Understanding the biggest market in the world Market Barriers US Internet Gaming 1
Executive Summary In 2009, the United States witnessed an alignment of forces that can finally bring long-awaited clarification to the status of online gambling in the country. The US has already shown itself to be the world s most valuable single market for online gaming, and one where the market for Internet poker has continued to grow even since its prohibition in 2006. But a combination of falling state tax revenues and economic turmoil has focused legislators attention beyond land-based casinos and racinos, and towards the benefits of expanding online gambling. Still, there is unlikely to be any blanket liberalization of online gaming, either at the state or federal level in the US. Internet poker will find itself favored above online casino gaming and sports betting which, thanks to the overwhelming political influence of the sports leagues, will remain outlawed except at a very localized state level. State lotteries which have proven their revenue generation abilities and settled their online payment concerns will lead the next wave of US developments towards regulated online gambling in 2010. They will take their lead from European national lotteries and Canadian provincial lotteries, which are already exploiting their respective online markets. Lotteries Leading on Tax The taxation position of US state lotteries is a known quantity for state politicians and budget comptrollers. By contrast, reliable and non-contentious revenue estimates for privatelyoperated online gaming are elusive, as a recent state-level study on Internet poker in Florida concluded. The endgame for online lotteries is Internetbased video lottery terminals (VLTs). Certain state lotteries already operate slot machine-style gaming via VLTs in land-based outlets. Shifting these games online would effectively open up lottery-operated Internet casinos and maximize revenues for cash-strapped state governments. Among the more progressive lottery states, online ticket sales will prove a halfway-house towards offering these VLT games over the Internet. Following the request for an opinion from the Illinois Lottery, the US Department of Justice (DOJ) is considering the legality of Internet lottery sales under federal law. However, with formal online legislation already passed, all indications suggest that Illinois is ready to proceed in the absence of outright DOJ opposition. At the same time, the state lottery in the largest lottery market in the US, New York, is also preparing to launch Internet ticket sales, followed quickly by online casino games. GamblingCompliance s resounding conclusion from the October 2009 North American Association of State and Provincial Lotteries (NASPL) convention was that other state lotteries including those in California and Minnesota are already charting moves towards interactive casino-style games. Others are poised to follow their example if they prove successful. Casino Sector Divided A recent report by the US Congress Joint Committee on Taxation (JCT) made chilling reading for the Nevada-based casino sector. It estimated that online gambling could raise $41bn in federal taxation revenues over the next 10 years. Land-based casinos have the expertise and customer loyalty to succeed online. But to do so will bring the heavy burden of federal taxation and the risk of exposure to a new group of regulators that might not understand the industry they are taxing. The Las Vegas industry is divided between those operators that welcome online expansion such as Harrah s and those, including Wynn, which doubt its value. As such they can find no formal consensus. Consequently, the land-based casino industry finds itself isolated between a lottery sector that already operates successfully under tax conditions commercial casinos could not accept, and the prospect of federal licensing accompanied by unprecedented federal intrusion. It is a predicament that will stifle action.
Online Tribal Gaming Still Distant There is a widespread belief in Europe that statelevel measures to implement an online poker network in California run by tribes and card rooms are close to success. This will not prove to be the case. Efforts by Californian politicians to introduce legislation to facilitate online poker demonstrate the perils of proceeding without tribal consent. At the same time, California s gaming tribes are far from united on the subject of online gaming. The prospect of federally-sanctioned online gaming has stirred much activity, as some tribes such as the Morongo look to secure a dominant state-level position before any national legislation takes effect. However, other tribes have very different positions, which look no further than the maintenance of their land-based franchises. The bruising disagreements over distinctions between class II and class III gaming machine types that have overshadowed Indian gaming for many years now look set to find resolution under a newly appointed National Indian Gaming Commission chairman. Yet, exploring the status of online gaming, with its uncertain position under the Indian Gaming Regulatory Act, presents far too much risk for tribes to accept. Fears over creeping state and federal control and taxation the so-called camel s nose under the tent also underscore tribal skepticism. Enforcement Far from witnessing a decline in federal enforcement activities, the three years since the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) have seen the net widen to include non-sports betting activities such as poker, and delve deeper to include seizures of funds from payment processors. In all cases, lawmakers have applied a wide range of enforcement tools and will continue to do so, even as they struggle toward a definition of what constitutes unlawful Internet gambling. The DOJ and its long-standing opposition to interstate gambling remains the biggest barrier for any operator attempting to conduct online business in the US. But in the past three years one principal change has occurred the spreading of a realistic belief that state-level regulation of Internet gambling is viable and that the once-chilly regulatory environment for federal legislation is thawing. The principal drivers of these changes are: UIGEA: Passed as an addition to a port security bill in October 2006, this hastily-drafted act has unexpectedly focused legislators minds on the exemptions and carve-outs that remain available under imperfect legislation. While moves to repeal UIGEA are underway, its legacy will ensure something similar is still required to ensure the exclusivity of licensed operators in a regulated gambling environment. Yet greater clarity over what constitutes unlawful Internet gambling is an absolute pre-requisite prior to any such legislation proving effective. State Budget Deficits: While California is in the worst position in terms of financial plight, recent analysis from the Pew Centre for the States suggests that at least nine other states are following close behind. Although the economic slump has savaged land-based casino revenues, states continue to license new VLT facilities. This same momentum has led them to investigate the possibility of state lotteries or tribal entities offering online gambling to provide additional revenue sources. The chilling effect of the DOJ s 2005 warnings to North Dakota remains, but it is not enough to halt the drumbeat of states looking to emulate Illinois in passing legislation to enable their lotteries to go online. Obama Administration: The November 2008 change in government has prompted far-reaching recalculations in many sectors. While there are no obvious indications of a softening of approach in DOJ policy toward online gambling, tribal gaming is seeing a reconsidered approach, with a commitment to address the vexed issue of offreservation gaming.
Foreign Interests Face Frustration While European and Canadian investors remain intently focused on developments in the emerging US online market, their hopes are set to be frustrated. In 2007, as a consequence of unfavorable judgments at the World Trade Organization s (WTO) appellate body, the US opted out of the WTO s General Agreement on Trade in Services (GATS) commitments regarding gambling. This cleared the way for the US to shape its trade policies on the issue of gambling as prohibitively as it chooses, with no recourse to external bodies for excluded investors. Private operators scored a notable moral victory when they sided with the Antiguan government at the WTO. But this consequently ensured a protectionist position from the US, which will limit opportunities for non-us gaming companies to at best business-to-business (B2B) or businessto-government (B2G) deals. Operator licenses will likely be reserved for US companies. Gaming companies that have attracted the attention of the DOJ in the past will also have their work cut out to obtain any legal market presence. Foreign observers and suppliers have kicked up a great deal of dust through their lobbying strategies. But their principal focus has been to support the federal initiatives of Barney Frank, which, in the current election cycle, have scant chance of progressing until at least the nonelection year of 2011.
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