'Would we abstain from spending $10m on a licence? Probably not'

Penn National Gaming signaled its intent with regards to interactive in 2015 by appointing experienced European igaming exec Chris Sheffield. Since then, he has overseen the building of a substantial social business and databases of social and casino players he sees as ripe for conversion to real-money online when the opportunity comes. Hence his describing the 54% tax on online slots at the time it passed as “completely unworkable” and stating that the only reason anyone would buy a licence was to begin a lobbying effort to reduce this. We caught up with the Penn Interactive Ventures MD once the dust had settled a few weeks later to find out if the operator’s position had changed and where Sheffield sees the opportunities for building a viable online real-money business in the state

iGaming Business North America: You were highly critical of the online slots tax and the conditions attached to Pennsylvania’s igaming licences when it passed its law. What is your position now you’ve had a chance to look more closely? Chris Sheffield: At the moment we are assessing the situation and reviewing our options. For PNG, the gambling expansion in Pennsylvania is much more than just igaming because the legislation also covers satellite casinos, VGTs at truck stops, casino ownership and gaming at airports, all of which are relevant.

We’re seeking clarity on some areas to do with igaming, such as where equipment needs to be located and the approach to skins. We are also in discussions with platform and content providers to help assess the situation and refine our strategy.

Certainly, the tax on slots is way too high, but I cannot envisage a situation where Penn will not be entering the igaming market in the long term.

iGBNA: So does that mean Penn National won’t initially be investing in and taking up its main licence? CS: Would we abstain from spending the $10m? Probably not. I think we will be operating something whether it’s casino, or just table games. We don’t know yet.

iGBNA: So the plan is to come in from the start of the market, but it probably won’t be slots?
CS: Mmm. It may not be. We are still very frustrated with the tax rate on the slots side. I don’t think we can make that work. But we are looking at it, to see if there is there any possible way iGBNA: So it sounds like you haven’t quite decided on slots yet?
CS: No, we haven’t. There are loads of conversations going on. One of the things we are thinking about the slots is: can we get the content cheaper? Is there a different type of deal to be done with the providers?

There are many things we are trying to do right now to get a model that works. It has also become apparent in the past few weeks that there will be many more options for platforms and content in PA compared to NJ.

We have been approached by a number of new entrants from Europe and beyond and we are keen to review all of the latest options. iGBNA: What is bringing these guys out of the woodwork now, given that big operators such as Penn would widely be assumed to have their platform and content partners already lined up?
CS: I think everyone assumes Pennsylvania is the start of a domino effect, so if you don’t get into Pennsylvania, then this will severely restrict you further down the line. I think it’s all tied up with sports as well.

There’s this huge feeling that legalized sports wagering across the US is going to happen. People are thinking, “We’ve got to get a position now. If we’re not in Pennsylvania then we are going to miss out.”

iGBNA: As the new law stands, the casinos would have to launch products within 120 days of receiving their licence or risk losing it, so what will Penn realistically launch then?
CS: Table games would appear to work at the proposed tax rate but again this needs more clarity. There is some uncertainty about what constitutes table games, lottery games and casino games, and the lines here are blurred.

Certainly, if you look at the games that have been defined as lottery, they look very similar to slots. They might not have reels on them or whatever, but they have the same math behind them, and arguably they probably are slots, but they will not be categorised that way. There’s an opportunity to look at table games in a similar fashion as well, and there may be opportunities to build a business around live dealer products and the usual table games.

We are also unclear as to where virtual racing sits — is that a table game or a slot? This product has just launched out of New Jersey with SugarHouse. There’s not enough clarity yet and too many question marks.

As we know from Europe and now NJ, poker is not what it used to be and seems to be a product in decline that’s less appealing to recreational customers. Based on New Jersey numbers, it does not seem that poker is going to be a business to get excited about in PA, especially with liquidity likely divided between different networks.

iGBNA: Other than the slots tax, which other regulation or conditions would need to be changed to make this a viable and sustainable market for Penn and other stakeholders in PA?
CS: There is a very ambiguous referral to skins, which means potentially somebody with a land-based licence could have as many brands as they liked operate off that licence.

So you could have operators from other states, or from Europe, paying a much smaller amount of money because they are already sitting on the licence that, for example, we paid for — and then they’re sticking a skin up.

It’s very similar to what you find with Tropicana and Gamesys in New Jersey, and Golden Nugget with Betfair and SugarHouse. So, at the moment, does that mean a casino could literally pay the $10m and then 100 people could come and then set up brands on their licence? They could look to make that money back that way. New Jersey limited the number of skins per licence to five. If there’s no restriction, then what’s stopping me from having 100 on my licence?

What the majority of land-based casino operators wanted in the legislation was for only land-based operators to be able to launch land-based brands in the state, because that protects the land-based businesses, which employ tens of thousands of people and pay huge amounts of tax. Obviously, a major concern from politicians and operators is that ideally igaming should not cannibalize the land-based businesses.

Clearly online-only and out-of-state operators would have no reason to protect land-based businesses and this is a key area of concern.

And there’s a risk that skins operated from out of state or by offshore operators would be totally focused on ‘sucking out’ the entire customer’s wallet rather than considering how to use igaming in conjunction with the land-based business to increase the wallet size and experience for the customer.

We also know that platform providers are keen to leverage their existing infrastructure from outside PA. Clearly, long term it would not make sense to have to build data centres and infrastructure on a state-by-state basis as igaming opens up.

IGBNA: How would the Hollywood Casino real-money and social brands run alongside each other in a regulated PA igaming market?
CS: If you are in a state where both social casino, which is everywhere, and real-money gaming is legal, then you have a choice of being able to use the portal to go into either your social or real-money account.

If you are in a state where there is no real-money gaming, then it be would only the social casino that you’d see.

The Hollywoodcasino.com platform has always been key to our strategy for real-money igaming. The social platform from Sci Games already features slots and brands from the land-based world and it is obvious that some social casino players will migrate to real-money gaming once it is legalized in their state.

Personally, I’m really interested to see what conversion from social to real-money will look like and the impact that real money igaming will have on social casino games in the longer term.

We have already got millions of social casino players with hundreds of thousands of these in Pennsylvania, and you would think a large proportion of those who spend money will convert over.

That was always our strategy — to build databases now of slots and casino players using that brand everywhere, and then when real-money happens we have got a head start, because we have got customers who know what our games are like, and whom we know spend money, so we know a lot about them.

It’s much easier to convert them into real money rather than having to find a totally new customer who’s never before engaged with you or the brand.

IGBNA: The new PA gaming law would legalize and regulate sports betting should a SCOTUS ruling in NJ’s favour as early as Q2 of 2018 lead to a change in the applicable federal law(s). How is Penn preparing for this eventuality in PA?
CS: As with igaming, it is obvious that land-based operators such as Penn will benefit massively from sports betting should this be legalized any time soon. We have been actively involved in the AGA’s Sports Betting Task Force from day one, and as we already host sports betting in our Nevada properties and provide ADW online, so this is not going to be something new for our wider business, but will be exciting if rolled out to other states.

This is an abridged version of the interview running in the forthcoming issue of iGaming Business North America.