Challenges are clear for online gaming industry success

The gaming industry is currently in the most dynamic period since the explosion of casino gambling in the late 1980s to 1990s outside of Nevada and New Jersey. The changes happening in the gaming industry today are more complex. They include innovations such as the rapid adoption of iGaming, or internet/online gaming, the use of online sportsbooks and the consequent move away from brick-and-mortar casinos, positioning sportsbooks for even more rapid expansion than retail locations.

The American Gaming Association announced in February that U.S. gaming in 2022 tallied a record $60 billion in revenues, topping 2021’s $53 billion—which itself was a record year. Of the $60 billion, sports betting, though a recent phenomenon, generated $7.5 billion in revenues in 2022, with online betting adding another $5 billion. Super Bowl wagering slowed this year compared to last, with $153 million total bet and operators taking in $11.4 million (compared to last year’s $180 million bet with revenues of $15.4 million), according to the Wall Street Journal. More adults actually bet on this year’s NCAA men’s basketball tournament, though the estimated total wagering for March Madness was only a 10th of that bet on the Super Bowl.

Traditional slot machines and gaming tables experienced a bump in revenues in 2022 as well. But long-term, the popularity of these types of gaming is expected by industry experts to wane, particularly as the demographic trend for this type of gaming is toward an older population. According to Shawn Stewart, gaming sector leader at Grant Thornton, the challenge for the industry is that online gaming and sportsbooks, which are much more popular with younger gaming customers, have not adequately resolved key impediments that are hindering the widespread use of these formats. Only when these issues are resolved can the level of their use adequately counter the expected future decline in traditional retail casino games. 

Increasing the acceptance of online gaming was a primary topic of the recent 2022 Global Gaming Expo (G2E), where speakers cited many reasons for this gap between its potential popularity and what is possible now given its present impediments. To grow online gaming, industry experts agreed that success involves addressing three main challenges: responding to new customer trends, winning out over increasing competition, and navigating ever-changing state and local laws.

Serving new gaming preferences

Not surprisingly, the growth of an increasingly cashless economy, accelerated by a surge in online purchasing during the pandemic, has already had a profound effect on the gaming industry. Joshua Bushard, a partner in Audit Services and a leader in the Gaming Practice for Grant Thornton, said that has led to an increase in creating an app-driven omnichannel experience at casinos, citing MGM Resorts as an example.

The gaming app, BetMGM, provides a full array of ways to bet, but key to the operation is providing the app user extra rewards and benefits only obtainable at a visit to a property. Aligned with that capability, MGM Resorts locations drive customers to use the BetMGM app to obtain the fullest experience at their facilities, a capability that is widely viewed as a “must.”

Related to omnichanneling is the idea of customization, making the gaming experience unique for each customer, while using individual preferences to introduce customers to other types of gaming. For instance, a sportsbook bettor may be very comfortable with the intricacies of different types of sports bets, but is uncomfortable placing an online bet, preferring to visit retail sportsbooks , said J.J. Bennett, an Audit Services senior manager at Grant Thornton. While accommodating that gamer at the casino, a gaming company can use that familiarity to slowly introduce the app at the gamer’s pace and level of comfort – and build brand loyalty in their retail environment where gaming options are increasingly varied.

Growing market share and market volume

Many in the sports betting industry compare the present state of businesses in the gaming industry to the early business model of the ride-sharing company Uber, which succeeded despite willingly incurring losses for years.

“Uber was willing to be a loss-leader in the personal transportation business for a while. In doing so, they anchored people in and grabbed a high market share,” Bushard said. Since then, Uber has both raised prices and changed driver pay in an effort to finally turn a profit.

Major sportsbook companies like DraftKings and FanDuel are following the same “playbook” in that they are currently forgoing profits to garner dominant market share, both to secure their own position relative to each other and to squeeze out competitors. To do that successfully, major sportsbook companies know that the goal is to differentiate their product from their competitors.

One other goal of the major sportsbook competitors is to increase the total market for sportsbook apps, which at present is approaching five million users. Garnering market share must include making gaming apps more user-friendly to accommodate a majority gaming customer who still prefers to visit a physical location. Part of this solution couples creating an omnichannel customer experience together with forming quality partnerships to build the market. There is talk of gaming companies partnering with other sports-related businesses such as sports apparel companies in order to gain access to those customers.

Online gambling regulatory trends

Stewart has said the move of U.S. states to legalize sports betting has understandably been driven by the enticement of additional tax revenue. With about 30 states where sports betting is now legal, the remaining states are seeing gambling revenues travel outside their state when residents use online gaming apps. However, the surprise to many legislators where sports gambling was legalized was how actual tax revenue fell well short of expectations.

States that have legalized sports betting commonly will tax sports-betting profits. However, because competition in the market is still intense, most of the companies’ profits are being reinvested in player promotions, and lowering the taxable income. States are now re-examining statutes to see if there are ways to limit the amount of income deductions allowed to drive the tax revenue they are seeking.

Where taxable profits seem more promising is where real money iGaming is allowed. Right now, only a handful of states allow this, but where it is, it has been a more reliable producer of tax revenue. However, the stigma against states “encouraging” gambling beyond sports is making it a tough sell for reluctant legislators.

On the federal side, sportsbooks and casinos alike are positioned to challenge the dominance of Native American-run casinos, Bushard said. Starting out with bingo halls in the 1970s, certain Native American tribes successfully parlayed their unique sovereign status within the U.S. to successfully run casinos, winning a landmark ruling that their status exempted them from federal gambling prohibitions. However, gaming compacts in Washington state have challenged the special status of Native American casinos on the basis that they constitute racial preferencing. In California, two propositions were on the fall 2022 ballot that would have allowed in-person sports wagering at Native American casinos or allow online sports betting from commercial operators. Though both propositions failed, the effort to enact them attracted over $200 million in campaign support. Stewart said the trend is clear that the current status of Native American casinos is being challenged which has implications on both land-based and online gaming.

All gaming industry experts agree that the current growth of sportsbook gaming is almost certain to continue, along with the anticipated growth of real money iGaming. But the question of who will benefit is very uncertain. There is still room for outsiders to make an impact in the effort to make iGaming more accessible and more integrated with existing casinos.