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Earnings potential for Web gaming in U.S. downgraded

3 Apr 2015

By Howard Stutz
Wall Street investment house Morgan Stanley has downgraded the future earning potential for the U.S. Internet gaming market, primarily because there has been little movement toward legalizing the activity in many states.

In a report to investors this week, Morgan Stanley gaming analyst Thomas Allen said the initial results from legal Internet gaming in Nevada, New Jersey and Delaware over the past 18 months “have been disappointing.”

He said there was little chance other states would legalize forms of Internet gaming this year. Allen also said it was a longshot for passage of a federal bill banning Internet gaming that is backed by billionaire casino owner Sheldon Adelson.

In prior projections, Morgan Stanley predicted the legal U.S. Internet gaming market would produce $5 billion in revenue by 2020. Allen now says the market could reach $2.7 billion by 2020. But the figure assumes California and Pennsylvania legalize Internet gaming, something he doesn’t expect to happen this year.

“We continue to believe that larger states ramping (up) should serve as a tipping point for other states,” Allen said.

The assessment by Morgan Stanley comes a week after Nevada and Delaware launched a multi-state poker network that pools players in the two states.

Allen said the three current Internet gaming states combined for $134 million in revenue in 2014, far below projections of $678 million. He blamed the low number on several factors, including problems with payment processing, lack of effective advertising, difficulties with geo-location, and a continuing illegal offshore Internet gaming market.

“We continue to believe that there is a material runway for growth,” Allen said.

California and Pennsylvania hold the key to expansion across the U.S.

Bills legalizing online poker in California have stalled because of infighting between Indian gaming interests, race tracks and card rooms. Momentum has also slowed for an Internet gaming bill in Pennsylvania.

Allen didn’t expect any state to pass an Internet gaming bill this year.

“Legislative processes continue to be slow as lawmakers remain unconvinced that online gaming is currently worth the hassle for limited tax revenue,” Allen said.

If California and Pennsylvania approve online gaming in 2016 — with the activity starting a year later — then other states, including New York and Illinois, might jump into the mix.

Based on 15 states having legalized Internet gaming by 2020, Allen said the market would reach the $2.7 billion amount. But much needs to fall into place.

Morgan Stanley hosted an online gambling forum last week to discuss the various issues. The growth of free play social gaming, such casinos games on mobile devices and Facebook, provided one of the few positive tones.

“The overall tone around real-money online gaming in the U.S. was depressed, but excitement around other means of online innovation appears to be building,” Allen said.

Meanwhile, Allen gave long odds for passage of a federal ban on Internet gaming. Last month, a subcommittee of the House Judiciary Committee held a hearing on a bill that would rewrite the Federal Wire Act and halt online wagering.

The bill is sponsored by Rep. Jason Chaffetz, R-Utah, but is backed by Adelson, the chairman and CEO of Las Vegas Sands Corp. Allen said lawmakers are split on the bill. The measure might make it out of the committee. But that would be as far as it goes.

Without carve-outs for pari-mutuel wagering, lotteries and existing legal online activity, the bill appears dead.

“Most operators do not believe (it) will pass, especially given Sheldon Adelson’s unwillingness for carve-outs,” Allen said.

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