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Mixed results for East Coast Internet gaming rollouts

If his gaming analyst job doesn’t work out, Brian McGill could try winning a seat in the Main Event at the World Series of Poker.

At least the Internet version.

In late November, McGill, who follows publicly traded casino companies and slot machine manufacturers for financial services company Janney Montgomery Scott, sampled the new East Coast Internet gaming opportunities in Delaware and New Jersey.

With a home base in New York City, McGill could cross state lines and check out the action.

He found mixed results in both markets.

New Jersey had sign-up issues in the initial days, which kept players from joining the game. Meanwhile, Delaware is just too small, with the average number of online players not even reaching 50 gamblers a day.

Nevada, by contrast, averages about 200 players daily on its poker-only websites Ultimate Poker and wsop.com.

“We still think that online gaming will ultimately grow into a meaningful driver of revenues in New Jersey,” McGill told investors in a research note. “But it will take some time to see it ramp.”

In New Jersey, six Atlantic City casinos — Borgata, Trump Taj Mahal, Trump Plaza, Tropicana Atlantic City, Bally’s Atlantic City and Caesars Atlantic City — launched a combined 13 full-scale Internet casinos (table games, slots and poker) just before Thanksgiving. The Golden Nugget Atlantic City expects to have its online gaming operation running this month.

In Delaware, Internet gaming websites are run through three racetracks and are jointly managed by the state lottery, Gibraltar-based 888 Holdings, and lottery provider Scientific Games.

McGill, who participated in New Jersey’s five-day test run and played after the launch, is bullish on the market’s long-term prospects. He said annual revenues would fall “on the high side” of the $200 million to $1.8 billion estimates.

Meanwhile, McGill told investors the Delaware racetracks seemed unprepared for the start.

“There was little promotion or information unless you went to one of the track’s sites,” he said. “You could not find any information initially at the actual casino in the track.”

Delaware, New Jersey and Nevada require gamblers and their computers to be physically within the states’ boundaries. With a half-dozen states considering laws that would allow the activity, interest runs high.

New Jersey is being closely watched by the investment community, online gaming supporters and those opposed to Internet wagering legalization.

New Jersey’s potential Internet gaming audience is huge; the state has a population of 9 million and proximity to East Coast population centers, including New York City and Philadelphia. Partially because of the audience’s potential size, New Jersey is being weighed for issues surrounding the complex technology that prevents underage gambling, screens for problem gamblers and has a geolocation process that stops gamblers from playing outside state lines.

There is also the financial viability question.

McGill told investors that online gaming could be a “significant catalyst” for Boyd Gaming Corp., which operates Atlantic City’s market-leading Borgata. He thought Borgata could garner upward of 20 percent of New Jersey’s online gaming market.

McGill doesn’t expect New Jersey to be a boost initially for slot machine manufacturers International Game Technology and Bally Technologies.

Approval of new online gaming markets, such as California or Pennsylvania, could provide an uptick in the eyes of investors. McGill noted that among Borgata’s 32 slot machine games offered online, the majority were popular titles owned by IGT.

Moody’s Investors Services Vice President Peggy Holloway also views Boyd Gaming positively in New Jersey. The company is partnering with Gibraltar-based Bwin.party Digital Entertainment, the operator of the PartyPoker online brands.

“As a single-asset company, Borgata stands to benefit more from incremental revenue from online gaming,” Holloway said.

But Holloway doesn’t believe online gambling will be “an immediate game-changer” for Atlantic City casinos, where gaming revenues have declined more than 41 percent since 2006. Moody’s predicts online gaming revenues in New Jersey will reach $250 million to $500 million in the first year, far less than the roughly $2.8 billion in annual gaming revenues Atlantic City casinos generate now.

“Operating margins will be about 10 percent to 20 percent, but startup costs will likely lead to operating losses for at least the first year,” Holloway said. “Nevertheless, online gaming is a much-needed boost for a market that has suffered protracted declines in gaming revenues amid increased competition from neighboring states and weak consumer gaming demand.”

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