US Poker: Fact or fiction?
US Poker: Fact or fiction?
With Nevada ready to throw the switch, and federal legislation looking increasingly unlikely, Joanne Christie asks what are the hopes for US online poker?
For several years, poker operators have been banking on the eventual resurrection of the US market to boost their flagging revenues. But their hopes for the regulation of what was once the biggest online gambling market have been repeatedly raised and dashed, as various pieces of legislation have been introduced to much fanfare only to stagnate or be vetoed by legislators. In recent times, however, the discussion about legal for-money play in the US has moved firmly into ‘not if, but when’ territory. A number of bills are progressing in states across the US, and the statement late last year from the Department of Justice (DoJ) that it now believed the Wire Act (the legislation frequently used in the past to justify the DoJ’s stance that online poker was illegal) applied only to sports betting, has only added weight to the momentum.
With an apparent softening of the government’s stance on internet gaming, and PokerStars and Full Tilt currently out of the way stateside, it’s no wonder many European operators are seeing dollar signs. But while online poker looks like becoming a reality in the near term, it’s not exactly shaping up as many had hoped. While individual states, including Nevada and New Jersey, are close to putting a licensing system in place and could have poker sites up and running as early as next year, the federal legislation many had hoped for still looks some way off, particularly given the upcoming election. And for many in the industry, state legislation can never be anything more than a second prize.
Most of the industry’s biggest names (headed by Caesars) have been vocal in their preference for a federal licensing regime, and many of the Native American tribes have also indicated an unwillingness to play ball with state regulators. Many potential roadblocks, objections and issues may yet appear and it doesn’t appear to be in many of the most powerful lobbying groups interest to allow online poker legislation to slip into the hands of the states. It is likely to be a slow process, and the time to act is now before the states get too much of a headstart.
State v Federal
There are two main reasons behind the push for overarching regulations, explains David Strow, director of corporate communications at Boyd Gaming. ‘Our strong preference is for internet gaming to be legalised and regulated at the federal level. It would be far easier to secure just one licence and be subject to one set of regulations. A nationwide system also provides much greater player liquidity than a state-by-state system,’ he says. ‘In our view only a handful of states will have enough liquidity to make internet poker profitable.’
Even those who’ve been championing state legislation agree that many states will not be commercially viable for poker operators if they operate with only intrastate player pools. Joe Brennan, chairman of the Interactive Media Entertainment and Gaming Association (iMEGA), says businesses could struggle in Nevada. ‘Nevada’s population is only about two million and 90% of the population lives within 20 minutes of a licensed casino and poker room. Why play online when you can go to the casino and you don’t have to worry about transferring cash into an online account. You also get all of the casino amenities such as comps and free drinks.’
But Brennan says New Jersey, with about nine million residents, may fare better, while others are pinning their hopes largely on bigger states such as California for commercial viability. Although desperate for additional tax revenues, California seems to be having trouble securing the support of all the interested parties for its current bill, hinting it may go the way of the two unsuccessful bills of the previous two years.
Brennan adds that federal legislation looks increasingly unrealistic. ‘I’m in favour of any legislation, whether it is federal or state. But we’ve become much more prominent regarding state because that is the only area that has shown any real progress. The federal track has only seen one committee vote in six years.’ Despite voicing positive proclamations about the possibility of a federal bill, and many rumours circulating about a possible partnership with long-time gambling critic Senator Jon Kyl, Senator Harry Reid has yet to follow up his unsuccessful 2010 bill with anything more promising.
Brennan also dismisses the major opposition voiced by many of those championing federal legislation. ‘Organisations that want to see a federal solution say things like, “you are going to have a patchwork quilt of regulatory requirements”. Well of course that is exactly what we have right now in the bricks and mortar industry. All of those companies are in multiple states with a patchwork of regulatory requirements. And the requirements are probably not going to be all that different from the ones they have in the offline industry.’
However, Frank Fahrenkopf, president of the American Gaming Association (AGA), says a state-by-state solution will not adequately protect consumers. ‘There has to be federal legislation that establishes minimum standards of consumer protection, underage gambling protection and support for those who can’t gamble responsibly. The federal government would not regulate and license states. What would happen under our proposals would be that the federal government would delegate to those states that have a long history of regulatory control with appropriate law enforcement oversight.
‘We believe that this is a better way to go to protect consumers than having every state trying to run off on its own to try to put into place a system. We think they would be establishing a race to the bottom with regard to consumer protection. If a state really wanted to attract companies they would put as little as possible in terms of consumer protection regulations in place so that companies would go there, as it would be less expensive than going to a state that had stricter controls.’
One of the other ways it has been suggested that states such as Nevada will get around the lack of intrastate liquidity is by pooling with other states via interstate compacts. But without federal legislation, this could also prove difficult, says Fahrenkopf. ‘If you have four or five states that join together in an interstate compact perhaps you would have enough liquidity to make it worthwhile. The difficulty with that is the United States constitution gives the federal government the right to accept or reject interstate compacts.’
Regardless of what the various participants actually want, it seems likely most will take whatever they can get, at least in the early stages. ‘We would obviously prefer federal legislation being put in place as opposed to a patchwork of state regulations, but ultimately will choose to prepare ourselves for all eventual outcomes,’ says Norbert Teufelberger, co-CEO of bwin.party, which in October last year announced a deal to form a new venture with US casino giants MGM and Boyd Gaming in the event of online poker legislation being enacted. ‘We see [Nevada and New Jersey] as a good first step and I do believe that once any of those states start to embrace online gaming then it is going to mean other states will follow,’ says Teufelberger. ‘But if it remains purely Nevada intrastate, obviously it has limited commercial appeal.’
Bwin.party has much riding on a US revival. Prior to UIGEA PartyPoker had a 50% share of the US market, but after a six-year absence, is there any real hope it can get back there? It hopes its proposed B2C joint venture with MGM and Boyd, in which the former will hold 25%, the latter 10% and bwin.party 65%, will see it come close. ‘Clearly the goal is to be the market leader again but obviously it will be a very different environment. Our footprint will be much smaller in terms of a percentage of the market. But we would expect to reach the same levels in terms of absolute revenues being generated, our goal is about 20% together with our partners,’ says Teufelberger.
While some have questioned this kind of optimism being bandied about by European CEOs, there is one big factor that suggests they may be on the right track and that is the strength of demand. With the DoJ being such a formidable opponent, there are few options left for US poker players, particularly since Black Friday. ‘For the most part, the for-money poker market here in the US was all but frozen with the Black Friday indictments. Only the very adventurous are playing on some of the smaller poker networks that are still trying to accept for-money play out of the United States,’ says Brennan. In its recent Land of eGaming Opportunity report, consultancy H2 Gambling Capital estimates that even if poker was the only game to be regulated, the size of the US market by 2015 would reach about US$5.4 billion, the same level as in 2006 when UIGEA was introduced. Though it says the US accounted for just 8% of global online poker revenues in 2011, it predicts this will reach 28% after just one full year of regulation in the 12 leading states.
But Brennan is not convinced that European poker operators will be the main beneficiaries of this boom. ‘The problem that existing European operators have is that they have essentially been seen as carpetbaggers waiting around the fringes for regulatory change and then assuming that since they are the only ones who are currently in operation of any meaningful scale that they are going to be the best positioned to swoop in. But they have not done the political state work, not even here in Washington DC, and instead they’ve relied on a handful of companies to try and do that work for them.’
With all the signs to date pointing at legislation that would grant licenses to American organisations such as lotteries, bricks-and-mortar casinos and pari-mutuels, Teufelberger says that it was only natural for European operators to take a back seat. ‘We are providing input from our online experience but we are not the ones who are in the driving seats, this is clearly the US incumbents. We expect that any US legislation will obviously give a big advantage to the US operators. I believe we read the situation correctly some years ago and we have been much involved in trying to pick the best partners to be prepared for any eventual outcome, be it state or federal legislation.’
Pick your partner
US casinos, for their part, seem keen to partner with European operators to help them navigate the regulated world and 888 has also entered into a pre-emptive deal with Caesars via its B2B arm Dragonfish. But not all of them are going down the partnership route. Some are simply buying the software they need, for example Shuffle Master, with its recent acquisition of Ongame. And after first signing a deal to provide a free-play site for Golden Nugget, Chiligaming’s B2B platform has now been acquired by Bally Technologies in the US.
For Chiligaming founder Alexandre Dreyfus, the move made more sense than trying to enter the US market alone. ‘When we did the deal with Golden Nugget we were aiming to become a B2B provider to the US market. But then we looked at the licensing process and we know that America is very protective especially for gaming, they do not have a lot of international gaming companies in the US, and I think that online gaming is going to be the same. Instead of trying to be a standalone and trying to fight against big American companies, we decided to join them.’
While some analysts have described the acquisition as modest for a company of Bally’s size, for Chiligaming it was lucrative enough to convince the firm to shut down all of its European customer-facing sites, apart from in France where the market is regulated.
The move, during which all of Chili’s European games outside France were merged with Poker770, was made to ensure all of its operations were 100% legal before it signed the US deal. ‘The fact we are a small company and not too big to integrate, the fact that we have a unique technology, very open architecture and the fact that we never did any US business either before or after UIGEA made us very clean and attractive for Bally,’ says Dreyfus.
But while this type of deal may seem a cheap solution for US firms, after all they already have name recognition and this way they could combine it with good software without entering partnerships as there are reasons this option falls short, says Strow. ‘We did consider such a course of action, but believe that being part of large, integrated network with sufficient liquidity would be a better solution for us than going it alone, and not having shared liquidity with other companies.’
Whichever way they go about it, it seems clear gambling companies will continue to ready themselves for the regulation of the US poker market. Though it seems it is state regulation many are, resignedly, preparing for, some are still hoping for something at a federal level. ‘We were very surprised by UIGEA back in 2006 so we may wake up one morning and find we have federal legislation, because it just makes so much more sense for online,’ says Teufelberger.
From the US there also remains hope, if not full belief this could be their year. ‘We are still hopeful,’ adds Fahrenkopf. ‘Our industry is an industry based on luck. We could be lucky and accomplish something in this session.’