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New analysis: California online poker faces many obstacles

10 February 2010

By Vin Narayanan

The California Senate Governmental Organization Committee held an informational hearing on Internet poker Tuesday and three facts clearly emerged from the full-day session:

  1. California's budget problems are so severe that legislators are seriously considering online poker as potential new revenue stream.
  2. There are huge political and legal hurdles that need to be cleared before regulated online poker becomes a reality in California.
  3. The online gambling industry is positively salivating at the opportunity to break into the California market.

State Sen. Roderick Wright, who chairs the committee that held the hearing, noted in his introductory remarks that there wasn't an active bill regarding Internet poker, and that the purpose of the meeting wasn't to discuss rumored or unofficial proposals.

"The purpose of the hearing today is to establish a framework with which the legislature can look at Internet Poker," Wright said.

"This is not for or against anybody's ideas. This is not about anybody's proposal," Wright added. "We're trying to identify what would be the best course of action for the state of California. We're trying to educate ourselves as to what makes sense."

"Whatever we end up doing will end up in court, so clearly Judge Wapner will be deciding this," Wright added.

While Wright joked about the potential legal battles surrounding online poker (more on that later), he was quite serious about the educational purpose of the hearing. Among the people invited to testify at the hearing were Ed Andrewes, managing director of eGaming for Ladbrokes, Paddy Power's Cormac Barry, former Tain CEO Roberto Savio and Jonas Sunderland, head of business intelligence at the Swedish Gaming Board.

Andrewes had no doubt a regulated online poker market in California would thrive.

"Why would people come off the illegal sites to play legal sites?" said Andrewes, restating a question asked earlier by a legislator. "(Because) players want to play on regulated sites. They want to play where they can find the trust and share the trust."

Barry was even more bullish about the prospects of online poker in California.

There is "a very significant pent up demand," Barry said. "Based on research from GBGC (Global Betting and Gaming Consultants), the California online poker market will be $150 to $200 million within three years," Barry said.

"California can have a significant license fee, one larger than Italy," Barry added. "(You) can easily charge single digit millions and a have a higher surcharge than France -- around 5 to 7 percent -- because the operators want access to the U.S. market."

Barry also said online poker could bring jobs to California if it acted quickly.

"It's a unique opportunity to become the center of excellence for online poker, not only in California, but worldwide," he said. "Another state will eventually do this, and if California hasn't, that's where all the operators will go to set up jobs."

The committee received independent confirmation of the likely growth and size of the California online poker market from William Eadington, a professor of economics at the University of Nevada, Reno and Simon Holliday of H2 Gambling Capital.

Holliday said California has about a $200-million market for regulated online poker. And Eadington assured the committee that players would indeed embrace regulation.

"If you make a legal alternative attractive, it increases the market," Eadington said. "Players have demonstrated a preference for legal forms of gambling over illegal or gray forms of gambling."

Eadington recommended that California issue three licenses for online poker, while veteran gaming law expert Frank Catania suggested that the open market should determine how many licensees were available in California.

"Companies should apply for licenses and licenses should be issued," Catania said. "And it should be well regulated. Internet poker that comes from other places like Isle of Man do very well, and it will do very well here."

While it's heartening that the committee received such strong pro-Internet poker testimony, most of the witnesses made it quite clear that regulation would only happen if the "exclusivity" issues were sorted out. What exclusivity issues you ask? Well, here it is in a nutshell...

When the Native American tribes negotiated agreements -- called compacts -- with the state of California that allowed them to build casinos, one of the clauses that was part of the compacts gave tribes exclusive rights to offer gambling devices. That meant that while the state could authorize card rooms to offer poker -- and there are many state-authorized poker rooms in California -- it could not license any gaming establishment to offer slot machines, or any other form of gambling that involves gambling devices.

This exclusivity right is why Indian casinos in California pay a substantial sum of money -- one witness estimated it a $365 million a year -- to state coffers. And if the exclusivity right is ever violated, the casinos will not have to pay that money to the state.

So the legal argument surrounding online poker is whether it relies on gambling devices, which violate the exclusivity clause. The legislative counsel for the California assembly doesn't think so, according to Wright. Neither does George Forman, a lawyer associated with the Morongo tribe, which wants to bring regulated online poker to California.

"Tribes have no exclusivity with respect poker," Forman said. "It is lawful in California for California and the legislature can offer it."

"The constitution allows slot machines and banked/percentage games only on tribal games," added Forman. "Poker is not a banked or percentage game. (The) compact defines a gaming device as a slot machine. A slot machine is a banked game, or a house game. In online poker there is no gaming device. The only thing is that Web site servers do is shuffle and deal the cards. They don't play against the machine or play against the house.

"I don't think there is an intellectually defensible legal argument that online poker could constitute a breach of the exclusivity laws."

Not surprisingly, Forman's opinion was vigorously contested by other Native American tribes who absolutely do not want California to regulate online poker.

Leslie Lohse, the chairwoman of the California Tribal Business Alliance, said there was no doubt that "Internet connected devices" for poker were a clear violation of the compacts.

"Terms of the compact clearly define gaming devices, which clearly includes poker on Internet connected devices...The only thing that matters is the electronic device allows the player to connect and place a bet."

Lohse also made it perfectly clear what would happen if California moved forward with plans to license online poker.

"Tribes are paying the state $1 million a day," Lohse said. "If non-Indian businesses offer gaming devices, the tribes will stop making payments."

"Your time is better spent looking in other directions to address the budgetary issues of the state of California," Lohse added.

Lohse wasn't the only Native American representative who bluntly opposed licensing online poker.

"Internet poker is a game changer," said Mark Macarro, chairman of the Pechanga. "We know we tried to insulate ourselves from this very thing by signing a 20-year compact. Maybe in another 20 years we can talk about this if there are no more exclusivity issues."

Wright, for his part, was not content to let this argument stand.

"This isn't about whether we should allow Internet poker," Wright said. "That ship has sailed."

"This is about what we should do now. Should we do nothing?" Wright asked.

"Yes. We should do nothing," Macarro said. "It's not possible due to the exclusivity agreements the state made with the Tribe."

At this point, State Sen. Leland Yee jumped into the fray.

"A contract is a contract and agreement is an agreement," Yee said. "But we are in rather extraordinary times, and the question is what other revenue resources are out there.

"If it is happening already, with horrendous budget cuts happening, we have to go out there and find a way to generate additional revenue. As nation, you can't turn a blind eye to the fact we're cutting child care and education. We've got a job to do and that is to take care of the people of California."

And that, in essence, is the political problem. The Native American tribes are big players in California politics. And the U.S. has a pretty poor history in terms of dealing with them. Deals, treaties and agreements have been continuously and capriciously broken by American governments, so honoring a treaty -- and not changing it midstream -- is a very big deal.

"It's about making agreements and honoring commitments," Lohse said. "The ink is not even dry on the last two compacts signed."

The Native American tribes have a lot of money to spend on political campaigns. So legislators will think twice before crossing them. Combine that with the potential legal challenges online poker could present and you get an environment in which it could be tough to get votes for an online poker measure.

Online poker might be coming to California. But it's not going to get there without a fight. And this fight will be unlike any the industry has ever seen before.

New analysis: California online poker faces many obstacles is republished from Online.CasinoCity.com.
Vin Narayanan
Vin Narayanan is the managing editor at Casino City. When he's not writing or editing stories, he likes to play Chinese Poker, Badugi, Razz and any other "non-traditional" poker game. He also thinks blackjack is his best game and loves game theory.

Before joining Casino City, Vin covered (not all at the same time) sports, politics and elections, wars, technology, celebrities and the Census for USATODAY.com, USA WEEKEND and CNN.

A proud graduate of Michigan State University, Vin can be found on most nights and weekends trying to find a way to watch the Spartans play football or basketball.