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Top-10 ways the industry could screw up online gaming in the U.S.

9 January 2012

By Vin Narayanan

Two days before Christmas, the Department of Justice handed the gambling industry a gift when it reversed its stance on the Wire Act and decided intrastate non-sports related gambling was legal.

As the industry cheered the DOJ opinion and eagerly anticipated licensed and regulated online gaming coming to the U.S., the only thought running through my mind was now was the time for a Lee Corso style "Not so fast my friend."

The DOJ opinion removes a legal and political obstacle for online gaming. But it doesn't ensure online gaming is suddenly going to dot the American landscape. Significant political hurdles still remain, as does the inability of major stakeholders of the gaming industry to agree on anything. So with that in mind, here are 10 things the gaming industry can do screw up online gambling in the U.S.

10. A federal or bust strategy

There are all sorts of logical reasons to want the federal government to regulate online gaming. At it's heart, online gaming is and should be interstate e-commerce. And as a result, it makes sense to create a national framework for online gaming. But there are significant obstacles facing federal legislation -- and the creation of good online gaming policy at the federal level (more on that later). And as a result, going federal or bust doesn't make sense.

In the House of Representatives, the Barton bill (named after chief sponsor, Rep. Joe Barton (R-Tex.)) faces an uncertain future. The bill, which would legalize online poker and criminalize other forms of online gambling, including lotteries, hasn't reached the mark-up stage. If the bill gets through the Subcommittee on Commerce, Manufacturing and Trade, and if the bill gets through the House Energy and Commerce Committee, it still faces a full floor vote. Barton has not been promised a floor vote by House Speaker John Boehner. And even though Barton told the Digital Gaming and Lottery Policy Summit he believes he has the votes in the House, it's hard to envision a scenario where Boehner will make his caucus take a pro-gambling vote in an election year. So a bill out of the House is unlikely.

In the Senate, the DOJ reversal on the Wire Act has given Senate Majority Leader Harry Reid more leverage. The Nevada Democrat can convince Republicans, including Unlawful Internet Gambling Enforcement Act (UIGEA) architect Sen. Jon Kyl (R-Ariz.), that in order to ensure most forms of online gambling are prohibited, they should legalize online poker and ban everything else. The problem in the Senate is senators who receive money from politically connected Indian tribes will not back Reid's approach, which confers a significant advantage to the Vegas casino companies Reid represents. In fact, it is in the best interest of many Native American casino operators to scuttle federal legislation -- especially with local casinos in position to enjoy the fruits of the DOJ Wire Act reversal.

Combine that with the fact that the best way for Reid to pass online gaming legislation is attaching a bill to must-pass legislation -- which is tricky enough in the best of circumstances, let alone an election year -- and the outlook for a federal bill is murky at best.

So if the outlook is murky at best, why insist on a federal or bust strategy when there are opportunities at the state level? I'm not sure. I would take what I could get, and use it as leverage to force Congress to act.

9. Kick the can in California

The concept of online poker has been kicked around by the California legislature and gambling interests in California since 2008, and absolutely nothing has happened. And it is entirely possible that California spits the bit this year and does absolutely nothing.

The critical stumbling block in California is the various Indian tribes running casinos in California can't agree on what their approach to online gaming should be. The Morongo Band of Mission Indians and the San Manuel Band of Mission Indians are clear proponents of bringing online poker to California, along with the state's card rooms.

Other Indian tribes in California want to take a much more cautious approach. Those tribes are not entirely sure online poker or any form of online gambling is good for their casino business. One of these groups is the California Tribal Business Alliance, which includes the Lytton Band of Pomo Indians, the Pala Band of Mission Indians and the Paskenta Band of Nomlaki Indians.

Until the Native American casino interests reach an agreement on online poker, it will be almost impossible to pass legislation in California. Politicians don't like picking winners among competing stakeholders, so the tribes will have to reach a compromise before anything moves forward.

8. Tribes get complacent

Until the DOJ made its Wire Act ruling, Native American casino operators were facing pressure to develop online gaming business plans and strategies. They knew Vegas casinos were pushing the issue, and that if Congress ever gave its approval, they would have to be ready to compete in a cutthroat marketplace. But now that the DOJ has put the power to regulate online gaming clearly in the hands of the states -- where local casino interests, including Indian casinos, rule -- some of the external stimulus to move quickly on online gaming has disappeared. And it's entirely plausible that in a resource constrained environment, which we are certainly in, Native American casino operators will look at online poker and say "Hey, let's slow down on this and figure out exactly what we want to do." And if that's the case, online gaming in 2012 isn't going to happen.

7. Smaller operators stay afraid

Smaller casino operators are worried that they can't compete in the online gaming space. They say they don't have the money to invest in the business, and they don't have the brand to compete against larger competitors. And as a result, they'd rather keep online gaming "illegal."

They're wrong. bet365 grew from a tiny, little-known sportsbook into an online betting behemoth. Netflix destroyed Blockbuster. Amazon beat Borders. But that's not the approach most smaller casino interests are taking. They view online gaming as a death threat, not an opportunity.

And in a state-by-state scenario, smaller casino operators hold much more sway than the big Vegas (and international) casino operators. These operators have working relationships with state legislators and have donated plenty of money to their coffers. And if they don't want online gaming coming to the state, it's going to be hard to pass legislation.

6. Let lotto operators get a competitive jump

State lotteries are in position to get a giant head start over the rest of the industry when it comes to online gaming. They can start selling tickets online right away, and work out all the kinks in the payment processing system before any online gambling legislation sees the light of day. They can also immediately offer casino games, like slot machines, that work off of a lottery engine instead of a random number generator -- much like video lottery terminals (VLTs). The games will look like and play like slot machines. And if the lotteries can do that before local operators get up and running, the casino industry will have a hard time catching up.

5. Poker only state legislation

The DOJ has given its imprimatur for all forms of non-sports intrastate games. That means as far as the DOJ is concerned, online blackjack, online slot machines, online roulette and other casino games are perfectly legal, along with online poker. Why should casinos push for legislation that will restrict their offerings if they don't have to?

The European experience has clearly illustrated online casino players are more valuable to operators than online poker players. They generate more revenue than online poker players. Even in the pre-UIGEA days, where more Americans gambled online, online casinos were more lucrative than online poker rooms. It makes no sense for the casino industry to push for a poker only solution.

And as the industry has learned from its attempts to repeal the UIGEA, it's hard to unring the bell. So don't ring it at all.

4. Lose a court case

Speaking of "unringing" the bell, the last thing the gambling industry needs is for a court case to void the DOJ's new opinion on the Wire Act, or anything regarding what's permissible in terms of online gambling. If a court ruling finds the Wire Act covers more than just sports betting, or some other horrific outcome (for the gaming industry) that I'm not envisioning, online gaming is in trouble.

Whether or not there is a court ruling may depend entirely on the defendants in the Black Friday cases. One of the Absolute Poker cofounders has already reached a plea agreement. But if others put up a vigorous defense, it may open up issues that are better left alone.

3. Lose a New Jersey vote

State Sen. Ray Lesniak has pulled his online gaming legislation (which would authorize all forms of online betting except for sports betting) and is trying to rework it so Gov. Chris Christie won't veto it. The biggest issue on the table is Christie views online gambling as an expansion of gambling in the state of New Jersey, and according to the New Jersey Constitution, the voters have to approve any expansion of gambling beyond the limits of Atlantic City. Lesniak views the gambling as being offered by Atlantic City casinos in servers located in Atlantic City, so there's no expansion of gambling that the voters need to approve. If Lesniak can't get the governor to budge on this issue, then it will have to go to a vote, and who knows what will happen then.
Some polls indicate that the voters will approve it. But the issue is hardly on the radar of New Jersey voters. However, it will become a major issue if it goes on the ballot. A ton of money, from people who support and oppose the measure, will be spent. There's no guarantee that it will pass. And if it fails, it's hard to see how New Jersey gets online gaming for several years.

2. Leave Native Americans out of the legislative process

This is primarily a problem at the federal level. So far, the legislative approach to online gaming in Congress is to write a bill that is heavily tilted toward the interests of Las Vegas casinos and then turn around and tell Native American casino operators, "Don't worry, we'll take care of you too." That's not a good approach to setting policy. And until that approach changes, it's hard to envision federal legislation passing.

Right now, the tribes are operating from a position of strength. The states have the ability to license and regulate online gaming. Most of their political strength is at the state level. So any clout they have at the federal level will be used to gum up the works. If federal online gaming legislation is going to pass, it needs to be more inclusive of the interests of the tribes. Otherwise, the industry is fighting the issue with one hand tied behind its back.

1. Poker only federal legislation

This is absolutely the worst strategy the gaming industry could pursue. Online poker doesn't make sense for every state. Many states don't have the liquidity to take advantage of it. Those states need online casinos, where liquidity isn't an issue, to generate revenue. Regulating online casinos isn't any different than regulating online poker. Yet the legislative process is treating online casinos like a poor cousin they don't want at the dinner table.

The legislative and political theory prior to the DOJ reversal on the Wire Act was poker needed federal regulation provide liquidity and lessen regulatory burdens -- complying with 50 different regulatory requirements is much more difficult than complying with just one. Poker was also believed to be the most politically viable game to pursue at the federal level, so it was worth it to throw online casinos and online casino games under the bus if it meant getting poker.

Although I appreciate the liquidity issue, it's a bit of a red herring. States can cooperate with each other, like they do with the Powerball and Mega Millions lotteries, so liquidity doesn't have to be a problem. And when you consider California is likely to opt out of any system put in place by Congress, there isn't going to be "true national liquidity."

The political calculus has changed now that casino games are clearly legal at the state level. It makes no sense to pursue legislation that would restrict what a casino could offer online. Yes, federal regulations are a worthy goal, but not at the expense of severely restricting the marketplace.
Top-10 ways the industry could screw up online gaming in the U.S. 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.