What Happens To An Online Gambling License If Its Retail Casino Partner Goes Bust?

Posted on June 22, 2020

Across the US, casinos have been hit hard by the COVID lockdowns. Share prices have in some cases fallen by 90%. Even with the relaxation of restrictions, casinos are facing big revenue reductions. Casinos have warned employees on furlough that their layoffs may become permanent.

In most states, online gaming licenses for sports betting, online casino and online poker are linked to licenses held by bricks and mortar casinos. So what happens if a casino goes bust? What happens to the partner operating the online gaming, and what happens to their online players?

Casino groups have lost massive amounts of revenue in 2020

Eldorado Resorts is merging with Caesars Entertainment. From a high of $69 in mid-Feb, its share price collapsed to $7 in mid-March—a fall of 89%. Since then the price has recovered to $39, still well below pre-COVID levels. All the casino groups are facing similar problems.

However, there is some light. During the MGM earnings call, CEO Bill Hornbuckle told investors that resort occupancy rates of 30 percent for regional casinos and 50% for Las Vegas casinos are enough to keep them viable.

MGM is probably in a better financial position than many casinos. Back in 2016 before the referendum on allowing casinos in North Jersey, Fitch Ratings estimated that “a roughly 25 percent decline in Atlantic City’s gross gaming revenue (GGR) would wipe out the operating profit,” of four of the eight Atlantic City casinos.

The New Jersey Division of Gaming Enforcement (NJDGE) report for May said that revenues across all gaming fell by 65.4% compared to the same period in 2019. This fall came despite a 124% increase in online gaming during the month

The big casino groups have laid in a lot of cash by drawing down pre-arranged loans, and this should see them through the crisis. There remains the risk that some casinos will fail. Even before the crisis, casinos in some states were in trouble.

Some casinos face an uncertain future

In New York, sports betting is legal in its four state-licensed casinos, but online gaming remains banned. The upstate Resorts World Casino said last year that it did not think the casino had;

 “any reasonable prospect for becoming financially self-sustaining in the future.”

Most recently, Penn National has warned workers that many of them will be laid off:

“After thoroughly reevaluating our business in light of the ongoing pandemic, we wanted to communicate honestly and openly with our team members that it could be some time before all of our remaining properties are open, and that those properties that are open will unfortunately not require the same level of staffing going forward.”

If casinos do fail there may well be knock-on effects for their online gaming partners.

The problem of linking online gaming to brick-and-mortar casinos

When online gaming was legalized, one of the big fears was that brick-and-mortar casinos would see their revenues fall as their customers moved online. The fear proved groundless and many casinos have seen the opposite happen. New online customers have become new casino guests.

To counter the concern, many states made it obligatory for online casinos to partner with an existing casino before they are allowed to operate. The competition from online gaming is further limited by rules capping the number of online partners each casino can use.

In Pennsylvania, each casino is only allowed one online sports betting partner, but an unlimited number of online casino and poker partners. However, customers are limited to only one account per casino, regardless of how many skins the casino offers.

In New Jersey, the law allows five “skins”–as online gaming partners are known–for each casino.

Clearly if a casino goes broke, its online skins will need a new home.

Online sports betting skins in PA

Focus on Pennsylvania and there are 12 licensed online sportsbooks either launched or planning to launch this year. There are 12 licensed casinos with a 13th in the process of construction. By the end of 2020, the Pennsylvania online sports betting market will include:

  • DraftKings at The Meadows
  • FanDuel at Valley Forge
  • PlaySugarHouse at Rivers Casino Philadelphia
  • Unibet at Mohegan Sun
  • FOX Bet at Mount Airy
  • BetRivers at Rivers Casino Pittsburgh
  • Parx at Parx Casino
  • BetAmerica at Presque Isle Downs
  • Caesars at Harrah’s Philadelphia
  • Hollywood Casino at Penn National Racecourse
  • Wind Creek (application submitted) at Wind Creek Casino formerly the Sands Bethlehem
  • Philly Live! Casino (launch expected December 2020) at Live! Casino & Hotel Philadelphia

That leaves only one licensed casino in PA without an online sports betting skin: the Lady Luck Nemacolin Woodlands Resort. The casino is owned by Churchill Downs, which also operates the Presque Isle Downs casino. It saw no need to pay another $10 million for a license when it could run online sports betting through its second PA property.

What this means is that if a casino does go bust in Pennsylvania, there is no other licensed casino with a free slot available for an online sports betting skin. For example, if Mount Airy failed, FOX Bet would be out in the cold with no other casino partner available.

History suggests that regulators will be flexible-ish

The year 2014 saw Trump Plaza file for bankruptcy in New Jersey. At the time Betfair was the casino’s online partner. It began online gaming operations in November 2013 under a “transactional waiver” from the NJDGE.

The DGE made an order allowing Betfair to carry on operating during the bankruptcy process. This positive response will probably be repeated in any future bankruptcies. But, Betfair was in a special position. The Trump Taj Mahal was still operating and owned by the same company as the Plaza. Even the Betfair servers were originally set up at the Taj Mahal, so perhaps the regulator was reassured that all risks were covered.

Slightly more worrying was the position taken by the Deputy Attorney General Sara Ben-David. She refused to allow Betfair to participate in the regulatory processes associated with the bankruptcy other than allowing written submissions to the DGE.

“However, there is nothing unique or special about Petitioners’ interest  which would elevate it above many other businesses affected by the shutdown…. At best, Petitioner’s interest is economic and thus insufficient to merit intervention.”

Other state regulators are likely to follow this model. Time is given for an online operator to find another partner, but no involvement otherwise.

Of course, if there are no other casinos allowed to add another skin, then the operator would have no alternative but to exit the market altogether.

The provisions re: skins are almost all written into the laws establishing the legality of online gambling and online sports betting. As a result, the chances of any changes to the law to cope with a bankruptcy are unlikely.

The bottom line is online partners have a real risk of being denied market access if their casino partner goes bankrupt.

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Are customer deposits safe when a casino goes bankrupt?

When you deposit money in your online account, that money becomes the property of the operator and you become a creditor. This is exactly the same as depositing money in your bank account. Laws and regulations protect you if the bank or gambling operator go bankrupt.

All state-regulated online gaming companies are required to keep your money in “segregated” accounts. In other words, they are not allowed to use your money for running their business. They must maintain balances equal to your deposits plus any winnings you are due plus the value of any other obligations they have to you from promotions.

Laws vary state by state, but in all cases you are explicitly protected. Regulators check their licensees’ finances usually on a monthly basis. The great advantage of the state-regulated operators is that you know your money is safe with them.

In bankruptcy, you should be repaid in full. There are theoretical circumstances that could arise where you don’t receive your money back, but these would involve some form of criminal activity. In that case, the DOJ would establish a compensation process.

Of course, if you place your bets at an offshore site you have none of these protections available. Your money is definitely not safe and you have no legal recourse if things go wrong. Bet in the legal market and you need have no fears for your money or the fairness of the games.

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Joss Wood

Joss Wood writes for a number of publications in the online gambling sphere. With a special focus on international markets, he writes for LegalSportsReport.com, OnlinePokerReport.com, and others. He also centers on sports betting, esports betting, and the emergent regulated US online gambling industry.

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