By Martin Owens
How fast do tortoises run in Iowa?
Small states, too, look toward licensed Internet gaming
"The race is not always to the swift, nor the battle to the strong...."
Philadelphia, PA (Sports Network) - Licensed Internet gambling offers many opportunities to state governments. But they all need to remember : none of those opportunities is marked "reserved". More and more states are considering the option given to them by the Unlawful Internet Gambling Enforcement Act of 2006 ( UIGEA), which allows any state to license and operate Internet gambling so long as it is only offered within its own borders, to its own residents, and is properly organized and supervised. There have been hearings and drafts of legislation, and any number of quiet discussions in and around state Capitol Buildings. But no state legislature has actually passed I- gaming's enabling legislation yet.
The situation reminds me of one of those National Geographic specials covering the march of penguins or the migration of wildebeest. There comes a time when the group must get wet. They must cross the river or jump into the bay, get on with their business and make their living. But on the other hand, something might be waiting for them in that dark, cold water. So the critters all huddle together and kind of nudge each other. Somebody's got to be the first one in, if only by accident.
The conventional wisdom says that the most likely candidates for early licensing and operation of Internet gaming are large states with large populations (and equally large deficits). Florida has already passed preliminary legislation to allow study and perhaps more forthright measures. California has just finished legislative hearings, and is moving toward fielding a legalization bill. New Jersey is also considering measures of this kind. And there are sound reasons to suppose that one of these larger, more populous states will lead the way in establishing licensed Internet gambling.
And on the other hand there is Iowa, which is also considering legal, licensed Internet gaming. At first glance, the Hawkeye State is an unlikely candidate to open the doors of I-gaming. For one thing, the political climate is not exactly slam-dunk for such things. The state is such a stronghold of conservative values that Iowa is host to the first Republican primary of the presidential election cycle. And Iowa, unlike larger states, does not have a full time legislature. Their lawmakers go home in May.
Second, it appears on the surface that Iowa has what is called a liquidity problem. In plain English, not enough customers to justify establishing the market. Iowa's whole population is just over three million, (California , by comparison, has 37 million) of which an estimated 50,000 gamble online, legal or not (California's Internet poker fiends number a million and a half).
So in what context does the effort of such a state as Iowa, or North Dakota, which tried much the same thing in 2007, in what frame of reference does it make sense? This is where we have to take a step outside the box. The political framework does not match the economic reality. Internet gaming is a global market from the get-go.
The whole idea of setting up a gaming website is to allow worldwide access 24/7. This opens the way to large, profitable, ready-made demographic groups, like the people who bet on March Madness or the World Cup. At the same time the Internet operator can, in effect, construct a profitable market by reaching out across jurisdictional lines to assemble markets that are geographically scattered but still lucrative. For example, there may be too few pai gow players in Delaware to justify a brick and mortar card room there. But if you can use the Internet to reach out and connect that pai gow player in Dover to other players in Hong Kong and San Francisco and Manila, that could well be a paying business model. (The so-called "Long Tail" effect). To put it plainly, state-by-state compartmentalized markets won't work for most states. And so, obviously, the licensing states will join up with each other for mutual advantage as soon as they "take the plunge."
Now the UIGEA allows state governments to license I-gaming within their territories (31 U.S.C. S 5362(10(B). But it also specifies that "unlawful Internet gambling" happens only where placing or taking the bet violates the laws of the place where the bet is placed or taken ( 5362(A). English translation: if a bet is legal at point A, and also legal at point B, then it is also legal to send a bet between point A and point B. The Wire Act (18 U.S.C. 1084(b)) says much the same thing, despite the denials of certain zealots in the US Department of Justice.
All of which means that when, not if, state governments start to legalize more I-gaming, especially poker (they already license Internet horse betting and some state lotteries) they will allow it to reach across their respective state lines so long as there's money in it (as they also already do with horse betting and state lotteries).
And this is why it makes sense after all - a whole lot of sense - for a small state like Iowa to look into exercising its rights under UIGEA and beating everybody else to the punch. To go back to that National Geographic scenario- once the first critter is in the water, the rest of the herd follows right behind. But however big the stampede behind may be, they can't catch up to that first one. So in the context of a soon-to-be national or even global market, it makes little difference how many players the home state has. The company or joint venture that launches that first successful Internet poker network will have a huge market advantage- the surrounding states, under pressure to get in the game as soon as possible, will turn to the leader and automatically expand the market. This is no projection - it has already happened with horseracing and with state lotteries. And by extension, its home state will reap some of those income and revenue benefits, too. In a global and digital context, size matters less than it used to, and location hardly matters at all.
But, once again, nobody, big or small, has actually made that first move. The bigger and more populous states still have their advantages of larger initial markets, existing infrastructure, and a ready reserve of licensed operators. But just as in the Aesop's fable of the tortoise and the hare, the obvious and natural leaders may have rested on their laurels just a little bit too long. The supposed underdogs are now becoming visible in the rearview mirror.
It's shaping up as a genuine race now. Who will be first when the dust settles?
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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