Online poker's window of opportunity may be closing
27 August 2012
By Howard Stutz
LAS VEGAS -- What seemed like a tremendous decision for the gaming industry nine months ago - the re-evaluation of the Federal Wire Act of 1961 - may not be so advantageous for Nevada unless Congress takes steps to enact Internet poker legislation.
A window of opportunity that could place Nevada at the center of the potential U.S. Internet gaming market is closing quickly, and some in the gaming industry worry that lack of federal action could cost the state tax revenues and casino customers, while making Nevada subservient to less-regulated states.
"There are different standards for gaming regulation in one state versus another," Station Casinos Vice Chairman Lorenzo Fertitta said. "We know some companies will shop for the lowest common denominator. We could start seeing bets being taken away from Nevada."
The U.S. Department of Justice on Dec. 23 reversed a 50-year-old interpretation of the Wire Act, saying the law covers only sports wagering. Legal experts said the decision frees individual states to let online operators offer poker and traditional casino games such as slot machines and blackjack if the play doesn't cross state lines.
It's been estimated that U.S. gamblers spent as much as $26 billion annually gambling online before federal prosecutors indicted the operators of three of the largest Internet poker websites in April 2011. Closing those sites, which had violated federal law by accepting wagers from the U.S., effectively walled Americans off from the online gaming universe.
Now, states dealing with tight budgets are looking at that huge, untapped Internet market and are increasingly open to allowing - and taxing - it. Lawmakers in several states are in various stages of adopting regulations to allow full-scale online gaming.
Several Nevada gaming companies are on the verge of offering in-state online poker, but they foresee trouble ahead if their market is limited only to players in the sparsely populated Silver State.
And not only are they concerned about missing out on poker profits, they fear gamblers who can play online at home won't bother traveling to Las Vegas's tourist-dependent resorts.
"We are sitting on our No. 1 economy based on bricks and mortar,' Fertitta said. "Now, those betting tourists might stay home and spend a significant portion of their budget online. You think we just went through a bad economy over the last three years? That could be nothing compared to effect of full-blown Internet gaming on a state-by-state basis. That's why we're so focused on some kind of federal structure that would set ground rules. What we advocate is poker only."
Fertitta's gaming companies include Fertitta Interactive, which plans to operate Ultimate Poker, an Internet gaming website branded in conjunction with his mixed martial arts Ultimate Fighting Championship. Nevada has adopted regulations allowing for in-state interactive poker on the Internet, and the first sites could be operational by the fall. Fertitta Interactive is seeking licensure by Nevada regulators to operate Ultimate Poker.
Tom Breitling, a co-founder of Fertitta Interactive and former co-owner of the Golden Nugget, notes that Nevada's regulatory structure and long experience in gaming oversight puts the state in a position to regulate Internet poker for the entire nation - something that can happen only with federal legislation. A state-by-state solution to Internet gaming "would be a disaster" for the Strip and could leave Nevada on the sidelines, he warns.
"You would see a proliferation of all sorts of games all over the Internet if this starts on a state-by-state basis," Breitling said. "If this goes interstate, Nevada may not be able to participate. Nevada could eventually compact into a national system, but that might take five or 10 years. Our operators are going to get hurt."
UFC General Counsel Lawrence Epstein, who has been assisting Fertitta and Breitling with Ultimate Poker, likened the issue to Nevada's fight against the Yucca Mountain. Elected and business leaders worked together to kill a plan to store nuclear waste near Las Vegas.
"This is the economic equivalent to Yucca Mountain," Epstein said, adding that a federal bill is needed. "It's the most important issue facing the state."
An issue gone cold
Those comments are seemingly falling on deaf ears. Federal online poker legislation has long been bottled up in Congress. There was some talk in July that Senate Majority Leader Harry Reid, D-Nev., and Sen. Jon Kyl, R-Ariz., had agreed on framework for legislation to regulate online poker. The bill would also strengthen laws prohibiting sports wagering and other traditional casino games on the Internet.
At the time, Reid said Republican votes were needed to push online legislation through Congress. He tasked fellow Sen. Dean Heller, R-Nev., with rounding up GOP support.
"We're now waiting again, as I do with a lot of things around here, to get some Republican support," Reid said.
Heller told the Las Vegas Review-Journal in July that he was "working with Kyl very closely to try to get something to happen."
But with the approaching elections distracting political leaders, the issue has apparently gone cold in Washington, shifting the debate to state capitals.
"Lawmakers are becoming more concerned that if the federal government does not pass its own bill, then too many states will have already enacted their own legislation that legalizes full online gaming," Macquarie Securities gaming analyst Chad Beynon told investors in a research report earlier this month.
Beynon said passage of any federal online gaming bill this year is highly unlikely.
"While we agree that progress at the state level could increase the pressure on the federal government to act, we think the hurdles for a federal bill in Congress are too big to overcome at this time," Beynon said. "We have not heard any change in how gaming companies are viewing this issue."
Seeking a federal solution
Most of the major gaming companies, backed by the Washington, D.C.-based American Gaming Association, have sought a federal solution to the Internet poker issue.
Caesars Entertainment Corp., which owns the World Series of Poker through its Caesars Interactive Entertainment Division, was first in line. However, Caesars is now exploring its options.
During the company's second-quarter earnings conference call Aug. 6, Caesars Chairman Gary Loveman said he doesn't believe Congress will do anything with Internet poker this year.
"It ultimately requires a legislative action in a Congress that hasn't had many in this session," Loveman said. "We will continue to pursue it. At the same time, we are much more active now on the state-by-state process than we have been historically.'
Loveman named Nevada, Delaware, and California as likely "early adopters in a state-by-state process."
Besides 10 properties on the Strip, Caesars has casinos in 13 states, including jurisdictions exploring Internet gaming legalization. Loveman told analysts that a state-by-state pool could grow quickly, which his company's attorneys believe will pass legal muster.
Caesars Interactive is already operating legal World Series of Poker websites in the United Kingdom, France and Italy that could easily go live in American markets.
"We are confident we can and will be in position to offer our products in any legal marketplace that opens up, as soon as they open up," Caesars Interactive spokesman Seth Palansky said.
Potential for jobs
To the Ultimate Poker operators, online gaming means jobs, especially in Nevada.
Breitling helped develop the Internet travel-booking service Travelscape.com, which was sold to Expedia in 2000 in a $90 million deal. He views Internet poker as the next wave of online business development.
In discussing the potential of Internet gaming, Breitling notes that he has spent time with Tony Hsieh, the Zappos CEO who plans to move 2,000 employees to a new downtown Las Vegas corporate headquarters by October 2013.
With federal regulation, Breitling said, Nevada companies would need to create and fill many high-tech jobs.
"It could equal five new Zappos businesses," Breitling said. "But we need a federal solution.
"We need to fix this," he added. "Doing nothing was an option before December 2011. Now, doing nothing is not an option."