By Martin Owens
Whose Name is On This Christmas Present?
Unseen drawbacks, benefits in the DoJ reversal
Luck is when preparation meets opportunity
By now the word is out. On December 23rd the US Department of Justice published an opinion it had privately given in September. The question was: Can Illinois, New York and other states sell their lottery tickets online without violating the Wire Wager Act ( 18 USC s 1084)? Yes, said the DoJ, for the Act only covers bets on sporting events.
This was a great encouragement for the efforts to expand licensed Internet gambling in the USA, especially at the state level. It was also, politically speaking, lightning from a clear sky. To this point, the DoJ (or at least a die-hard cadre therein) has insisted that all Internet gambling violates the Act, even the horse bets authorized by the expansion of the Horse Racing Act.
Even where the only case law on this point, from the Federal Fifth District, clearly stated, even on appeal, that the Act covered sports bets and sports betting only.
Why the change of heart? It may be that somebody finally realized that the Department of Justice does not get to choose which laws it likes. It may be that a Department of Justice under the Obama administration saw a chance to help out the Democratic governors in those two states. But in the end, it doesn't matter. Don't look a gift horse in the mouth, as we used to say on the backstretch.
For while this may be a great Christmas present to the Internet gaming industry, it's not a gift that everyone can use equally. In general of course, it removes one of the stock arguments against expanding Internet gambling under state license. Up to now, opponents could always say: "The DOJ says it's illegal, therefore we shouldn't do it." Not anymore. But simply removing that bar doesn't guarantee a flood of legalized I-gambling throughout the Republic. First, because there are always a hundred good reasons for doing nothing. Second, an opportunity belongs to the people who are ready for it.
And here in American, most still aren't.
Nevada, one of the few states to legislate intelligently on gambling, has played its cards brilliantly. Enabling legislation to authorize I-gambling was passed in 2001. But they didn't go all the way- at the time there was still lots of opposition both from the Bush administration and from the big Vegas resorts. Rather than stage a confrontation, regulations and implementation were left up to the state Gaming Commission and its Gaming Control Board, and these were given the leeway to determine when the technology of Internet gambling would be reliable enough to prevent unauthorized bets, particularly from out-of-state. Well, that day has finally come, and Nevada will begin accepting applications for Internet poker licenses no later than this coming March. A number of big outfits still don't like the idea of Internet gambling - but now they disliked the prospect of being left out even more.
At the other end of the country the District of Columbia took the plunge all at once last year, and authorized Internet poker at a single stroke, via its lottery system. Political pushback against this surprise move has delayed its implementation. A peculiar problem of DC politics is that its laws are subject to supervision and veto by the U.S. Congress. If, however, Congressional disapproval has not been registered by a deadline date, then the measure in question is allowed to become law. And that's what happened. Anti-gambling stalwarts in Congress, taken by surprise as usual, have declared the deadline to be advisory rather than statutory and their threats of retaliation have translated into months of delay. Even so, hearings will be held early next year, and it looks as though online poker may come to the nation's capital as well.
There is a logistical problem, however, particularly in low population locales such as Nevada (2.7 million) and DC (600,000). It's called liquidity. In short, will there be enough people gambling at these online sites to turn a profit? In both cases, the licensors are depending on enough visitors to play online while they're in town. That seems possible with Nevada; about 30 million people visit Las Vegas every year. Less so with Washington DC - about 15 million. Of course there is a slight problem here. Very few people visit Washington DC for the purpose of gambling, and it's hard to imagine people driving in from Virginia or Delaware or Maryland just for that. And while people do in fact visit Nevada just to gamble, once they arrive they have an inexhaustible range of choices of the brick-and-mortar variety. They can't gamble online at a Nevada site from outside Nevada. State law is very, very clear on that. On the other hand, once you've got them in your hotel, who needs the Internet? So even if these two pioneering jurisdictions get what they want, will they profit by it?
The disconnect here is trying to pretend that Internet gambling, which has always been a global market, can be magically cut up and pigeon-holed among 48 or 50 state authorities and still maintain its profitability. Only a few US States can hold their own as independent markets.
Foremost is California. With about 3 million steady online poker players out of a population of 37 million, its online poker market alone is worth about $800 million a year, even in its present disorganized and half clandestine condition. At current rates of taxation that's about $200 million in free revenue that the Golden State is missing. Proper licensing and supervision could easily triple the size of that market, with commensurate increase of the public income.
Unfortunately, after five years of assorted attempts, California is no closer to licensed Internet poker today. The big problem is not the opposition of conservatives or fundamentalists. Rather, entrenched brick-and-mortar interests, principally certain licensed card rooms and Indian gaming tribes, have been opposing licensed Internet poker in the stubborn and mistaken belief that this expansion of the overall market will somehow injure their particular interests. And while they don't have the legislative clout to make I-gambling go away, they have enough to enforce gridlock.
Things are even less hopeful in smaller states such as Florida and Iowa. Their legislatures are part time and meet for brief periods each year. I-gambling advocates continue to make the mistake of attempting to enlist their support much too late. Only when the legislative session begins do they try to make their case. And by then the legislators have far too much other business to attend to.
Who's Already Moving
The point of offering poker (or any other game, gambling or not) online is to make money. If a company has to submit to state gambling laws to do that, they will. If they don't, they won't. Now a new business model has arisen online, offering poker in no-pay, optional-pay or subscription mode. What makes it powerful and profitable is that it's offered via social media such as Facebook. It's called viral marketing: people recruit their friends and family. in effect a self-recruiting, self marketing effort that expands exponentially. And it works. Today Facebook has 750 million users, in 190 countries worldwide and translated into 70 languages. The most noticeable poker variant is offered by Zynga. In their version of Texas hold'em, anyone can enter or play for free. But like other games that Zynga offers, performance enhancers- in this case extra chips- are available for a small charge. Nevertheless, anyone can win, whether they buy the extras or not. It may sound strange to gambling and betting traditionalists, but this, too, works. The revenue from Zynga poker alone has been estimated at more than $7 billion a year. Compare this to the entire US online poker market, of about $15 billion.
This alternative Internet poker or Internet gambling is coming on strong. Zynga's recent attempt to float an IPO was unsuccessful- but a flat economy is probably more to blame than any fault or flaw of Zynga's. They'll be back. Meantime, state licensing authorities have received a respite for the second time this year (the first was the Black Friday prosecutions of Fulltilt poker, Poker Stars and Absolute.) Whether those authorities will make use of the extra time that's been granted to them remains to be seen.
Who May Yet Benefit
The fact that most state licensing authorities are still getting their act together also holds open an opportunity for overseas operators to form strategic alliances with local interests, the better to enter the competition for a licensed platform quickly. But they have to realize that these opportunities will not be delivered by parcel post. They have to get in amongst'em, as Davy Crockett said, and make their name and capabilities known.
An unforeseen beneficiary may be the online gambling affiliates. All very well to talk about the huge customer lists someone like MGM or Harrah's may have - that's a list of folks who might gamble online. An affiliate knows who is gambling online right now, because he cultivates them. The object of legalizing and licensing Internet gambling is to get revenue for the state, it follows that the faster the money comes in, the happier the state will be. And the best market for online gambling is the people who are already gambling online. Many states have categories of licenses for vendors and service providers associated with the gambling industry. It would probably be a good idea for a successful affiliate to get licensed as such. In fact, it would probably be advantageous to be licensed in the number of states.
The Pool of the Future
This will be particularly important for the future, because the liquidity problem is not going to go away. Smaller states to license expanded online gambling will be driven perforce to combine their betting pools. This has already happened in regards to horse racing bets with OTB and simulcast, and to state lotteries, with programs such as Powerball and Mega Millions. And nor would this violate federal law. Federal gambling laws require an underlying violation of state law to trigger them - therefore, if it's all right with the states, there is no problem. And federal gambling laws themselves, including the Wire act and UIGEA, contain very strong safe harbors: if it's legal at Point A, and legal at Point B, then it's legal between Point A and Point B.
And so now, especially since the DOJ has finally climbed off its high horse about the Wire, it should be no great endeavor to blend in the customer pools for online poker and other games, just as has already been done with horse betting and lotteries.
One word of caution: it ain't happened yet. Past experience tells us not to count our Internet gambling chickens before they hatch. All the same, this is a very positive development, and it wouldn't hurt affected parties to start getting ready.
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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