You knew this wasn’t going to be easy.

New Jersey’s Internet gaming launch—on which ride the hopes of Atlantic City in particular and the growth of U.S. brick-and-mortar interactive gaming businesses generally—was marred by technical glitches, so-so marketing and weak revenue results. With all of that, the apparent strength of poker as a complimentary online business and the large numbers of sign-ups was enough to support the case for significant, statewide annual revenue projections that most place in the $400 million to $500 million range.

All told, online gaming accounted for $8.4 million in revenue from opening day in late November through the end of December.  Of the six licensed operators, Borgata garnered the largest share, capturing almost half of the market, followed by Caesars Entertainment. The leading operator captured slightly more revenue from poker than from online casino games, which was one of many surprises, more bad than good.

“It’s definitely disappointing,” Christopher Jones, managing director-senior gaming and lodging analyst at Telsey Advisory Group, said of the results. He talked to bwin, the partner for Boyd and Borgata, which characterized the challenges of the first month as threefold:  continued issues with geolocation software; an inability to transfer funds; and the lack of a mobile wagering application that is actually viable.

On the plus side of the ledger, there were 140,000 sign-ups during the reporting period (though it is unknown how many are duplicates); online poker revenue almost equaled live poker revenue; and payments processing was relatively smooth. “There haven’t been reports of major problems,” said Fred Gushin, managing director, Spectrum Gaming Group, in a webinar called, “Lessons Learned in Online Gaming,” early last month.  “About 3,000 transactions have not been fully accepted by the issuing banks. Over time, as more states legalize Internet gaming, they’ll be able to synchronize these types of payments with the banking system in the U.S. and it will become a lesser problem.”

“Everybody needs to take into consideration that this industry is in its infancy,” Tropicana President Tony Rodio told the Associated Press last month when announcing his property’s online partnership with Virgin Group and Gamesys. “There will be mobile applications, and a lot of the slot content isn’t operational yet.”

 

TECHNICAL DIFFICULTIES, EMERGING UPSIDES

Clearly, it will help to be patient. Chat rooms abounded with tales of players being cut off from sessions in mid-hand. “For bwin, their mobile application today only works when you’re connected to the Internet, which kind of defeats the whole purpose of mobile,” said Jones. “The conversations we’ve had about Caesars’ mobile application is that it’s borderline unusable. When I think about the younger generation, there are people out there who just have an iPad or an iPhone. You need a mobile application for it to work an HTML 5 option as well. These are just growing pains but they have to be fixed in order for it to work.”

Jones noted that there’s a requirement in the software that needs to check your location every couple of minutes, so it recycles whatever functionality the app is engaged in and instability can result. “It might be an issue with the software but, then again, it might be that there’s no consistency in the device that is being used, “ said Jones, who added that compliance issues might be playing into the problem as well. “The operators have been physically going through some of the border areas of New Jersey. When you sign up, they will tell you if you are within a mile or two of the border that’s a gray area and they can’t guarantee that you’ll be able to get consistent service or if you’ll be able to log in at all. I think that comes from state regulators taking a very hard line about accidentally allowing someone from a neighboring state to log into your online gaming site. New York is obviously easy because you have a giant river as a border, but for the Pennsylvania state line it’s a little more challenging.”

That said, “mobile is going to be the upside surprise here,” said Jones, simply because there’s a massive transient community that goes through New Jersey, such as the people who take the Northeast Corridor Amtrak trains between New York City and Philadelphia each day. Newark Airport is one of the busiest airports in the world. There’s also a lot of commuter traffic in New Jersey, and the Jersey Shore is a very popular summer destination. “People rent a house for a week and then another group comes in,” noted Jones. “There are a lot of positives that will drive New Jersey’s online gaming; they just have to get through the growing pains.”

Jones also found it remarkable how poker outperformed online gaming, running counter to conventional wisdom coming from the European online gaming experience. “One possibility is that there are already a number of players who understand how to play online poker, whether they used to do it before Black Friday and/or kept playing, now there’s a legal and easy way to do it and you had a huge adoption rate,” he said. “You got up to good numbers of players very fast at bwin; Party Poker is one of the most recognizable games in online poker. On the casino games front, there may be a bit of technology mistrust from a generational perspective. At the same time, bwin and Borgata were the only ones running it the whole time using IGT content. Caesars isn’t using branded content; I believe they’re trying to use some of their own content and I personally think that’s a very significant mistake.”

Another area of disappointment for many observers was the initial marketing, which didn’t make it clear that transients in New Jersey are even eligible to gamble online. “We haven’t seen the marketing blitz that was expected yet,” said Jones. “Sports team sponsorships, ads in airports, trains stations, you will see ads there.  The ads have been generally weak about being explicit about what’s going on.”

 

THE EARLY IMPLICATIONS

It’s wise not to overstate the importance of one state’s opening month Internet gaming numbers; but neither should they be minimized because, in point of fact, a lot of people are looking at New Jersey right now. “I don’t think you can ignore it,” said Jones. “A lot of things need to be done; a lot of heavy lifting. If development costs all of a sudden start to spiral well into the seven figures, it’s a surprise for people who thought this was going to be a minimal capital investment and, when they wake up, they were just going to have this nice little cash flow generator.  I don’t think that’s the case. It’s going to take a little more capital investment. Seasoned operators have been saying from day one it would be a long haul.”

The New Jersey effect could be felt as far away as California, for instance, where industry actors are keeping a close eye on developments, said Dennis Ehling, an attorney with the Los Angeles office of Blank Rome.

“There are a lot of people out here paying attention,” said Ehling. “The headaches that go with a launch like that and the revenue report… while it’s still early we haven’t quite seen the explosion yet, so that gives some people pause. On the other hand, what is fairly clear in the early days is that there’s much more interest initially in poker than in some of the online games. That gives some support for the thought that poker is likely to be the driver and it doesn’t cannibalize existing business. So that can help to assuage fears that make some of the tribal governments that spent a lot of money building out their brick-and-mortar facilities hesitant.”

Ehling believes that Internet gaming legislation in California is a 2015 proposition as this year is an election year and two bills that were introduced in the current legislative session have yet to make it out of committee. Sen. Lou Correa’s bill, which had the support of several high-profile tribes, including Pechanga, is a poker-only bill.

“I don’t see anything going anywhere without tribal support and I don’t see the tribes comfortable with anything but poker,” said Ehling. The early returns from New Jersey will only strengthen that view.

Beyond the election-year issue, the absence of an immediate fiscal crisis could retard legislation in California as well. “The fiscal problem that was driving a lot of the arguments in favor of Internet gaming licensing have subsided, at least a little,” said Ehling. “It’s not nearly as pressing, so this issue is not going to move to the top of the agenda. Even within the tribal nations, there has not yet been unanimity that Internet gaming is a good idea.”

Gushin, who cited Pennsylvania and Colorado as states where legislation could happen in 2014, sees state lotteries and tribes getting in the game this year, regardless how New Jersey unfolds. 

“We can’t forget state lotteries because many are contemplating going into the Internet gaming field,” he said. “This is going to be extremely interesting as casino licensees on the one hand and state lotteries on the other hand  get involved in Internet gaming. Lotteries are the marketing arm for gaming for state governments. They have played a very active role in marketing over the years and they are prepared to move into Internet gaming. They enjoy high awareness levels in the states and generate a lot of revenue for them and they are very well-positioned to enter the online market along with casino licensees. It’s going to be interesting, where there are casinos and lotteries in the same state, whether Internet gaming will fall under lotteries or the gaming commissions.”

Tribes, for their part, are not going to sit back and allow other jurisdictions to have Internet gaming exclusively; they want to participate, said Gushin. “There are arguments to be made that under Class II gaming, which is essentially the province of the tribes, there may be opportunities to go forward on Internet gaming,” he said. “There are likely to be a lot of creative approaches to this, and court challenges as well. My point on the tribes is they cannot and should not be excluded. They’re an important component of the American gaming industry and they will be players in Internet gaming.”

On the revenue front, most observers seem to be holding the line around the $400 million mark, though there are exceptions on the low- and high-ends. Spectrum Gaming Capital has estimated that the New Jersey revenue for 2014 will be $400 million. “We feel confident that that’s actually a conservative projection,” said Gushin.

“We’ve always been around $400-$500 million and we haven’t changed on that,” said Jones. “You can see New Jersey fixing the issues and righting the ship. I’ve seen estimates well north of that and I struggle with how people get there.”