, however, accounting for an ever-larger portion of gross gaming revenue. The one thing that could potentially sour investors on the igaming sector, Santarelli added, is a proposed tax increase currently before the New Jersey Legislature.
Santarelli wrote, “While there are many blind spots with respect to promotional tracking … make no mistake, net revenue continues to grow healthily, despite the promotional acceleration, though the [current] 15% tax rate is important to facilitating this.” This trajectory, the analyst posited, would be adversely affected by the proposed hike of the tax rate to 30 percent.
Characterizing New Jersey’s present-day rate of igaming taxation as no impediment to aggressive promotional outlays, Santarelli opined that even if the effort by state Sen. John McKeon (D) doubles the levy, the Garden State will still be more attractive than Pennsylvania and its 54 percent impost. Unlike in New Jersey, however, promotional allowances are tax-deductible in the Keystone State.
Should McKeon prevail, Santarelli predicted a curtailment of igaming promotions. He noted that “adjacent states provide plenty of cover for the increase,” with Pennsylvania’s tax haul 50 percent higher than New Jersey’s and New York State taxing online sports betting at 51 percent.
Santarelli also warned that “what one reads on the topic is unlikely to be based in reality, given the various constituent media agendas in the mix on this issue.”
At present, the growth of igaming in the Garden State is only accelerating, having gone from 18 percent last year to 22 percent in the first quarter of 2024. Most of that activity is concentrated among DraftKings (25 percent), FanDuel (21.5 percent), and BetMGM (20.5 percent).
As for promotions, Santarelli wrote, “We are comfortable working under the assumption that promotions are undoubtedly being used to fuel, to what we think is a fairly considerable degree, the GGR growth in the market. We believe aggregate promotions, as customarily defined, represent closer to 30%-35% of GGR on a market-wide basis and have increased significantly on a dollar basis over the last several years.” Should taxes be doubled, he predicted that activity would be curtailed by 29 percent.
