Clicks and mortar: David Rebuck on the New Jersey online market's inexorable growth

Towards the middle of each month, a coterie of US sports bettors like to make predictions among themselves on Twitter as to the previous month’s handle in New Jersey ahead of the Division of Gaming Enforcement (DGE) releasing the latest numbers. You could describe it as wagering on wagers. With the line for May set at $770m, people could take a guess using the platform’s polling functionality about whether the handle was under or over this figure. As it turned out, over backers were correct this time; the regulator revealed the total staked on sports was $814.2m, which was the fifth highest month so far since legal sports betting began in June 2018 in the Garden State. The digital sportsbooks, of which there are around 20, accounted for $734.7m, or 90.2%, of May’s total. The fact casual industry observers speculate on New Jersey’s handle underscores why the state is considered a barometer of how legal sports betting is performing in the US. And with total handle for the first five months of the year already above $4.1bn, which is close to what was achieved in the whole of 2019, the market shows no sign of slowing down. Likewise, the other main vertical, igaming, continues its winning streak with nine-figure months in terms of GGR now a regular occurrence. Indeed, four of the first five months in 2021 saw revenue across the two dozen brands operating on seven licenses breach the $100m barrier. May’s total was $108.2m, up 25.9% on the same period in 2020, and the second highest since the market’s launch in 2013. March 2021 still accounts for the all-time high of $113.7m. Cross-sell between sports betting and igaming since PASPA’s repeal three years ago has clearly been a factor, illustrated by the fact the aforementioned record month coincided with March Madness. “What you saw with the advent of sports wagering was a synergy between people who wanted to engage in sports wagering and when they have downtime move over and engage in online casino gambling,” DGE director David Rebuck explains.

“So, the marketers for the operators began to say, ‘Whoa, we have an opportunity here to expand the reach of online gambling,’ based on all these new customers that are joining sports wagering platforms. I think the two together – online sports wagering and online gambling – have worked very well. I didn’t see that coming. I saw it after the monthly numbers started coming in, but I did not anticipate that at the time sports wagering was legalized,” he admits. Whether online gaming in New Jersey declines with the full reopening of brick-and-mortar gaming facilities and the successful rollout of the vaccination program is the big unknown. It is a question public online gaming companies on both sides of the Atlantic have been openly pondering as they wait to see how that pent-up demand plays out and the ways in which consumers choose to spend their leisure time and disposable income in the months ahead. “I really don’t know what happens now Covid is over,” Rebuck acknowledges. “I mean the emergency is over, but it seems like the retail industry is starting to bounce back in the United States and in New Jersey. But do we now have a downturn in gross gaming revenue with igaming? I don’t know. Time will tell. I’ll let the economists weigh in on that one, but you’ll see first-hand with our monthly numbers.”

A decade at the top

It is a little over 10 years since Rebuck was nominated on April 29, 2011, by New Jersey’s governor at the time, Chris Christie, to be the director of the DGE, succeeding Josh Lichtblau who had been in the hot seat since 2008. Rebuck, who had served as an attorney for 23 years as a deputy attorney general for the State of New Jersey prior to his appointment, took up the post of acting director before being officially sworn in as the head of the casino regulatory agency within the Department of Law and Public Safety in January 2012. One of the first tasks in his in-tray was the streamlining of regulatory oversight to make the DGE the primary regulator rather than the hitherto setup of sharing responsibilities equally with the Casino Control Commission. As well as that, Rebuck orchestrated the overhaul and modernization of the DGE’s regulatory processes, some of which were mandated by law. Seven subcommittees held meetings with representatives from every casino before feeding recommendations into a regulatory review process. “Then I got crazy, and I made the decision after we implemented those – and they seemed to work well after a year to 18 months – that we were going to do it again,” Rebuck reveals. “And we did it again. And after another year and a half, I decided we were going to do it again. Then we did it again.” He adds: “I think that the industry decided, ‘We’re very pleased where we are, and we don’t have much to bring to you for modernization or regulatory change anymore.’ So, we kind of wore them out on that one.” The DGE’s director insists that because “everything was on the table” during discussions with the industry, there aren’t any grumblings today that the regulations are “onerous or not innovative”. He continues: “The adversarial relationship that might exist between some regulators and the regulated community just doesn’t exist here. I’m very pleased at that.” Casinos first arrived in New Jersey, or more specifically Atlantic City, in 1978 with the opening of Resorts, known then as Resorts International. Crowds queued for hours outside the boardwalk property to play the 84 table games and almost 900 slots housed in the 33,735 sq ft casino space. Yet some three decades later, this iconic seaside town’s casinos faced mounting competition due to the “explosive growth of casino gambling in the country,” says Rebuck. This chipped away at Atlantic City’s standing as America’s second gambling hub behind Las Vegas. For instance, neighboring Pennsylvania legalized casino gaming back in 2004, while Maryland opened its very first property, Penn National Gaming’s Hollywood Casino in Perryville, in 2010. Add in the fact that New York’s first casino at Aqueduct Racetrack opened to packed crowds in 2011, and New Jersey was then finding itself challenged from all sides on the East Coast alone. Moreover, more than half of all states had commercial casinos by 2010. Then there were all the states with tribal casinos. In the early part of the previous decade, the country was also recovering from the worst economic downturn since the Great Depression triggered by the global financial crisis of 2007-2008. By the end of 2012, total revenue among Atlantic City’s 12 casinos that year hovered above $3bn, a decline of more than 40% on the peak of 2006 ($5.2bn). However, the Department of Justice’s Opinion issued just before Christmas in 2011 that the Wire Act only applied to sports betting opened the door to regulated igaming. A little over a year later, on February 26, 2013, Christie signed Assembly Bill 2578 that authorized online casino and poker in New Jersey. It was a watershed moment that would put the state at the forefront of innovation and future growth. The coordinated launch would be in November that year over Thanksgiving, which was a mightily ambitious timetable. “We had nine months to implement that. We were entering into a new arena of gaming that many in the United States had little experience of regulating,” says Rebuck. Nevada already had online poker, while Delaware boasted a limited online casino and poker offering. And that was all. “It was a nascent industry. Very few B2B and B2C companies were embedded in online casino gambling in the US. The majority of companies that had extensive experience of operating online casino gaming were overseas companies; some were illegal companies. Other jurisdictions regulated online gambling in Europe, and New Jersey found itself having to engage in a very fast and progressive educational experience in learning how to regulate online gambling,” Rebuck adds.

Action stations

Rebuck’s staff packed their bags and jetted all over the world to meet with B2C and B2B companies, as well as online gambling regulators to seek their advice. The vision was not only to create some of the more robust regulatory protocols around, but a model unique to New Jersey that could be readily adapted for other states if, and when, they were to legalize igaming. Rebuck and his team were under no illusion as to the enormity of the task ahead, though. “The challenges in that nine-month period were immense,” he recalls. Perhaps the biggest obstacle was ensuring only players physically located in the Garden State were gambling on the licensed sites. Verifying a user’s location purely by IP address would in no way cut it. “IP address-only, as everybody knows, could be hacked and beaten in a second by anyone with minimal experience using technology,” Rebuck says. The solution was geolocation to pinpoint a player’s position using GPS and WiFi triangulation. The technology worked perfectly fine in sparsely populated border towns in Nevada, where it was already being used for online poker, but New Jersey has a high concentration of residents clustered near or right on its borders. There had been a proposal to create a 10-mile buffer zone within state lines just to make doubly sure no one situated close to the border in New York, Pennsylvania, or Delaware was able to gamble on New Jersey-licensed sites. “If you know anything about New Jersey, pushing our borders in by 10 miles means we’re going to take out a lot of people who would be trying to gamble in the state of New Jersey and simply won’t be able to get online. So that was just not possible,” Rebuck explains. Put simply, geolocation had to cover the entirety of the state and, more importantly, it had to be foolproof. DGE staff were sent out to travel along and over the borders to manually test it. Mario Galea, the ex-CEO of Malta’s Lotteries and Gaming Authority who had been hired by the DGE as a consultant, was tasked with venturing out on foot in what were sub-zero temperatures at the time to try to trick the system. He told EGR NA in 2018: “By using high-gain antennas you could shift your position a few hundred meters, which is enough if you are standing on the west side of New York and the GPS thinks you are in Hoboken, New Jersey.” Also, a fast-food chain outlet was mistakenly located by the system as being in Maryland and not New Jersey, Galea discovered. Even after launch in late 2013 there were teething troubles as geolocation provided false results, however these bugs were ironed out and the technology ultimately proved to be a resounding success. Four weeks after the market went live, Vancouver-based GeoComply, which was deployed by 10 of the 11 igaming sites at the time, had provided five million geolocation results for operators. Rebuck remarks: “Had we not been successful in the geolocation protocols, we could have been easily defeated and shut down by those who oppose online gambling because we’d essentially be violating federal law.” Of course, the other potential friction point in the customer journey was payments. “How do you fund your account? We had to work the payment processing companies to establish protocols to allow for credit cards, debit cards, as well as payment processing to be used,” Rebuck explains. “This was at a time when many banks and financial institutions would not allow for those types of transactions on gaming to be processed. Either the bank wouldn’t allow it, or in some cases the credit card company like American Express or Discover just did not accept it.” Then there were all the companies that the DGE had to vet and approve. Galea previously described the DGE offices as resembling “a warehouse” on account of all the banker boxes jam-packed with application documents. Rebuck says: “Whether it be financial fraud, AML, responsible gaming, know your customer, geolocation, or game providers, you’re dealing with hundreds of companies that are new to the United States and looking to get a foothold in New Jersey.” Ahead of the launch almost eight years ago, projections as to how much revenue the state’s regulated igaming industry could achieve varied considerably. Wells Fargo Securities forecast $650m-$850m in the “near term” before rising to as much as $1.5bn in five years. RBC Capital Markets and Union Gaming Group were lower with their estimates of $500m-$600m and $410m respectively in the early stages, while others like Isle of Man-based Global Betting & Gaming Consultants pegged the market in Year 1 at below $250m. In the end, they had all over-egged the market as $122.9m was generated in 2014. It was all a distinctly underwhelming outcome, not least for Christie who had talked up a $180m tax windfall for the state budget. It turned out to be a tenth of that amount. Yet those who had posted such lofty long-term predictions were not too far wide of the mark as igaming eventually began to snowball. It had risen to $300m for FY 2018. Then almost $483m in 2019, marking five years of consecutive full-year growth. And in 2020, igaming more than doubled year on year to a head-turning $970.3m, or almost eight times the amount generated in 2014, due largely to casino closures. And judging by the first five months of 2021 ($527.2m, up 56% year on year), New Jersey is on course to comfortably smash the $1bn GGR mark to set yet another record. So, did the DGE’s director ever envisage revenue of this magnitude at the outset in 2013? “One thing I tell people all the time is that I’m not an economist and I don’t make projections on what the industry is going to be in size. I never have. But am I surprised where we are with gross gaming revenue generated from igaming? Yes, I am surprised.” Around 2015-2016, Rebuck discussed with his staff about whether the market had flattened out, yet it “kept going up.” Operators continued expanding their products with live casino, which was first rolled out by Golden Nugget’s online arm in August 2016, while more and more New Jerseyans became aware that online casino and poker were legal in their state. Then, of course, came the landmark dismantling of PASPA in May 2018. Senator Ray Lesniak and Governor Phil Murphy placed the first sports wagers in New Jersey (both on the soccer World Cup) just 23 days after the federal law that limited sports betting to pretty much Nevada was struck down. By August of that year, the first online sportsbooks flickered into life and were soon joined by many more local brands and overseas operators, creating a vibrant and competitive space. Almost 18 months later, in December 2020, online sports betting handle came narrowly close to hitting the $1bn milestone.

Blueprint for success

As online gambling regulation goes, New Jersey is often hailed as the gold standard. The DGE took inspiration from Nevada and the world’s largest regulated online market, the UK, when formulating its frameworks for igaming and sports betting. New Jersey allows for all the key verticals: sports betting, casino, poker, and bingo. What’s more, it boasts an open licensing model with a maximum of three sports betting skins, or unique brands, per land-based casino and racetrack, as well as up to five online casino skins per license, while the tax regime is agreeable: 8.5% of revenue for retail books and 13% for the online equivalent. Online gaming is taxed at 15% of revenue. These rates are considerably lower than most European online markets. And unlike Nevada and Illinois, legislation has never forced consumers to traipse to casinos to open online betting accounts in person. It does beg the question: why haven’t other states simply cut and paste the New Jersey model? New York is headed for a restricted market like New Hampshire’s, which could benefit New Jersey as bettors continue to cross the Hudson River to place wagers. In fact, a report by Eilers & Krejcik Gaming in February 2020 estimated that New Yorkers bet $837m in its neighboring state in 2019. A modest Rebuck says: “Not a day goes by that we don’t have small issues and challenges in all forms of gambling regulation in the state of New Jersey that we deal with. We have always strived to ensure that we promptly, effectively, and fairly respond to the problems that are brought to our attention. And when we solve those problems, even if they’re small problems, we look to reduce the risk of it being repeated. “The challenges you face in these nascent industries are such that if you are not open to dealing with little problems until you get a report on them, or you procrastinate, you’re going to be in big trouble.” This also applies to implementing best practices. “[Operators are] in competition with each other to have the best product out there but when it comes to safeguards like consumer protections, responsible gaming, fraud protections, AML, cybersecurity, you’re not in competition.” Expanding on the point about responsible gambling and protecting vulnerable players, Rebuck insists advertising and raising awareness about the issues are “critical.” “If there is a scandal, or if there is a meltdown as to how that product is offered to the consumers in any state, the consequences of that could be far-ranging. One only needs to look at the UK to understand that those consequences could be quite severe.” Looking ahead, New Jersey and its regulator plan to stay at the forefront of future innovation and growth. Fixed-odds horseracing is heading to the state, as is the country’s first legal sports betting exchange. Esports is another product the state is embracing. “It’s clearly something that is seen as an opportunity […] we’ve had long dialogues with people on how to get this up and operational in a very safe, secure way that works for the industry as well as for the consumers.” He adds: “Governor Murphy and his administration want the state to be a leader in taking the nascent esports industry and determining what involvement it should have in the gaming industry, and how it can be a hub of growth in the US. When your governor says he wants something done, you listen, and you put all your full efforts into achieving the goals that have been outlined.” And Rebuck certainly has a track record for achieving goals. Just as the hour-long interview was wrapping up, the director makes an off-the-cuff remark about the EGR NA magazine being retired after nine years. “I wonder if this is a signal, the last issue of EGR NA and it’s over for me.” Thankfully for the DGE and the industry, he was only joking. The journey is far from over.