Roll the Dice: The Future of Online Gambling

Despite some initial misdeals, experts say Atlantic City’s online gambling sites hold a winning hand.

Deal Her In: Professional poker player Jamie Kerstetter moves seamlessly from the tables at the Borgata in Atlantic City to the resort's own gambling website.
Photo by Tim Townsend

For Jamie Kerstetter, online gambling is a win-win. For New Jersey’s new online gambling business, she’s a dream date.

One recent evening, Kerstetter—a former tax attorney from Monroe Township who now makes her living playing poker—was eliminated from a live tournament at the Borgata in Atlantic City. Call it a night? No way. Settling in with her laptop on a comfy bench in the casino’s B Bar, she skirmished with anonymous opponents in a tournament on partypoker, one of the Borgata’s three online gambling sites.

On her screen, cards were dealt rapid fire on an animated poker table. Kerstetter’s fingers danced over the laptop’s touch pad as she made her betting decisions. Virtual chips swooshed around the virtual felt.

All the while, Kerstetter chatted with friends, allowed herself a single beer, and in the end finished 25th in the online tournament, earning $239 in an event with nearly 300 entrants. The buy-in was $100.

“I made $140 while drinking beer,” joked Kerstetter. “What’s not to love?”

Her quip represents the reaction serious players have had to New Jersey’s, launch of online gambling last November.

In April 2011, the earnest, cerebral 31-year-old left the country after the U.S. Department of Justice cracked down on Internet poker. Living in Mexico in order to play online, Kerstetter missed her family and friends. When New Jersey passed the law legalizing Internet gambling in February 2013, it meant she could have her poker career and proximity to her loved ones. Now she can play online for convenience or live at the casino tables for big money and fame. Returning to her home state, she even landed a sponsorship from partypoker.

For New Jersey’s Internet gambling industry itself, things have not gone quite as smoothly.

Stringent regulations, money-processing snafus, unrealistic revenue expectations and some self-inflicted wounds have bedeviled Internet gambling from the outset. It remains to be seen whether the emerging industry can succeed at its dual mission: to generate substantial new revenues while bringing more people to Atlantic City’s struggling casinos.

“I think it will work,” says Chris Grove, a Las Vegas-based consultant to the Internet gambling industry who co-founded the website Online Poker Report. “So far, people have been judging the product like it’s a mature product, and that’s just not the case.” He adds, “This has really been a case of venturing into terra incognito for the gambling websites.”

Indeed, New Jersey is blazing a trail. While other countries permit regulated online gaming (as do Nevada and Delaware, domestically), New Jersey is the first to offer both peer-to-peer gambling (poker) and house-banked games (slots, blackjack and roulette) while marrying those to brick-and-mortar casinos on a sweeping scale.

Only Atlantic City casinos are eligible for online licenses in New Jersey, but they can partner with outside gaming companies.

To date, 16 online gambling sites have been launched here. Early reviews have been mixed at best. A Wall Street Journal headline called Jersey’s Internet gambling revenues to date “tepid,” and Time.com tarred initial efforts as “pathetic.”

These unflattering observations largely stem from the astronomical revenue estimates floated by the Christie administration prior to launch. Online gambling still hasn’t come close to meeting the governor’s hugely ambitious projections, which were baked into the state’s fiscal 2014 budget.

Pie-in-the-sky projections forecast first-year online revenues of more than $1 billion, with $160 million of that flowing to the state. Here’s the reality: If things go well for the rest of 2014, actual online revenue will reach $150 million to $200 million—about what informed industry observers had said all along.

The inability to meet revenue targets is just the most visible issue. New Jersey requires online gamblers to be physically within the state. To comply, the casino sites use technology that tracks the location of would-be players. At launch, the location technology operated with such caution that many prospective customers who were legitimately inside the state could not get on the websites. It was a major turnoff.

Dawn Lucarelli, a public school administrator from Maryland, was actually inside the Borgata in March when she was twice rejected by one of the Borgata’s poker websites, once while in a casino showroom and again in a lobby area.

“It allowed me to register but not to deposit money,” she says. “More frustrating than not being able to get onto the website was there was no recourse to tell them that I was having a problem—not on the website and not even inside the casino itself.”

David Rebuck, director of New Jersey’s Division of Gaming Enforcement, attributes the false negatives to several causes, such as the way IP addresses are assigned by Internet providers and the presence of computer software applications that can “spoof” or disguise a location—even if the applications are not used for that purpose. Such problems are being addressed, he says.

“It’s better than it was,” says Jeffrey Haas, group director of poker for bwin.party, the parent company of partypoker. “But our geolocation vendors have a lot of work to do.”

Through April, only seven of the 11 Atlantic City casinos had applied for an online license: Borgata, Caesars, Bally’s, Tropicana, Golden Nugget, Trump Taj Mahal and Trump Plaza. Each license holder can create five Internet domains. While casinos hold the licenses, they can partner with online gaming companies that provide the technology.

In the first few months, the two industry leaders were the Borgata and its partner, bwin.party; and Caesars Interactive Entertainment, with its World Series of Poker brand, and online gaming partners 888 and Amaya. For the first quarter of 2014, Borgata and Caesars Interactive combined for nearly 71 percent of the state’s $31.6 million in online revenue. Taken together, all of the websites had generated about $5.5 million in various tax obligations.

The lagging revenue was red meat for Internet gaming’s critics. “The Christie administration projections were never rooted in reality,” says Grove, of Online Poker Report. “But when the industry doesn’t come near those numbers, it becomes easy to tell the story of an industry that isn’t doing as well as some people thought it should, even if that’s not the honest story.”

Further hobbling Internet poker at the start was unexpected resistance from banks and credit card companies such as American Express and Visa. In many cases, credit card companies refused to play along. That meant gamblers could not deposit money in their online gambling accounts.

State Senator Raymond Lesniak (D–Union), who championed online gambling in the Legislature, has worked behind the scenes to convince banking and credit card companies to ease up.

“There are two issues,” Lesniak explains. “One is compliance, and in that area we can help give [the financial companies] confidence that what’s happening is completely legal and well regulated. But then they may have a moral reluctance to have their credit cards associated with gambling. If that’s the case, they need to grow up and start treating their customers like adults.”

The Internet gambling companies have introduced several alternatives to credit cards, such as automated clearing-house transfers and electronic payment services Neteller and Skrill. But Americans are most comfortable using their plastic.

Lesniak sees another big problem—and he lays it at the doorstep of the operators.

“I’m disappointed in the lack of creativity in the marketing and the lack of connection to Atlantic City,” Lesniak says. He supported online gambling because of its presumed ability to attract more gamblers to New Jersey casinos. In addition to promoting the live casino experience as exciting, the sites can reward online players with “comps”—or player loyalty points—redeemable for free rooms, shows and meals only at the casinos.

“I’ve been waiting for the support where they use comps to go to Atlantic City for dinner, for shows, for rooms—to use the experience online to attract people to Atlantic City,” says Lesniak. “They’re missing a huge opportunity.”

In that regard, the industry is pleading for patience.

“To say we were ready to hit the ground running on day one would not be accurate,” says Caesars Interactive Entertainment spokesman Seth Palansky. “And if we deserve criticism for that, so be it.”

Palansky reminds critics that operators had just nine months to get ready for a November 26 launch, and during that time, regulations were still being hammered out.

Borgata president Tom Balance, testifying in April before a California legislative committee weighing online poker, likened the task to “painting an airplane while it was flying.”

Palansky agrees. “Priority number 1 was just getting there for November,” he says. He wants to see more emphasis on converting online customers into Atlantic City visitors.

Tropicana general manager Steve Callender says he noticed one of his casino’s biggest online players was a Hoboken customer who hadn’t been to the Atlantic City casino in five years. (Online players must provide substantial personal information when they sign up.) Callender called the player to thank him for his online business and found out that he had been frequenting New York casinos. As a result of the outreach, the high roller brought a party of 12 to the Tropicana for a visit.

“That’s how this thing is supposed to work,” Callender says.

One bright spot has been substantial out-of-state participation from players best described as online-poker tourists. Some websites report as much as 15 percent of their action is from non-New Jersey residents who either cross into the state to play on the Internet, or perhaps just crave more action while staying at the casino hotels.

Industry figures are particularly impressed with how quickly revenue from online games—slots, blackjack, roulette—rocketed past poker.

At launch, much of the attention had been on poker, largely because that was where player money was flowing before the federal government shut down the most popular offshore websites in April 2011. Poker players—such as Kerstetter—were expected to be early and enthusiastic adopters of the legit sites. But the casino games are proving more popular.

“Our initial revenue results for the first few months of operation have shown decisively that casino games are far ahead of poker in revenues, with between 65 and 70 percent of revenue derived from games other than poker,” says state gaming regulator Rebuck. “As new content is submitted, approved and offered, and as people become familiar with the technology, we believe there will be a continued strong upswing in online gaming revenues.”

Rob Davies, a 25-year-old from Hillsdale in Bergen County, says he plays casino games on partypoker’s website two or three times a week. His table games of choice are roulette and Texas Hold’em Bonus and slots, a form of poker in which the player goes up against the house. But his big score—a $30,000 jackpot—came on the site’s Monopoly slots.

“I’m kind of laid back, and online allows me to play whenever I want without having to make a long drive,” Davies says. “I think it’s particularly good for people who want to learn the games, and the casino is just too intimidating.”

As online players go, Davies is a relatively high roller, betting $20 a spin on roulette. In both poker and casino games, so-called micro-stakes games let players wager dimes, nickels and even pennies.

As New Jersey’s Internet gaming industry works to right the ship, it needs to navigate the rapidly changing cyberworld.

Executives like Borgata senior vice president of operations Joe Lupo and bwin.party’s Haas say the industry must pivot quickly to add apps for mobile devices—online gambling’s near future. And social media is increasingly viewed as the key to marketing Internet gambling and creating a community of online players.

Internet gambling also needs to court the corporate world. Partnerships with prominent organizations, such as partypoker’s sponsorship deals with the NBA’s Philadelphia 76ers and the NHL’s New Jersey Devils, can lend credibility and exposure to online gambling.

The leaders of New Jersey’s online gambling industry know they have much work ahead of them. But they also believe that momentum is on their side.

“We don’t want to be Barnes and Noble that can’t compete against Amazon,” Palansky says. “We are trying to attract the next generation of gamers….And in that regard, Internet gambling is not an ‘if’ business. This is a ‘when’ business.”

Bill Ordine, a former reporter and editor at the Philadelphia Inquirer and Baltimore Sun, runs the website phillygambles.com, covering casinos and gaming in Atlantic City and Southeast Pennsylvania.

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