By Martin Owens
California: Return of the Indian Wars Paralyzes Internet Poker.
"There is science, logic, reason; there is thought verified by experience.
And then there is California"
It may be a stretch for outside observers to believe, but California began its inquiries into the possibilities of expanded online gaming as long ago as 2005. It doesn't make sense because six years later, the possibility of state licensed Internet poker ( and other games) is still circling the landing pad.
The Map of Paradise
At first glance, an outside observer can hardly see why. The Golden State seems to be a natural for Internet gaming. First, Internet gambling is already up and running there. California has licensed Internet betting services to take bets on it horse races from all over the country since the 1990s. And not many states can take better advantage of the opportunities offered by the Unlawful Internet Gambling Enforcement Act of 2006. That law specified that Internet gambling, licensed and properly supervised by state authorities, and offered only to people within the state, was not to be considered "unlawful". Meaning US banks could finance it without fear of being hauled off to the gulag. So at least initially, licensing further Internet gambling (remembering that horse bets are already legal) would seem to depend on what the operators call liquidity. That is, the number of people who are available, day in and day out, to play poker and such on the Internet and thus make the venture profitable. So to be a worthwhile prospect for a licensed I gaming network, a given state would have to have a large population, a relatively large geographic area to justify the expense of designing and installing such a system, and a fairly tolerant attitude toward adult entertainment generally and gambling in particular. Also helpful would be a chronic state deficit, to encourage legislators to see the advantages of extra revenue which involves neither raising taxes nor cutting services.
And California has all the necessary requirements, in spades. State population is the largest in the Union at 37 million; its land area of 156,000 square miles makes it the third largest state. California's liberal attitude toward practically everything is legendary. Finally, budget deficits have been a fact of California life for years, peaking with last year's galactic black hole of over $26 billion ( later finessed to a few billion, which lack was papered over with pure moonshine. But I digress.) If ever all the pieces were in place, and the planets were aligned, to run Internet gambling through in one smooth motion, it was surely in California.
And yet in mid-August, the head of the California State Senate, Sen. Darrell Steinberg and the chairman of the Senate committee overseeing Internet gambling, Sen. Rod Wright, issued a joint letter, stating that consideration of Internet gaming legislation would be held over until the beginning of next year.
So what happened?
Cowboys, Indians and Horses
The problem is that California already contains vested gambling interests who are fiercely protective of their turf. Jealous, suspicious, and vindictive to the point of viciousness, they have clashed again and again, in public and behind the scenes, and the infighting is an all too effective barrier to any sort of progress in this direction.
First, we have Indian gaming. California contains no fewer than 108 of the 500 Indian tribes of the USA. For long, weary years, they were almost invisible second class citizens . But then came the Indian Gaming Regulatory Act ( IGRA) of 2008, precipitated by a Supreme Court decision against California's attempt to shut down gaming offered by the Cabazon Mission Indians. This law allowed the various Federally recognized tribes across the USA to make arrangements for offering gambling on their respective tribal lands. Nevertheless, it took until 2000 for California's Indians to win the right to offer full-blown gambling operations, with the passage of Proposition 1A. It was widely believed (but never quite proven) that the delay was caused by Vegas gambling operations, who depended in large part on California customers, funding the political opposition to Indian gaming, year after year. Also entirely unofficial is the hypothesis that when the California tribal authorities finally wised up and promised the big fish in Vegas they could have the operating contracts for these new Indian casinos , the financial backing for the little old ladies in tennis shoes promptly disappeared, and Indian gaming in California finally became a legally recognized fact.
Indian gaming became a billion-dollar industry , not least because of its legal monopoly on what was called Class III gaming- mostly slot machines. The gambling tribes went overnight from pariahs to power players in California politics. But all was not sweetness and light! Before the Indians got the okay for their casinos, California had hundreds of municipally licensed card rooms, later telescoped to 91 active licensees. They felt, with reason, that the growth of Indian gaming had been at their expense. Since most of the cardroom owners tended to be working class, self-made men, cowboy hats were often seen among them. And so the legendary good feeling between Cowboys and Indians continued.
Meanwhile, despite being first on the ground with Internet gambling generally, California's racetracks continued to lose customers- in fact the interstate handle is a big part of their survival strategy now. But they could not figure out a way to get in on Internet gambling expansion before Indian gaming came along, and once the Indians got hold of the slot machines they were not about to share. That means the ?racino? strategy employed in other states- blending horse races with other forms of gambling on site, slot machines for choice- was and is a nonstarter in California. So the horses were out in the cold, too.
Bad Press and Bad Blood
Internet gambling first appeared in 1995, and by 2000 had become a force to reckon with in the gaming world, whether or not the vested interests approved. And mostly, they didn't. Brick-and-mortar operations reflexively damned I-gaming operators as poachers upon their own hard-won clientele. They were only too eager to echo the Bush administration's completely inaccurate allegations that all Internet gambling was illegal, and to make sure those allegations got to the local news outlets, who mostly repeated them without examination.
It took years for the existing factions to realize that Internet gambling was not a threat to their current customer list, but rather might be the only way to grow it. One of the few things human beings can be relied upon to always do is grow older. However, as the existing customers died, retired, or went into rehab for the gambling monkey, their replacements were by no means guaranteed. For these were largely blue-collar workers- a dying breed in the USA and almost extinct in California.
But Internet gambling could reach the most desirable new demographic group: male, white, young, college-educated, technically savvy, and well paid with lots of disposable income.
So, the reasoning ran, appeal to them already. What could go wrong?
What went wrong, quite frankly, is that too many people in California's gambling constellation were not looking to future profit, but to payback for half-imaginary past offenses. A lobbyist who pioneered the outreach to secure support for I gaming from California's card rooms reported that they were all in favor of making lots of money off this new development- on the condition that no one else could.
The picture was no brighter in California's Indian country. Only so many tribes, after all, controlled territory close to major population centers. These were the haves. Their casinos made them rich. Many of the other California tribes were located out in the sticks, and let's face it, people who drive five hours into the woods are more likely to be hikers and fishermen than gamblers. These were the have-littles and have nots- scrimping along on thin revenue, or given an annual stipend in return for NOT trying to open up their own gambling at all. You can only slice the pie so thin, after all. So while the haves were just fine with brick and mortar operations, the have nots began to think I-gaming might be their ticket to the big time. The advent of Internet gambling, in short, threatened to upset the equilibrium in all directions. That's predictable: it has long been known that the Internet is not merely innovative , but disruptive. Some of the factions found disruption a welcome prospect. Others thought it was the end of the world.
The Race for the High Ground
But every faction knew just what they wanted to solve this conundrum. They wanted the California state legislature to pass laws about Internet gambling. And every proposed bill had two important features. The first part involved unlimited license and profit for the party proposing the legislation. The second part involved a length of metal pipe and the kneecaps of all potential rivals. The informational hearings held by the State Senate's Government Operations Committee were truly eye-opening, even to me, a twenty- year resident of Sacramento. No one really wanted information, only advantage. Time after time, one faction would characterize the other as absolute criminals and try to claim exclusive rights to the whole thing- before it was even designed. Things reached their lowest point in February of this year, when an online operator from Britain, contributing his own time and effort, was upbraided in public by a disgruntled and grossly ill-informed cardroom boss from some coastal town or other. The language and demeanor were so openly hostile that the Englishman positively began to fear for his personal safety , right there in the Senate chamber, and the lobbyist who was his sponsor died of a heart attack that same evening. This is perfectly true.
Meanwhile, California's gaming tribes had essentially split into two camps by 2010. The larger operations had finally realized that Internet gambling was the wave of the future, like it or not. Immediately, various of these tribes allied themselves with some of the bigger card rooms and sought joint ventures with European operators. Most of the Europeans bailed out after discovering their erstwhile partners had nothing like official approval to begin operations. There was another group, however, who alleged that California had no right to license Internet gambling at all, because that would violate the agreements made with the gambling tribes. According to them, Internet poker would interfere with their exclusive rights to casino gambling, and furthermore compromise the tribal sovereignty of the various Indian peoples. Legal experts on all sides of the question agree that these arguments have no support in fact or law. Nevertheless the opposition remains, issuing vague threats of drastic action if the legislation is ever passed..
The Factions vs the Facts
Right now the future of California Internet gaming could go one of three ways.
It could follow the plan of SB 40, the bill proposed by Senator Correa. This would license online poker only, licensing a maximum of five web sites. Eligibility would be limited to those already holding gambling licenses from the state of California. Games to be offered within California only, to residents 21 and over. Operators applying within 30 days of the regulations being issued would have to make an initial deposit of $50 million each, credited against an ongoing charge of 10% of the annual take as a further fee. Parties applying after that 30 day window would be required to make a $100 million deposit, also credited against the 10% fee.
If, however, the total take from these advance deposits does not equal $250 million by July 2012, then the fees will be equally raised all around until it hits that amount.
Obviously this bill is aimed at restricting participation to major players such as the bigger gaming tribes ( the Morongo nation is a principal sponsor), and perhaps some of the bigger Vegas operations in partnership with some locals. Equally obvious is the questionable status of some of the fee mechanisms, especially measured against antitrust laws and the commerce clause of the U.S. Constitution. A more immediate question, of course : with the economy all over the world in the rotten state that it's in, who has 50 or $100 million laying around in a drawer someplace?
The other path is outlined in SB 45, introduced by Sen. Wright, the committee chair.
This bill would limit the licensed web sites to three, but allows any sort of Internet gambling (which drove the Indians wild, as that just might actually conflict with their agreements) , and does not specify any set amount for licenses. Taxes and fees could go as high as 20%, but there is no dollar amount that must be met in advance . California applicants are also naturally favored.
There is, unfortunately, a third option. Namely that the quarreling between Indians and non Indians, between Indians and other Indians, between pro-and anti-gambling, and all the rest will drag on indefinitely. The vote has been deferred to 2012, but we need to remember that 2012 will be a very busy political year. Not only will there be a hotly contested national election, but 40% of California's legislative seats will be up for grabs. It remains to be seen if anyone will have time to deal with Internet gambling at all.
So who's the winner in the struggle for Internet gambling in California? So far it's the offshore gambling sites. Legal or not, they're the ones raking in the money. And everybody else is full of .... politics.
Mr. Owens is a California attorney specializing in the law of Internet and interactive gaming since 1998. Co-author of INTERNET GAMING LAW with Professor Nelson Rose,( Mary Ann Liebert Publishers , 2nd ed 2009) ; Associate Editor , Gaming Law Review & Economics; Contributing Editor, TSN. Com
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