Online gambling will be a reality in New Jersey. Governor Chris Christie signed a bill that sets a 10-year trial period for online gaming, a trial the state is unlikely to let expire. Casinos will be able to allow any game currently on the casino floor, and 15% of profits will be taken as a tax by the state.
Companies currently operating casinos in Atlantic City will be first in line, and it's unclear right now if others will be added. That means Caesars Entertainment (NASDAQ:CZR) and Boyd Gaming (NYSE:BYD) have a head start on competitors, one that both companies could use.
A boon for Atlantic City... or that's the hope
This is really a lifeline for Atlantic City, which fell behind Pennsylvania for second place in gambling revenue in the U.S. last year. The city generated about $3 billion in gaming revenue last year but that was down 8% from the year before, and there are rumors that multiple casinos are not far from closing. Online gaming could turn the decline into revenue growth if everything goes as planned.
What's unknown is the scale of gaming revenue New Jersey can generate. Is $1 billion within reach? What about $2 billion? Who will take share and how many competitors will there be?
There's also a question of whether or not Atlantic City will benefit or be hurt by online gaming. PokerStars recently announced an offer to buy The Atlantic Club, an unprofitable Atlantic City casino, with the hopes of gaining favor in New Jersey gaming. Is there any doubt PokerStars would rather have people gambling online than in an expensive casino with expensive tables, dealers, drinks, etc.?
This may actually be a negative for Atlantic City, allowing casinos to attract gamblers online instead of in-person and attracting smaller bets as well. Gaming companies will benefit from online gaming, that's for sure, but I'm not so sure Atlantic City will.
Is this the start of a trend?
The big question for investors is whether this is going to be a national trend. So far, Nevada and Delaware have passed some sort of online gaming bills, and others may follow. But it's still unclear if states will be able to accept bets across state lines, as they hope, of if the federal government will somehow get involved.
I think online poker and maybe sports betting will be a matter of time. Other games I see as less palatable on a national level. I'll predict that this is a mini-trend for online gaming. With actual play still months or even a year away, there is time to answer the other questions.
The most important question for investors is: Who wins?
Caesars is a clear winner, with gaming licenses across the country and the World Series of Poker brand. Boyd Gaming has a partnership with bwin.party and MGM Resorts (NYSE:MGM), which should be advantageous, but MGM was forced to leave New Jersey because of its ties to Pansy Ho in Macau, so MGM may be behind the curve.
Glu Mobile (NASDAQ:GLUU) and Zynga (NASDAQ:ZNGA) have also set their sights on online gaming to save their floundering businesses. Zynga has a huge play-money following, but it's unclear how that would transition to real money. I doubt that high-stakes players would see Zynga as an attractive choice off the bat, and once novice gamers lose their shorts after playing less-skilled play-money players, I doubt they'll stick around long-term.
Glu Mobile may take the supplier angle, providing games and back-end services to casinos that don't want to build the technology themselves. They would be competing with the likes of Shuffle Master, International Game Technology, and Bally Technologies, which have dealt with gaming regulators for years, so it might be an uphill battle.
One step forward
New Jersey coming into the fold is a big deal for the future of online gaming. This will put pressure on the Feds as well as provide another testing ground for gaming companies. I'd take a cautious approach and stick to brand names if you're looking to invest in the trend. Caesars is an extremely leveraged bet that may be saved by online gaming, MGM will play a big role even if it isn't in New Jersey, and Boyd Gaming has the partnerships to be in the game profitably.
Right now, Zynga and Glu Mobile are just too risky and I wouldn't bet that they can dominate online gaming.