Fortuna audaces iuvat is an old Latin proverb that, loosely translated, means “Fortune favors the bold.”

For centuries it’s been used as a motto for various branches of the military service and in family crests. It’s also often used to describe a “first-in” business strategy. After all, the early entrants into a new market almost always get to dictate how that market will evolve, in addition to capturing the lion’s share of the proceeds while everything is new, exciting and full of potential.

But while being bold or first may lead to fortune, these attributes don’t necessarily guarantee that the path to success will be easy or obstacle free. This observation has been born out in any number of industries over the years, one of the latest being the nascent for-pay online casino gaming market in New Jersey. 

When the re-interpretation of the Wire Act by the Department of Justice in 2011 cleared the way for states to consider the legalization of various forms of online wagering, New Jersey quickly planted its flag in this virgin gaming territory, becoming the first and so far only state to approve both Internet poker and casino games in 2013. State officials heralded the measure, claiming it would be a shot in the arm to the state’s existing casino industry (only Atlantic City casinos could host iGaming sites), and estimated online gaming would generate $1.2 billion in revenue during its first year of operation, which would provide the state with $180 million based on the 15 percent Internet gaming tax. Enticed by both the opportunity and potential profits, six Atlantic City-based casino operators applied for and received Internet gaming licenses and authorized iGaming platforms officially went live in November 2013. At this point in time, as the first state to approve and launch casino-style gaming on the Web, New Jersey’s iGaming forecast appeared sunny.

But fast forward a year, and the Garden State’s Internet gaming gambit appears anything but successful and secure. Indeed, gross revenues for the industry’s first full year of operation in 2014 amounted to $122 million, only 10 percent of the $1.2 billion initially predicted by the state, leaving officials to try and determine what went wrong and what is needed to bring the market up to predicted revenue levels.   

“Even one year into the process with the experience which has been gained, Internet gaming is still in its early stages of development and the industry and the regulators continue to learn from each other,” said David Rebuck, director of the New Jersey Division of Gaming Enforcement in a January report on the state’s iGaming market. “From a regulatory standpoint, our system is working… However, we are far from out of the woods; we must continue to be vigilant and ready to take on new challenges as they come our way.”

The poor initial results of New Jersey’s iGaming venture have some rethinking the overall impact for-pay online casino gaming will have going forward.  

“Do I really think [online casinos] are going to be the game changer some people thought? The answer is no I don’t,” said Steve Rittvo, chairman of The Innovation Group of Companies, during a session at Global Gaming Expo (G2E). “I think… that the parade has passed for the for-money gaming model. I think social gaming and social play is really generating more revenue right now. I think it will continue to generate more revenue than for-money play.”

Others, however, believe that it is still too early to pass judgment on New Jersey’s web gaming venture; that the numbers are not as bad as they first appear and steps are being taken to address issues that slowed market growth. And while Internet gaming may not reach the lofty revenue estimates first predicted for New Jersey and the U.S. as a whole, it is still a worthwhile business to pursue and develop.

“We believe in Internet gaming,” said James Murren, chairman and CEO of MGM Resorts International during a general session at G2E. “I am not intimidated by it as a bricks-and-mortar operator.... I do think that it is a business opportunity for MGM, and I think we are all kidding ourselves if we think it is going to go away.”

 

WE’VE GOT A PROBLEM

So, what went wrong during the first year of Internet gaming in New Jersey? A better question may be what didn’t.

“One surprise from a regulatory perspective was how operationally unprepared the platforms were to implement Internet gaming in a regulated U.S. environment,” Rebuck said. “They thought they would be able to flip a switch and start up their current system here. They quickly found out that was not going to happen.”

As reported in various regional newspapers and online gaming news sites, these operations issues included:

Geolocation glitches—New Jersey gaming law stipulates iGaming can only take place within state boundaries. To make sure this would be the case, online gaming regulations mandated operators use geolocation technology to track the whereabouts of customers while playing at web-based wagering sites. Once the player crossed a state border, the geolocation system would alert the operator to shut the session down.

On paper, this appeared to be the ideal solution. In practice, not so much, with reports claiming the geolocation technology had trouble distinguishing borders and would automatically reject customers who launched playing session at a location near state lines.

Payment problems—Customers using credit cards to set up wagering accounts at New Jersey iGaming sites also ran into problems, usually in the form of transaction denied notice—not all that surprising really, since most major credit cards still do not approve any transactions involved with online wagering, a legacy of the Unlawful Internet Gambling Enforcement Act of 2006, which had made finical institution acceptance of such monies a punishable act. Today, roughly 27 percent of Visa and 56 percent of Mastercard transactions with New Jersey online gaming sites are still rejected, according to information provided by the Division of Gaming Enforcement.

Customer confusion—Affiliate marketing companies used by New Jersey iGaming operators often promoted unsanctioned web gaming sites along with those authorized by the state. Customers, unable to tell the difference, would play on these unlicensed sites.

Poker bust—When iGaming legislation was passed in New Jersey, many thought Internet poker would be the primary beneficiary. This was not the case, and online poker games taking in a paltry $29 million in 2014. Much like the online casinos, that state’s poker networks were plagued by connectivity and payment issues. The inability of some of the larger established online poker networks such as PokerStars to clear licensing hurdles has also hit the industry hard, leading to a lack of overall liquidity and smaller jackpots which does little to entice online poker players away from better funded sites.

Whatever the reasons, the slow startup for New Jersey online gaming has caused a bit of a shakeout within the market. Two of the Atlantic City operators originally offering online gaming, Trump Taj Mahal and Trump Plaza, have since closed their sites. Ultimate Gaming, which had been affiliated with Trump Taj Mahal, also vacated the New Jersey iGaming marketplace. Betfair, which was tied in with Trump Plaza, shifted its operation to Golden Nugget but decided to drop its Internet poker service during the transition. With the loss of Ultimate Gaming and Betfair sites, two New Jersey-based online poker networks remain in operation, affiliated with Caesars Atlantic City and Borgata.

More problematic still, the less than expected online gaming results emanating from New Jersey have given renewed vigor to anti-Internet gaming crusaders. One such individual is Las Vegas Sands Chairman and CEO Sheldon Adelson, who has thrown his influence behind the Restoration of America’s Wire Act, a federal bill that would once again make online wagering illegal within the U.S. The measure failed to make it out of legislation last year, but many believe the bill will be re-introduced sometime this year.  

 

PATIENCE REQUIRED

Of course, there are two sides to every situation, and for those that support iGaming, the results from New Jersey have not been as dire as reported. Five brick-and-mortar Atlantic City casino operators (Caesars, Borgata, Golden Nugget, Tropicana and, most recently, Resorts Atlantic City) currently host 15 Internet wagering sites. According to the Division of Gaming Enforcement, as of January 2015, these sites offer 423 authorized games, and have a combined 506,172 player accounts, a 300 percent increase from the 126,231 accounts as of December 2013.

Although these sites combined to generate only $122 million in revenue for 2014, that number is not terribly out of line with the more modest estimates made for the market by entities other than the state of New Jersey, which was extrapolated from a Wells Fargo Securities report describing how big the market could eventually become. Gambling Data had predicted $235 million in gaming revenue for the first year of New Jersey online gaming operations. Econsult predicted $210 million. Eilers Research said the market would be at $228 million in revenue when it matured in three years. In the prism of these predictions, the first year take of $122 million doesn’t appear terrifically out of line.

Further good news can be found in this year’s revenue statistics, which showed year-over-year growth in both December 2014 (22.8 percent) and January 2015 (22.3 percent), according to various reports.

This uptick in results can partially be credited to needed improvements made to online gaming platforms. The Division of Gaming Enforcement reports geolocation issues have been resolved, and the technology currently boasts a 98 percent success rate. A new credit card code has also been created for New Jersey online gaming which is expected to go into effect soon and should substantially lower credit card rejection rates. Internet-friendly payment processing companies such as Neteller have also been recently licensed, which should further aid player payment processing. The state has also created a special online seal to help players distinguish between licensed and unlicensed online casinos.

New Jersey has also started negotiations with established online gaming jurisdiction to boost the player pool. “An important area for the future of Internet gaming is interstate/international compacts,” Rebuck said. “This type of cooperation between jurisdictions is very important for building liquidity in peer-to-peer games such as poker…The Division has been in discussions with other jurisdictions, such as Nevada and the United Kingdom, but no compacts have been entered to date. The Division is open to discussions in this area and always seeks to ensure that any agreements are most beneficial to New Jersey’s Internet gaming industry.”

Despite the down revenue results, a number of gaming entities have shown a willingness to enter the New Jersey online gaming marketplace. Recently, Resorts Atlantic City had completed a beta test of its online gaming site and was preparing to go live at the time of this article. A few months earlier, Pala Interactive, a subsidiary of the Pala Band of Mission Indians, which owns and operates the Pala Casino Spa and Resort in California, launched palacasino.com with Borgata acting as host, becoming the first gaming tribe to enter the New Jersey online marketplace. Jim Ryan, Pala Interactive CEO, told North New Jersey.com that he believes the online market will double to $240 million in yearly revenue once it matures.

It also seems the New Jersey doldrums have not had any lasting effect on jurisdictions seeking to join the Internet gaming pool. Pennsylvania lawmakers are reportedly weighing an Internet gaming bill to help fill a projected budget hole. California is still debating a number of bills calling for the legalization of online poker. Nevada and Delaware, two states where online poker is already legal, are in the final stages of a system that would share online poker players. The measures are only the tip of a growing Internet gaming iceberg.

“It’s come to the point where we can’t wish Internet gaming away,” Murren said. “Who better [to develop it] than the gaming industry? Let’s face it, if someone has a bad experience gambling illegally online here in the U.S., we are all tarnished. So I feel it is the responsibility of all of us to accept a leadership role.

 “I also believe there is a commercial opportunity if [online gaming] is done correctly.”