Should MGM Resorts Worry About Pennsylvania Trying to Kill Off Online Gambling?

By Rich Duprey Markets Fool.com

Although online gambling has yet to get the green light in Pennsylvania, some supposedly supportive state legislators seem intent on killing its chances -- or at the very least stunting its growth. They're introducing bills that by imposing high taxes and fees could smother internet gaming's profitability. And that might be a concern for MGM Resorts (NYSE: MGM), which is rumored to be interested in buying Las Vegas Sands' (NYSE: LVS) Bethlehem resort.

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As these bills wend their way through the legislature, online casino advocates might be wondering: With friends like these, who needs enemies?

Image source: Getty Images.

An early draw

Currently, just three states have enacted laws regulating Internet gambling: Delaware, New Jersey, and Nevada. While a number of others may join their ranks this year, Pennsylvania is viewed as the one where online gambling has its best chance, and since the start of the year, several bills have been introduced in the legislature to make it legal.

However, even if it's legalized, the online gambling business in the state could wind up being crippled, depending on which of the bills under consideration becomes law. The one that has arguably caused the most consternation is SB 524: It would allow online gambling, fantasy sports betting, and mobile tablet gaming at certain airports, but would set a 25% tax rate on gross online gaming revenues, while imposing higher licensing fees on the companies that would participate.

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Of the three bills that have been introduced to legalize online gambling (a few have also been floated that would specifically ban it), two would set a 14% tax on internet gambling revenues. That would make the state friendlier than New Jersey, which imposes a 17.5% tax. They would, however, alsoimpose one-time upfront licensing fees of $8 million for casinos and $2 million for operators.

In addition to setting the tax rate for online casino operators 11 percentage points higher than those rival bills, SB 524 would impose higher licensing fees of $10 million and $5 million, respectively, on casinos and operators. That combination could keep any companies from entering the market.

Image source: Getty Images.

Penny ante play

Pennsylvania's population, and thus its potential online gambling market, is larger than New Jersey's. Nonetheless, the Keystone state's smaller resorts may not want or be able to pay the higher fees being debated. Although there may be something attractive in the local nature of Pennsylvania casinos compared to New Jersey's casinos, which are all concentrated in Atlantic City, the diffuse nature of the locations also spreads the potential market thin -- almost as thin as the margins realized by online casinos.

It has taken Betfair, which is partnered with Atlantic City's Golden Nugget casino, several years to just reach break-even status on its earnings before interest, taxes, depreciation, and amortization.While it is now the biggest in the state in terms of internet gaming, having surpassed MGM's Borgata, which fell to third, its growth rate is expected to slow.

Industry researchers at Eilers & Krejcik say that after a 32% gain in revenue for online casino operators in New Jersey last year, growth will be nearly halved this year to just 17% as the state's pool of poker players has largely been tapped.

UnlessNew Jersey enters into a pact with Delaware and Nevada to let residents of those states gamble at its online casinos -- something Delaware and Nevada have already agreed to between themselves -- the online gambling marketplace for the state has likely peaked.

Those are the kinds of risks and opportunities facing Pennsylvania as it considers its own online gambling bills.

The concern for MGM, if it is in talks to buy the Sands Bethlehem, is that taxes and fees could stall online gambling in the state before it takes off. While the Pennsylvania resort is a natural fit for MGM's portfolio of regional casinos, the potential for online gambling in the state also has to be one of the reasons it is considering buying the property. Until this year, the Borgata has been the crown jewel of Atlantic City, both online and offline, and expanding the portfolio into neighboring Pennsylvania would benefit it. If Pennsylvania also joined into amultistate arrangement with those that have regulated internet gaming, the larger pool of players might help all survive and profit.

However, if Pennsylvania chooses the path of higher taxes and fees on online gambling, it will handicap the industry, and that has to worry MGM Resorts as it thinks about entering the state.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.