Value Added: Internet Gaming

Author’s Note: This article is an extension of remarks made to the National Council of Legislators from Gaming States, Napa, Calif., on June 11, 2010.

When I am asked about the advisability of gambling expansion, I retreat and make explanations based upon a “bathtub” model I formulated years ago (see Figure 1). The bathtub model demands facts about the source of gambling dollars. Precisely whose pockets are these dollars coming from—tourists or local residents? It also demands facts about the alternate depositories for the dollars so collected—employees’ pockets, suppliers, taxation funds and profits for owners. The model also considers externalities such as economic losses from associated crime and compulsive gambling. What also must be considered is the value we place upon the product produced for the gambling customer—the value of the gambling experience.

Unfortunately for gambling proponents, the model usually shows that gambling results in losses of revenues for most host communities. The influx of dollars from a small number of tourist gamblers is strongly outweighed by the flows of dollars outward to suppliers, owners and taxation authorities, in addition to the costs tied to the externalities. While this may lead me to conclude that, economically speaking, the entire society would be better off if there was no gambling whatsoever—i.e., total prohibition—reality lies somewhere else.

Reality is that the total prohibition option is simply not on the table. Nor will it be. The gambling train left the station on many tracks, a long time ago. Moreover, the model is not totally applicable to situations where we ask what the solitary effects of one kind of gambling will be added to a blank slate where there is no other gambling. We cannot make a pure cost-benefit analysis by pretending to look at just one gambling project or just one form of gambling. We should instead use our theoretical bathtub model in another way—in a comparative way, as in a cost-effectiveness analysis.

The theoretical direction for a cost-effective analysis is significantly different. We are not asked to look at just one project—for example, one type of gambling or one gambling facility—and assess whether the project gives more or fewer benefits (money) to a community. Rather, we accept the existing reality—the existing types of gambling and the existing facilities—and ask whether the new project will add or subtract from the existing totality of benefits and costs coming from gambling activity. We do this by comparing the existing projects to the new project. Here, the bathtub configuration is helpful as we consider new flows of revenue coming from a new project.

The new proposed project we’ll discuss in this article is simply the legalization of Internet gambling operations. We can focus on various aspects of the bathtub diagram, and we can focus on the value of the gambling products before and after we add legal Internet gambling.

First, let’s return to the railway analogy. The Internet train began with one engine (provider) back in the early 1990s. Now there are 2,500 engines, and each is pulling many cars on many tracks. They are all chugging in one direction—and that direction is away from the station. The trains are not going to be turned back. Another way of putting it is that Internet gambling is an 800-pound gorilla, and it is in the room. In fact, it’s in every room where there is gambling activity. Internet gaming today permeates the globe as it offers wagers on just about every kind of game.

Unfortunately, at the present time, many of the Internet offerings are conducted, at least in part, illegally. Almost all play within the United States, where a majority of Internet players reside, is illegal. (There are exceptions, of course; for example, some horse race betting and some intrastate lottery play.)

The question on the policymakers’ agenda is whether we should give legal status to an activity that already exists. While I will not address all of the attributes of each game offered on the Internet, I wish to present the following considerations that will support the legalization of Internet gaming. The reasons all revolve around this one overall belief: Legal Internet gaming will improve the value of the gambling product for the consumer, for the gaming operator and for the government.

Legal Internet gaming will stimulate business for land-based (terrestrial) casinos, as they will be able to use the facilities of the Internet games to promote their own products, using their own brand, to conduct satellite games and tournaments and to target marketing efforts to potential visitors. The best gambling brands are casino companies operating in Las Vegas—MGM, Harrah’s, Sands, Wynn. These brands will prosper when attached to games on the Internet and will give customers confidence that they are playing with solid, established, honorable companies. By having access to selling Internet gaming products, the terrestrial casinos can take a share of revenues and enhance their standing much as horse racing venues did when they embraced off-track betting opportunities.

Legal Internet gaming also gives the players more choices, as they can peruse many sites, seeking games they wish to play as well as comparing the prices (odds) of the games. The player saves transportation costs in terms of both time and fuel. The players are also afforded the opportunity to play in surroundings that fit their desires. The players have a total choice on whether the site of the game will be smoke-free or smoker-friendly. The players can determine if there will be drinking at the site. The players set the room temperature and determine ambient sounds with their choice and volume of music, if any. Internet gaming can also be fully in compliance with the Americans with Disabilities Act standards—a player’s personal computer can give voice messages regarding each transaction. By making wagers in a controlled “home” setting, players are also given enhanced security; it is a cash-free setting regarding gaming activity, and wins are automatically put into the player’s account. Contrast this with a casino, where the ATM will not allow deposits, or a 7-Eleven late at night where a player wins $600 in cash from a scratch-off ticket.

The legal Internet game can also be required to give multiple protections in regard to exploitation and compulsive-type play. Unlike the terrestrial casino or the live-lottery sales point, the Internet player can be fully identified. The site operator can know the age of the player. A list of excluded players will be automatically enforced. No one can “sneak in.” This also applies to people who use a voluntary exclusion policy. Records are kept of play, and limits can be set on how much is played per hour, per day and per week. This history of play can even be made available to the player. Indeed, the player can have this put on the playing screen periodically, with or without permission. Along with this information, the player can also be given warnings about problem gambling, as well as sources for help. The site can also be programmed to tell the player the odds on each game. Even the familiarity of the surroundings can be a control on troubled play. Whereas in some casino settings a player may go into a “time warp” or even a trance, a home environment can have many attributes to guard against this, such as the telephone ringing, pets demanding attention, or people coming to the door. Unlike some terrestrial casinos, which give players drinks but also guard against the player becoming intoxicated to the point of going to sleep, the home player who imbibes has no one watching to make sure he does not fall asleep.

Legalization of Internet gaming will give game operators advantages in marketing their products, as they will have tracking records on each player. Important in this tracking will be knowledge of the geographical location of the player.

Legalization will also provide revenue sources for governments. However, governments should be warned that, while lucrative, Internet gaming is not a golden goose that can solve all of a venue’s fiscal woes. As with terrestrial casinos, high tax rates will only drive business to competitors. If tax rates on gaming sites are excessive, the sites will not register with the jurisdiction—and they may just take the chance of operating illegally. If this is the case, the advantages identified above may be lost.

The geographical identification of players will facilitate taxation benefits that can be given to the venue of the player in addition to the venue of the Internet site. A wager tax of 1 percent (or another similarly low percentage) on play from a venue can assure that revenue from play stays in the locality—a positive using the bathtub model.

One last point deserves mention here. Legalization has positive benefits for all concerned but only if today’s operators of Internet gaming sites all see the advantage of registering with government authorities, and by doing so, becoming legal. A bit of history: In 1931, there were many operators offering games for players in Nevada. They were doing so illegally. Then one day the state legislature passed a law making casinos legal. Every operator was invited to step forth and get a gambling license. All did so. In one day, a venue with many illegal operators became a venue with no illegal operators. In the same fashion, Britain invited illegal providers of sports betting games to apply for licenses in 1960. All did so, all becoming legal and regulated. Nevada and Britain did not refuse to license parties that previously operated illegal games. If they would have done so, the illegal gamers would have found a way to continue doing business—after all, it was their business. In 2003, after a successful invasion of Iraq, American forces appealed to the local population to join a new Iraqi army in alliance with the Americans. One stipulation was placed upon the new recruits. They were excluded from joining if they had previously been part of the old Baathist Iraqi forces. But the old forces paid their soldiers. Now unemployed, and unemployable by the new army, the old forces simply became insurgents and kept doing what they had been doing—fighting. By not co-opting the enemy, we guaranteed a continuance of the enemy. When Internet gaming is legalized, we must license all operators and assure that there is no more illegal Internet gaming.

How will legalization come about? It would be nice if members of the U.S. Congress recognized that the 800-pound gorilla is not going away, that whatever laws are in place against Internet gaming are not being enforced and cannot be effectively enforced. But that might not happen soon. Legalization will come with some outside force. Perhaps several state lotteries will start using the Internet with intrastate wagering. Maybe a Native American tribe will put forth an Internet platform in the manner of the Kanawahke tribe in Quebec and challenge authorities to close them down. With such operations (either or both) in place, foreign observers might use the authority of the World Trade Organization to institute legal proceedings leading to requirements that Internet operators be allowed to offer products to American customers. Following such a decision, that would be a distinct possibility. Congress might take a stance such as they did following the Cabazon case in 1987 and realize that the best posture toward Internet gaming would be legalization, registration and regulation, of course with possibilities for taxation … hopefully reasonable taxation. The 800-pound gorilla is here, and he is on a train that has left the station. He can only add value to our gaming products.