Thursday, April 25, 2013

U.S. Online Gambling Revenue is WILDLY Overestimated

Well well, less than two weeks after I published my article about the online gambling industry in the U.S. being a "gold rush," we have a study released that shows that the estimates on which the state governments are relying are, like, totally out of whack. Before we get to it, though, a few points I'd like to go over.

One of the more egregiously stupid aspects of the gambling gold rush that I forgot to mention in my magnum opus on the subject is who is providing the numbers for analysis. It's not industry specialists. It's not casino companies, even though they would be just as likely to lie. It's not anyone you would expect.

It's the banks. The very financial institutions that stand to earn buckets of money implementing all of the financial infrastructure necessary and all of the underwriting are the ones producing the studies. Oh yes. They're completely trustworthy.

In my previous article, I said that "gold rush" was an apt term to describe this hullabaloo because like the California Gold Rush, it will be defined by a small number of people earning lots of money while the vast majority of people will be left poorer than they started. It now appears that the ones who will end up on top will be the casino technology companies and the financial companies. In retrospect, I should have guessed that the banks would have been included in the group of winners.

But that's beside the point. This article is about studies, and about studies I shall write! We saw some pretty optimistic numbers in that infographic I posted a few weeks ago, although even that wasn't as optimistic as this recent study. Also noteworthy, the graphic specified numbers for social online gambling, but I still don't know what that means.

But what about these recent studies? So what are the number, eh? What's the 411? Well I'll tell you.

The entire house of cards that is online gambling in the U.S. is built on a study released in January of this year. It was composed by Wells Fargo and predicted that the online gambling market in New Jersey could grow to $1.5 billion within the first five years. The treasurer for New Jersey, Andrew Sidamon-Eristoff, ran with this, stating that the first year revenues for New Jersey's market would be $1.2 billion.

This study is in direct conflict with a study done in 2010 done by the Interactive Media Entertainment and Gaming Association. The iMega, as they refer to themselves, is basically a lobbying group for online casinos. The study was produced to motivate the U.S. to re-open its borders to online gambling, which means that it was already optimistic! Keep that in mind when reading the numbers.

The iMega study estimated between $210 and $260 million in overall revenue, giving $32 to $39 million in tax revenue. Considering that New Jersey's budget deficit is $11 billion, this number doesn't even count as a drop in the bucket. It's more like putting a bucket in a humid room.

The authors of that study claim that the study was being conservative, since it was intended to support the New Jersey initiative, which began back in 2010. They feared an optimistic study would be a hard pill to swallow. Obviously, their usage of the word "conservative" is what the rest of us would call "realistic." Also, can I just say how stupid I find that statement. Fearing that politicians would be unreceptive to an "optimistic" study is like saying a starving dog would be unreceptive to a pork chop.

I understand that iMega is in a difficult position. They want online gambling to expand across the U.S., so they must now support a study that goes against their own study while simultaneously saying that their study still has merit. In service of this goal, they are talking up Wells Fargo by saying that their estimates must also be conservative, because Wells Fargo is conservative.

First, Wells Fargo? Conservative? There wasn't a bank in America that could be called conservative. The old days of stodgy old bankers doing boring stuff with money are looooong dead. Wells Fargo is just like every other bank — a massive complex of aggressive, risky investments designed to generate as much short-term revenue as possible. They're conservative like I'm the Queen. Of maybe just the band Queen. Or maybe the Queen of Hearts.

Second, if iMega's estimates were conservative at $210 million, and Wells Fargo's estimates are conservative at over six times that number, iMega is incompetent. The only way to explain their numbers is that they mixed up the online gambling numbers with those for the snack cake market. The industry can't have it both ways. One study is correct, and the other is wrong. If only we had a way of choosing between the two. Like, say, another study. If only... if only....

Oh right! We have another study. And guess on which side of the argument it falls. That's right Timmy, this study finds a number almost identical to the iMega study of $260 million.

This newest study was released by Gambling Data, an industry research firm. While I think that almost everyone in the industry is lying, an independent research firm is least likely to lie, so their numbers are probably the most trustworthy. That being said, $260 million in taxable revenue would still be very high in my opinion.

I look to some of the best publicly available data — the Spanish study I wrote about some time ago — runs counter to this. In that Spanish study, all of Spain's online gambling industry, which includes revenue from throughout the Eurozone, was only $873 million. Even if these revenues came only from Spain, Spain's population is nearly fifty million. New Jersey's population is nine million  — over five times the population. And remember that lovely chart in my earlier article: Spain gambles quite a bit more per person than the U.S. does.

Based on that Spanish data, what numbers can New Jersey expect? Well, if we divide Spain's revenues by five, we get a number of $174 million. I want to go on the record here and say that I predict that New Jersey's annual online gambling revenue will be around $174 million.

Well, that's enough babbling and ranting. The ultimate point is that the estimate that proponents are parading around is nonsense. Atlantic City generated slightly over $3 billion in profits in 2012. The idea that online gambling that can currently only serve New Jersey residents would generate half of that is just balls-to-the-wall insane.

But then again, this is gambling and politics. Anyone who expected a reasoned, level-headed process is just as nuts.

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