Internet Gambling’s Rocky Road to Regulation

The current status and uncertain future of Internet gaming was the focus of three intense days of debates, panel discussions, breakout sessions and keynote addresses during the second annual iGaming North America Conference, held March 4-6 at Planet Hollywood Resort & Casino in Las Vegas.

According to conference organizers, approximately 558 people from around the world attended the three-day conclave to hear what gaming industry heavyweights, politicians and experts in the field had to say about how Internet gambling may affect the gaming industry as a whole.

Linda Shorey, a partner in the legal firm K&L Gates LLP and a member of the firm’s Betting and Gaming Practice Group, perhaps summed up the uncertain future of Internet wagering best:  “My crystal ball is very muddy,” she said.

There seemed to be a lot of muddy crystal balls at the conference, which generated far more unanswered questions than any semblance of clarity on the subject. But one did thing emerge from the discussions that most everyone could agree upon: When Internet gambling does become legal, whether through umbrella federal legislation, by a patchwork quilt of state laws or a combination of both, its financial impact will be massive.

To put this into a historical perspective, sports betting generated $380 billion in revenue; not last year, or the year before that, but in 1997, when the Internet, 24-hour cable sports and related technology were in their infancy.

The Innovation Group, one of the event’s sponsors, provided research predicting that gross gambling yield for U.S. online gaming could reach $15 billion by 2017 if this nascent industry is regulated.

Jonathan Halkyard delivers the keynote address.The iGaming North America Conference unofficially began on March 4 with a “boot camp” that featured such topics as “Interactive Gambling – The View from 30,000 Feet” and “Internet Poker 101.” A welcome reception later in the day gave attendees an opportunity to mingle and network.

On Monday, former Las Vegas mayor Oscar Goodman, accompanied by two brightly plumed showgirls, each carrying a martini, buoyantly welcomed the attendees to the official kickoff of the conference. Goodman was followed by Caesars Entertainment Executive Vice President and Chief Financial Officer Jonathan Halkyard, who gave the keynote address.

Halkyard advocated for reform of federal Internet gaming laws such as the Wire Act, and for strict federal regulation of online poker and other forms of Internet gaming to protect consumers, including the authority to shut down rogue gambling sites. He believes that only congressional action can adequately address the many issues surrounding Internet gaming, and that individually managed and network-hub wagering sites can coexist.

Shaun Rieve, a legislative and policy analyst for the Arizona Department of Gaming, reacted to Halkyard’s remarks by noting the importance of states’ rights as it relates to federal regulation of Internet gaming.

“As far as states are concerned, it’s important that all states have their own rights,” Rieve said. “If a state doesn’t want to opt into it they can. If they don’t, they still have the potential to say that ‘no this isn’t right for us’ and maybe look at it later down the road.”

The states’ rights issue also has a major impact on Native American casino operators. Tribal gaming operators expressed their concern that creating state-regulated Internet gaming would be a tricky and difficult process. Questions regarding how state and federal legislation will affect existing tribal compacts remain unanswered.

This was one of several topics discussed during a federal legislation panel chaired by Anthony Cabot, a partner in the firm Lewis and Roca LLP.

At the heart of this panel discussion was the impact of two pieces of legislation that are currently being considered by Congress. The first, generally known as the “Campbell/Frank bill” (HR 1174 and HR 2267, respectively), would provide for licensure and regulation of Internet gambling, other than sports. It would exclude any operator that “knowingly participated in, or should have known [it was] participating in, any illegal Internet gambling activity,” such as “taking an illegal Internet wager,” as well as allow individual states or tribes to opt out or in. Oversight would be vested in the office of the Secretary of the Treasury. The bill does not, however, provide for new taxes or fees for licenses.

A different bill, HR2366, authored by Congressman Barton (R-Texas), would provide for licensure and regulation of Internet poker facility operators and strengthen the Unlawful Internet Gambling Enforcement Act (UIGEA) under the oversight of the Secretary of Commerce. Initial licensure would be limited to certain U.S.-licensed gaming operators, including commercial casinos, tribal casinos, racetracks and card rooms.

“It’s critical to understand that there are really multiple forms of gambling in the United States and these affect online gambling,” Cabot noted. “There’s horseracing, there’s sports, there are games of chance, which can be casino-type games or lottery-type sponsored games, or games of mixed skill and chance like poker. When you start looking at all these different bills, you cannot assume that all four forms of gambling will be treated the same. The greatest example of that is horseracing. Horseracing is always going to win. For any legislation that comes out, horseracing will get an exemption. When people ask ‘why,’ the answer is: Horseracing is the sport of kings, and the kings are United States senators.”

The conference also featured a panel of gaming visionaries who shared their five-year predictions for the U.S. Internet gaming market. John Acres, CEO of Acres 4.0 and a respected gaming industry innovator, was perhaps not as optimistic about the future of Internet gaming as his colleagues. “The taste and feel of Coke triggers a pleasurable emotion,” Acres noted. “Similarly, players just want winning experiences and are willing to pay for them. The Internet is just a delivery mechanism. Without the possibility of loss, winning is meaningless.”

“We can only succeed in putting the player first by deploying personalized experiences tailored to individual players,” Acres added.

Fellow panelist John E. Taylor Jr., chairman of the board of Twin River Casino, agreed, commenting, “We need to meet the player where they are and give them the content they want.”

One of the hot-button issues swirling around the three-day conference was the impact—real or imagined—of last year’s Department of Justice (DoJ) ruling that intrastate online gambling (sports betting excluded) does not violate federal law.

During a structured debate on the topic “The DoJ Has Spoken – Who Wins and Who Loses?” a number of differing opinions regarding the legal implications of the ruling were discussed. Joe Brennan Jr., representing the Interactive Media, Entertainment & Gaming Association (iMEGA), argued persuasively that despite the impact of this federal opinion, the businesses and institutions that will drive industry growth need more clarity on the legal and political fronts before Internet gaming can become truly viable.

When asked whether or not the DoJ ruling accelerates the process of legalized regulated online gaming in the U.S., panelist Bryce Geoffrey, general counsel for the Lock Gaming Group, responded by saying: “From the legal perspective, I don’t think that the DoJ’s statement is very important at all. …What it’s really saying is that lotteries can sell tickets across state lines and it’s not a violation of the Wire Act. And the second point is that it’s nonbinding; it’s just a statement by one group of lawyers within the DoJ. There’s not been a court ruling.”

Katie Lever, general counsel and executive vice president of Shuffle Master Inc., which had earlier that day announced they had purchased European online gaming company Ongame, agreed. “You can sell lottery tickets online without violating the Wire Act. But it is non-binding and a very narrow legal opinion,” Lever noted.

Jeff Danielson, president pro tempore of the Iowa State Senate and Massachusetts State Representative Dan Winslow participated in a panel discussion regarding current state Internet gaming legislation and the issue of states’ rights versus federally mandated Internet gaming laws.

“Today, the policy for online poker is to do nothing by default,” Danielson stated. “We neither prohibit it nor do we say that it’s legal. It’s really in legal limbo. I believe that we ought to have a thoughtful policy and a responsible policy that protects poker players’ rights to have a fair game and a level playing field, whether they play in a casino or online.”

Danielson noted that the state of Iowa doesn’t necessarily need the potential revenues generated from online poker; rather, he is concerned about the money leaving Iowa for offshore or European websites.Former Las Vegas Mayor Oscar Goodman with two showgirls.

“What concerns me in Iowa is our economic status; that is, the money that is currently in Iowa that leaves every year based on online poker,” Danielson said. “Our estimates on the conservative side are $30 million a year leaving Iowa and going overseas. At the height of poker popularity in 2008 and 2009, we believe that was closer to $100 million. I consider that a problem that needs a resolution.”

“Everybody in this room probably in their careers has thought that we will eventually see online Internet poker gaming here in the United States,” declared Winslow. “And I’m here to tell you that the time has arrived and it is 2012 and 2013. The time is now.”

“The states are all in a race to see who can be first, better, faster with respect to development of (online poker) technology, Winslow added. “The kinds of pressures and incentives that motivate Massachusetts are the same and are common throughout all of the states in the United States. The commonwealth of Massachusetts has a very successful lottery. It brings in $4.5 billion a year in revenue, mostly within Massachusetts. Here’s the scary truth: Young people don’t play the lottery. Young people are engaged on the Internet, and we don’t have that product line, either for the lottery, or for poker or for any other kind of gaming.”

The conference was not without its lighter moments. Odds maker Wayne Allen Root, chairman and CEO of Cool Hand Root Television and former presidential candidate, joined Brennan, director of iMEGA, and Art Manteris, vice president of race and sports operations for Station Casinos, for a spirited and often humorous discussion regarding the prospects of legalized online sports betting.

“I grew up in New York, and I don’t think I knew a single person who didn’t have their own bookie,” Root noted. “So sports gambling and sports, to me, go hand-in-hand. It’s no coincidence that the No. 1 TV event is also the No. 1 gambling event—the Superbowl. It’s also no coincidence that No. 2 TV event is also the No. 2 gambling event—March Madness.”

“It’s also no coincidence that no one bets on women’s volleyball and the ratings are zero,” Root quipped. “To me, TV and sports leagues and gambling are all intertwined. I’ve never seen anything so hypocritical in my entire life than the NFL and other major networks and the NCAA acting as if they are anti-gambling. Without gambling, they wouldn’t have the money or the popularity that they’ve gotten. It’s all a gigantic farce.”

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