The Fight … Delegitimizing the Online Poker Cannibalization Myth

Check them. The numbers don’t lie

After his improbable victory at the 2003 World Series of Poker Chris Moneymaker is credited with kick-starting what would become known as the “Poker Boom,” a period that can only be described as a golden age for both poker and gambling.

Man climbing ladder drawing chartDuring this time, poker was thriving like never before with what seemed like a new online site being formed every day, and casinos couldn’t reopen their poker rooms fast enough to keep up with the public demand.

Yet for some, like Ultimate Gaming CEO Tobin Prior, the entire “Poker Boom” is seen as a missed opportunity, or as he called it at California’s online poker hearing in April, “the Lost Decade.”

What Prior is referring to was the long held perception by U.S. land-based casino interests that online poker and online gambling was something to be fearful of, something that could potentially turn their billion-dollar resorts into ghost towns. So instead of embracing this new form of gaming, they shunned it.

Profits from the poker renaissance headed to the shareholders of the overseas operators who not only became rich, but also gained complete control of the burgeoning online gambling industry.

With gaming giants like Caesars/Harrah’s, MGM, Wynn Resorts, and Las Vegas Sands sitting on the sidelines, upstart companies like Party Gaming and PokerStars became extremely wealthy, with most of the revenue coming from the U.S.

For iGaming companies it was simply a matter of picking the low hanging fruit; their coffers were filled with revenue a fearful U.S. brick and mortar casino industry wanted no part of, but now, some 10 years later, the brick and mortar gaming giants are trying to catch up.

The rise and fall of the cannibalization myth

Where did this fear of online gambling come from?

For most gambling companies there was a fear of disrupting the status quo, which during the mid-2000s was a time of prosperity — gaming’s seven years of plenty if you will.

With gambling profits booming during the mid-2000s there was little reason to get out in front of online gambling or to adopt a potentially risky online expansion strategy, so instead of innovation and risk-taking this period was the genesis of the cannibalization argument, and for the mega corporations making record profits during the “Boom” years there was little reason to take the cannibalization argument past the anecdotal stage.

They didn’t need online gambling … but now they do.

As Prior intimated in his comments in California, U.S. companies let the billions of dollars generated annually from online gambling slip through their fingers over fear of the industry cannibalizing what they’d already built — apparently even mega-corporations can fall victim to the Sunk Cost Bias.

Then came 2008 and the economic collapse, and as revenue drops started to pile up year after year the brick and mortar companies started to take a second look at online gambling.

Still, it was only at the beginning of this decade that minds started to bend, and the casino magnates were dragged (in some cases kicking and screaming) into online gambling.

By 2011 these CEO’s and mega-corporations who were once so fearful of online gambling were now ready to take the plunge, and do you know what they found after diving in head-first, they discovered their previous fears were completely unwarranted.

As it turns out, online gambling is not a cannibalizing agent. Furthermore, as we’ve learned from the data that is now available, it’s a complimentary product, increasing profits at land-based casinos and bringing new customers from new demographics into their land based properties.

You’re entitled to your own opinions but not your own facts

At this time, not everyone is on board with online gambling expansion, but cannibalization is no longer a legitimate concern. Whatever negligible cannibalization occurs when online gambling is introduced is more than made up for by the new revenue stream.

The argument over whether or not online gambling cannibalizes land-based gambling is settled, and the answer is no, it does not, and there is plenty of evidence to back it up.

Recent attempts by anti-online gambling groups to say otherwise have been discredited and dismissed out of hand, mostly by the data and evidence below.

For instance, a spokesperson for the Tropicana informed me that 60 percent of their online players (all casino players mind you as the Tropicana doesn’t offer online poker at this point) are new customers, and were not in the company’s rewards program prior to the launch of online gambling.

Keith Smith, the president and CEO of Borgata’s parent company Boyd Gaming isn’t buying the cannibalization myth either. “About 85 percent of our online players have not had rated play at Borgata in at least two years,” Smith told investors during an earnings conference call in February. “Online gaming is growing our database,” Smith added.

The most startling number on this front came from David Satz, the Senior Vice President of Governmental Relations at Caesars, who told the Pennsylvania Democratic Policy Committee that a jaw dropping 91 percent of their online players are new customers that were not in their Total Rewards program prior to the launch of online gambling.

Satz went on to say that the roughly 10 percent of players who were already “known” to the company have increased their play in Caesars’ land-based casinos since online gambling launched.

Satz’s numbers were corroborated by independent polling data by the group Commercial Intelligence, which found that 83 percent of new players expect to visit land based casinos as frequently (70 percent) or more frequently (9 percent) than they have in the past, and this is just the tip of the iceberg of CI’s findings.

Poll demonstrates brand loyalty

Commercial Intelligence conducted a poll of 506 New Jersey online gamblers who had gambled online within the last 12 months back in January.

CI’s findings clearly indicate that online gambling is a complimentary product to a company’s brick and mortar operations and good experiences online and in land-based casinos will keep that customer loyal through multi-platform marketing.

According to CI’s data, players who had visited one of three top land-based casinos in Atlantic City over the past 12 months were likely to sign up at the company’s online site at the following rates:

  • Caesars 77%
  • Borgata 70%
  • Tropicana 62%

The most  important findings as it pertains to online gambling’s complementary role to land-based casinos was 41 percent of the online gamblers polled made their first visit to a land-based casino within the last year. With a full 21 percent saying they had never visited a live casino before they played online, indicating online gambling can act as a breeding ground for new customers at your brick and mortar properties.

Furthermore, of the players who only started gambling online after New Jersey’s licensed sites were launched in November of 2013, 71 percent tend to use the same gambling brands online and live.

The bottom line

If the number of new signups and brand loyalty aren’t enough to persuade you that online gambling doesn’t cannibalize brick and mortar gambling perhaps these numbers, once again provided by Tom Ballance during the online poker hearing in California will.

According to Ballance the total poker revenue (live and online) at the Borgata is up 60 percent during the first quarter of 2014 compared to the same period last year. Of course the Borgata did not offer online poker in the first quarter of 2013, so if there was a slight cannibalization of brick and mortar poker I’m sure the Borgata, and any other company, would be fine with it so long as total revenue was up 60 percent.

Even more proof of the symbiotic relationship between online and land-based gambling was Ballance’s statement that “by far” the most popular online rewards redemption were Borgata Comp Dollars, which was yet another area of agreement between the facts on the ground and CI’s January polling data, as CI found 67 percent of new online gamblers (players who started gambling online after Nov. 21, 2013) said land-based rewards were important in selecting an online gambling site.

Comments
June 2014