By Martin Owens
Try, Try again
Hidden speed bumps on the way to Internet gambling
"Failures are great learning tools.. but they must be kept to a minimum."
Jeffrey Immelt (CEO of GE)
Philadelphia, PA (Sports Network) - And once again, here we are.
For the third straight year - or is it the fourth? - Internet gambling seems on the point of expanding in the USA, through state licensing. California, Iowa, Florida, and even Hawaii are all considering legislation to legalize I-gaming, or at least online poker. New Jersey, which had an apparent touchdown whistled back, to use a football analogy, is headed for a voter referendum on I-gaming in the fall. But as with the Ancient Greek paradox of Achilles and the tortoise, we get closer and closer to overtaking the goal, but never seem to arrive there. There is always one more point to negotiate, one more little gap to close.
And not all of them are immediately obvious. Observers were quite prepared for vigorous opposition to Internet gambling from right wing, conservative, and fundamentalist sources. But this has been much less than anticipated. Further problems were looked for from the vested interests, existing brick-and-mortar gambling licensees. Nope - even powerhouse opponents such as the Atlantic City casinos seem to have been won over, or at least neutralized. But while these turned out to be less vigorous obstructions than anticipated, others have surfaced which more than make up for that.
The big delays now seem to be rooted not in the political sphere, but in logistics and the hard calculations of what it'll take to make a buck here. As in getting a state licensed Internet gambling system, poker or any other game, actually plugged in and working. The crux of the matter surfaced about a month ago, during information hearings held in the California State Senate chambers in Sacramento. The question under discussion was - how long would it take to set up an intrastate online poker system in California? Spokesmen from the state Department of Justice estimated that it might take as much as two years between passing the enabling legislation and the actual commencement of licensed gambling activities. A well-known UK operator, on the other hand, gave an estimate of only a few months. Why the discrepancy?
The difference is between setting up the system and setting up the state contracts for the system. Large purchases or contracts made on the public's behalf, of course, have to be put out for competitive bids. The problem is, the bid has to describe what the state is looking for - and in regards to something like an intra-state poker system, they don't know what to ask for. How could they? If not actually illegal, it's certainly against policy until the enabling legislation passes.
Ah, you say, but what about the alliances and understandings now flowing so fast between vested brick and mortar interests and overseas I-gaming operators, as with Wynn and PokerStars? Caesar's and 888? Couldn't these overseas associates advise? Well, (as we wicked lawyers are trained to answer), yes and no.
General information is fairly easy to give. The hard work and heavy lifting will require more. California, for instance, estimates about 3 million of its 37 million residents play poker online, 1.5 million of 'em steadily enough to yield an Internet poker market worth just under a billion dollars a year. But that's not enough to design a system with. For that you need specifics: how many players per hour, and at what time of day? How big a server farm will be needed? Where to locate the redundant systems needed to protect it? Speaking of protection, what kind of firewalls will be needed, what kind of software "armor" against denial of service attacks and like-minded cyber-mayhem? What about system access? Cable Internet connections or wireless? All very well to talk about screening out the underaged, the problem gamblers, players from out of state - what exact mechanisms, procedures, protocols will be employed to do that? What sort of investment will be needed to pay for all this? (Don't forget the state authorities want the system operators to bear the startup costs.) Where and when is the break-even point?
Now the professionals can answer these questions, but not off the top of their heads.
The easiest thing for them would simply be to add State X to their customer list. Can they do that and not let others in? Certainly. For years now, it has been possible to screen Internet input as closely as a given zip code. That's plenty close enough to let in the residents of a licensed state, and keep out those of its unlicensed neighbor. But the current thinking is that such a simple step ain't allowed. You see, this all turns on the wording of the UIGEA, which excludes state licensed Internet gaming from the definition of "unlawful Internet gambling", provided it is made "exclusively within a single state" (31 U.S.C. Sec 5362 (10)(B)) - that is, the bettor and the betting facility have to both be inside the borders of the same state. Some commentators, this writer included, believe that sub-section (A) of that same law contains a safe harbor whereby a foreign operator might be able to do just what he wants: if the bet or wager goes from one place where it's legal to another place where it's legal, then that's alright too. But most folks see that position as a direct confrontation with Uncle Sam, and they're not eager to try it
Therefore, intrastate poker in the USA, has to be set up one state system at a time, just at the moment. Which in turn means that serious research and study of the relevant market is needed, to be sure that the potential is worth the outlay. And there's the rub. Precisely because a state government won't know precisely what to ask for, they'll put out an RFP - a request for proposals. And then pick out the best one for the model, which they will then turn into a Request for Bids. So let's suppose you're an overseas Internet poker operator, interested in one of those state licensed systems. You can essentially research and design it yourself, so as to meet the RFP. If you do this, you have to make serious investment in consultants and designers and such. Things can then turn one of two ways: either the state adopts your design as the model (in which case your rivals can now underbid you, because you have that much more cost to recover and they just get to copy the ideas you paid for). Or not (in which case you're still out the money and time).
On the other hand, if you simply wait for somebody else to provide the Model that will be the basis for the RFP and the bids, then you're the one who's that much money ahead. This would seem to be the reason everybody is walking around the edge of the pool, but nobody has actually jumped in yet.
On the surface at least, it remains a classic standoff: The state authorities want a clear picture of what an in-state Internet gaming system would look like - otherwise the legislators and regulators are worried that they're giving their approval to a pig in a poke. Foreign operators, even in partnership with local gambling licensees, don't want to go to the expense and trouble of a detailed design project, only to risk seeing it given away by the vagaries of the political and bidding processes.
There may be crucial negotiations going on in private - the rumor mills are working overtime. But then again, they always are. With the possible exception of the New Jersey referendum, what is on view today for Internet gambling expansion at the state level seems to be the same old, same old.
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. Comments and inquiries welcome at to email@example.com.