Learn to love Trenton and Sacramento

Many in the igaming lobby  in Washington DC have been counting on the global economic downturn, and the need for the Federal government to find incremental revenue sources to fund the programmes that comprise the annual Federal budget, to provide the incentive for legislation to 'legalise' the industry in America. Numerous economic studies produced by well-known research firms have been circulated on Capitol Hill, and their estimates have become a talking point for industry supporters and legislative sponsors who are trying to bring the undecided into the fold.

The effect of those same global economic forces, though, have trickled down to the state government level, where the need for new and substantial revenue streams is perhaps even greater. In fact, by comparison, the states have one significant disadvantage: they cannot print their own money, unlike the Federal government.

The result is that a few states are seriously looking at the igaming market and are measuring the feasibility and expected revenue from hosting their own 'intra-state' internet gambling systems. Specifically, internet poker has drawn the most serious interest. However, because of the unique peer-to-peer aspect of the game, and the direct relation it has to critical mass and liquidity, the question arises: can states, given their limited populations, adequately support and grow an internet poker system that will provide sufficient liquidity to draw existing players and become attractive to new players as well?

The answer is a qualified yes. However, it is unlikely that built-from-scratch new poker networks can succeed. And not in the time frame and with the projected revenue promised by some advocates, to make the intra-state proposition worthwhile or have a substantial positive effect on a state's fiscal prospects.

The reason is simple: existing operators hold most (but not all) of the cards, and are unlikely to go quietly into oblivion while these new systems take root, grow and attempt to capture the market that the operators themselves created.

Cooperation not competition

The only way for any internet poker system to work in the US will be for a government to offer a stake to existing operators in the future success of the new networks. The way forward, though, may not be as obvious or direct as operators may prefer, but I would suggest that failure to capitalise on this opportunity will inevitably lead to the decline of their own enterprises.

States have always enjoyed the exclusive right to regulate gambling in the US. While it leads to cross-border disconnect - with 50 states, there are 50 different sets of gaming laws - it is not unlike the differences experienced across the EU regarding igaming. European nations stand firm behind their sovereignty on the gaming question, even in the face of EU laws and agreements and the trans-national nature of the web. In the US, with our Federal system, states have always carefully guarded their rights with regard to gaming and have objected to most Federal encroachments on their sovereignty.

Already, three states have made definite steps toward enacting intra-state online gambling. As the prospects of regulated, intra-state internet gambling are judged to be realistic, other states will surely be watching these efforts with great interest.

New Jersey has taken the most concrete steps, with two bills introduced into the state legislature this January. The first bill would permit internet poker, and also casino games, for residents on sites sponsored by the state's brick-and-mortar casinos in Atlantic City. Additionally, both California and Florida have heard testimony from industry operators and analysts and considered the results of studies detailing the economic potential of regulating their internet poker systems within their borders.

Each of these states have existing brick-and-mortar gaming industries that hold significant economic and political sway. They are unlikely to stand back and permit the establishment of a new gaming industry in their backyards without trying to exert control or exclusive franchise over any in-state 'expansion' of gaming. This would not be an 'expansion' into internet poker, but rather an attempt at 'migration' of the existing internet poker markets into state-regulated outlets.

Necessity and utility

As a result, political necessity, in addition to utility, is likely to shape any resulting intra-state internet poker system. For online operators unaccustomed to sharing, this would seem to be a huge disincentive to play ball and try to become stakeholders.

Also, any new state-regulated sites would be at a significant competitive advantage when trying to bring over sufficient numbers of existing players to make good on the blue sky projections made to state governments to speed passage of intra-state igaming laws.

After all, players (and more importantly, their money) already have good homes at PokerStars, Full Tilt and other sites. The costs new state-regulated operators would have to assume, in marketing and incentives, to move existing players to their networks would be enormous, perhaps prohibitive. The liability the new sites would have for generating gaming tax revenue would also limit the amount of latitude they would have on rake (and rakeback). Existing operators, free of this burden, could peg rates at a level that would make the new, regulated sites uncompetitive.

When describing this to a state legislator, I compared it to two armies engaged in a battle, with one army (new sites) at the bottom of a pit, trying to fight its way up, while the other army (existing operators) encircles them at the top, throwing rocks down on the heads of their opponents. Given such an apparent huge advantage, what possible incentive would an existing operator have for joining state-regulated sites as a stakeholder?

The answer: banking, processing and capital. These are the only cards the new sites would have to play, but they are powerful and over a long enough timeline, could offset the advantages existing sites hold. If government were to show some patience (granted, not a typical characteristic in the US), these factors could actually prove to be the undoing of our industry's leaders.

Safety and security

The surety that would come from being normalised and regulated by states such as New Jersey and California would ensure access to proper banking and credit card processing that will enable significant expansion in the years ahead. One cannot underestimate the importance for drawing new players into the pool of trustworthy processing of Visa and MasterCard transactions.

Though existing players have shown that they are willing to continue to deposit funds at sites, despite great difficulty and without the level of trust one can expect from the big credit card companies, eventually they would 'follow the money' if the new sites created a large enough pool of easy games filled with newbies.

Given that, though not ideal, it would be prudent for existing operators to partner with casino operators, and develop business-to-business (or even business-to-government divisions) within their own corporate house. Whether casino, card room or internet poker operator, the best friend you can have, over the long run, is a satisfied host government, made so by immediate and substantial gaming tax revenues. Make one state happy and you are likely to be hearing from more faster than you can build your business.

If the US does go down the path of a state-by-state internet gambling system, be aware that the market will only become more Darwinian, with only the strongest, most adaptable companies likely to thrive over time. This will be good for the marketplace and consumers, though, as the evolutionary winners in this drive will have increased access to the capital markets to consume smaller competitors, and the processing that will be the foundation for significant expansion in the years ahead.