Black Friday, Today and Beyond

On April 15, a day now known as “Black Friday,” the poker world was turned upside down. On that day, the U.S. Department of Justice and the Federal Bureau of Investigation released an indictment charging the founders of the three major online-poker sites — PokerStars, Full Tilt Poker, and Absolute Poker/Ultimate Bet — with violating the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006.

The sites, which circumvented UIGEA rules to service U.S. customers, were charged with bank fraud, wire fraud, and money laundering. Along with the indictment came the seizure of each site’s U.S.-facing Web page. Facing roughly $3 billion in civil money-laundering penalties and revenue forfeiture, all three sites cut off ties with U.S. players.

The UIGEA prohibits gambling businesses from accepting payments from bets via the Internet. For years, the poker industry has argued that the UIGEA is a murky law, and has asked the U.S. government to tax, license, and regulate the $1.4 billion U.S. online-poker market.

Combined, the three online-poker sites named in the indictment represented more than 70 percent of the U.S-facing online-poker market, and collectively averaged 55,000 real-money players at any given hour of the day. The sites also employed thousands globally, sponsored more than 300 poker professionals, invested in poker television programs, sent thousands of players to the World Series of Poker each year, and introduced many new players to the game of poker.

The indictment states that the poker companies illegally coerced U.S. banks into processing payments for these thousands of U.S players. In addition, restraining orders were issued against 76 individual bank accounts and payment processors who were named in the Department of Justice’s indictment.

In total, 11 defendants were named in the indictment, including Isai Scheinberg of PokerStars, Raymond Bitar and Nelson Burtnick of Full Tilt Poker, and Brent Beckley and Scott Tom of Absolute Poker. Additionally, John Campos, Bradley Franzen, Ryan Lang, Chad Elie, and Ira Rubin were named as co-conspirators for allegedly assisting the sites with processing payments.

In the month that followed, the Department of Justice arrested four of the indicted — Rubin, Franzen, Elie, and Campos. The FBI is currently working with Interpol to extradite the remaining seven. Meanwhile, the sites have since worked out varying deals with the Department of Justice to begin returning funds to U.S. players. PokerStars has successfully started the process, but Full Tilt Poker and Absolute Poker have yet to provide any details on when U.S. players will see their money.

This entire case does not stem from the sites’ ability to offer real-money online poker to U.S. citizens. Playing online poker in the U.S. is not a crime, but according to the UIGEA, it is illegal for these sites to have knowingly accepted payments or deposits for hosting these games.

Now, with the poker world’s main catalyst of growth handcuffed, the industry moves forward in a time of uncertainty. In this piece, Card Player takes a closer look at the various parts of the poker world that have been affected, and talks to experts to get a clear picture of what the future holds for the game.

Economic Implications of Black Friday

When starting to talk about the economic implications of Black Friday, it would seem necessary to begin with the players themselves. According to John Pappas, executive director of the Poker Players Alliance in Washington, D.C., 8 million to 10 million Americans were playing poker online for money. About 50,000 of that population considered themselves professionals, according to a PPA membership survey 18 months ago. This figure does not include those who used poker to supplement their income from another job.

Not being able to earn a living at poker has not been the only concern for players, as Pappas estimates that there are currently hundreds of millions of dollars stuck online. While the players received the brunt of the blow, ancillary businesses employing thousands of people were affected by the online poker crackdown, which wiped out about 70 percent of the U.S. market. “The online game really created its own economy and own separate industry, equivalent to billions of dollars,” Pappas said. “The idea that it has been snatched away has sent a lot of people into economic harm.”

According to the U.S. Bureau of Labor Statistics, 13.7 million Americans were without work as of April, a figure that has only increased, albeit slightly, since Black Friday. Pappas noted that the government has spent millions to “enforce an ill-conceived prohibition” that has hurt the economic livelihood of many of its citizens.

Nevada, the state with the highest unemployment in the country, was gearing up to pass its own online-poker bill (one that was sponsored by PokerStars) before April 15.

According to Las Vegas economist Jeremy Aguero, Nevada was looking to collect between $2 million and $3.4 million in taxes annually with online poker regulated within its borders. That figure could have skyrocketed to $65 million if Nevada captured 25 percent of the international market, according to Aguero’s economic analysis. Assembly Bill 258, in its early form, would have imposed a 4 percent tax rate on an online operator’s rake from customers around the globe.

Economic Implications of Licensed and Regulated Online Poker

While various U.S. states have attempted to pass their own intrastate online poker bills — among them, Nevada, Florida, California, and New Jersey — all efforts have stalled and the U.S. land-based casino industry now seems to have its sights on a federal bill.

According to Frank J. Fahrenkopf Jr., president and CEO of the American Gaming Association, the AGA is currently working toward a federal online-poker bill, which will likely be drafted and introduced to Congress in early summer, as lawmakers and casino executives have been in discussions since the events of April 15.

Potential federal legislation, which would give each state the right to opt into providing online poker, could, thanks to an estimated 15 million Americans who go online to gamble, tax a poker share that could provide about $2 billion annually in tax revenue. According to a 2010 report by H2 Gambling Capital, a supplier of data and market intelligence for the global gambling industry, regulating all Internet gaming (except sports betting) would generate $67 billion over five years and 25,470 new jobs in the U.S. The AGA estimated that 10,000 high-tech jobs would be created. In terms of player job growth, Pappas said regulation would cause a boom in casual participants, which in turn could increase the number of players who make a living on the virtual felt.

While the federal government would be able to collect some revenue from income tax, as online-poker winnings and losses would be tracked by operators, the real economic carrot dangling out in front is the benefit to states across the country, many of which face massive debts. According to Fahrenkopf, under a federally regulated system, not only would the state that grants the license reap the tax revenue, but also the states where the players are located. The net gaming receipts of the online-poker operators would be eligible for taxation at the state level, and a tax rate of 15 percent or 17 percent, said Fahrenkopf, would be divided in half; 50 percent would go to the home state of the operator, and the other portion would go to the state where the player lives.

Fahrenkopf said that if Congress doesn’t act quickly, players will be forced to engage in action on an estimated 1,000 remaining foreign sites, eventually rebuilding the online-poker market in the U.S. and resetting the poker economy. “I am convinced, and I am telling members on the Hill, that the vacuum left by PokerStars and Full Tilt will be filled shortly, and we will be back to where we were before the indictments were handed out. That’s just the way it is.”

Regulation Abroad

Although the U.S. online-poker market accounts for a large percentage of the $4.8 billion global market, the digital game is flourishing overseas. In 2010, European countries saw $12.5 billion in online gaming revenue — more than 40 percent of the gambling industry’s total — thanks to online poker as a major catalyst. When Italy, for example, introduced regulated online poker in the second half of 2008, the industry went on to generate $338 million in revenue in about six months. For online poker’s legalization, the country implemented a 20 percent tax on the revenue generated by licensed Italian online-poker sites. Players in Italy, like those in countries such as Denmark and Sweden, are required to pay taxes on any winnings from online-poker sites that are based in foreign countries. Winnings that come from domestic sites are exempt from taxation.

Despite a climate of regulation in Europe, some countries in the region are still working on establishing an online-gaming system. In Germany, an estimated 4 million people play online poker, and online poker’s supporters in the country are pushing for Germany’s state betting monopoly to be opened up to private companies, which will be allowed to bid on seven national betting licenses. The companies would have to pay a 16.7 percent tax on gross profits, and online-poker and casino operators will have to hold an existing land-based license. PokerStars has historically been behind pushes for regulated online poker in European countries.

Future of U.S.-Player Sponsorship

Black Friday has had an undesired effect on those who spent their time marketing for online-poker sites as sponsored players. In the weeks following the indictment, Ultimate Bet/Absolute Poker restructured, and 95 percent of its workforce was “liquidated, and the process of rehiring approximately 20 percent of staff in key positions” ensued, according to a statement made by Blanca Games. As a result, all 11 U.S.-sponsored pros had their contracts terminated.

Meanwhile, the other two indicted sites have continued to put on a brave face, thanks to a higher percentage of international players who have so far been able to keep paying the bills. Sponsored pros are traditionally given a base monthly salary in addition to being paid for time spent spurring activity on the site itself. UB players were given back 100 percent of their rake, buy-ins to various online tournaments, as well as a monthly wage. Full Tilt pros earned $35 for every hour played on the site, along with getting back their entire rake. PokerStars contracts are determined individually, but are generally considered to be more lucrative. Industry standards place these deals in the six-figure range, including tournament buy-ins to major televised events and rakeback, all in exchange for wearing the brand’s logo.

Full Tilt currently employs 199 players on its roster of team pros, not including 34 others labeled as “Friends of Full Tilt,” players who are rumored to get only rakeback deals for their play as a “red pro.” Of those 233 players, 108 are Americans, although many more call the United States home. Over at PokerStars, the roster is a much more svelte 103 players, divided between its Team and Online pros. A total of 23 are from the U.S., but that includes a small number of nonprofessional celebrities and sports stars.

So far, it’s been business as usual, other than the absence of some logos at a few key U.S. tournaments, but Poker Royalty founder and CEO Brian Balsbaugh says that he expects more players to lose their sponsorships in the coming months.

“I suspect that marketing expenditures will be slashed as a result of all of the lost revenue these sites are seeing, specifically from U.S. players,” Balsbaugh said. “Obviously, UB has decided to terminate all of their existing contracts with their sponsored players, but it looks like Full Tilt Poker and PokerStars are kind of in a holding pattern for now, taking the wait-and-see approach. In my opinion, a good number of those existing contracts will be terminated on a case-by-case basis. I do think those two companies will continue with their player-centric marketing strategies, whether it be with French players in France or Italian players in Italy. I don’t think that European sites will all of a sudden start picking up players to fill the void. It wasn’t their strategy to start and it won’t be now.”

When asked what would make a player a good candidate to keep his job, Balsbaugh explained that those players who have strict ties to the U.S. online-gaming market may be in trouble. “There are a lot of variables that go into that decision-making process,” he said. “Those players who have international appeal are now favored, but it is also about being able to bring in new players from emerging poker markets, regardless of where you are from.”

The upcoming World Series of Poker main event will be a good indicator of how each site spends its marketing budget in an effort to gain ESPN exposure, but the days of one-time “hat and patch” deals, in which online-poker sites paid players a minimum of $5,000 for wearing an online-poker patch at a final table, are likely a thing of the past.

Future of Televised Poker

The events of Black Friday changed the landscape of televised poker almost overnight. Estimates put the percentage of ad buys coming from online-poker sites during poker-related programming at 75 percent or more, and with most of the ad money leaving the marketplace as sites pulled out of the U.S., their dot-com sponsorships left the airwaves, and shows got canceled.

FOX announced that the PokerStars Big Game and well-established PokerStars Million Dollar Challenge were canceled despite solid ratings. “That was the most watched show in poker history; it helped that football was the lead-in, but to maintain that level of eyeballs was impressive,” said an industry insider who chose to remain anonymous for this report.

Episodes of the PokerStars North American Poker Tour on ESPN also were canceled, and the newly formed Onyx Cup tournament series that was co-sponsored by Full Tilt Poker was postponed indefinitely before it could even shoot its first episode.

NBC continues to air rerun episodes (reruns of poker episodes surprisingly perform as well in the ratings as new episodes) of Poker After Dark, and pressed forward with the full lineup of new episodes for the 2011 NBC National Heads-Up Poker Championship, which has a mainstream sponsor in GoDaddy.com that is not tied to online poker. The extremely popular High Stakes Poker, which gives an intricate look at professionals playing at huge limits, also continues on GSN.

Gone are the days of made-for-television poker specials like the Full Tilt Challenge, Ultimate Bet Challenge, or MansionPoker.net Poker Dome Challenge. Almost all of those shows were time buys that were produced by the advertiser, on top of the fact that they were purchasing the air time to run in the given time slot.

These time-buy deals were a significantly more sophisticated version of paid programming that worked for poker, thanks to the huge profits coming in from online cardrooms. “I think we will see that many networks will drop their poker shows, because they saw them as a means to an end to grab premium ad rates that were served up on a silver platter,” said World Series of Poker Executive Director Ty Stewart.

Currently, mainstream advertisers are going to be wary, because of the moral stigma of poker, but if poker were to become legalized and regulated, many television-industry insiders believe that advertisers would jump at the chance to sponsor poker, because of the game’s desirable demographics.

The _WSOP _has already proven that it can attract mainstream advertisers, even in 2011 under the cloud of Black Friday, so the possibilities in a licensed and regulated online market are promising. This summer at the WSOP, Jack Link’s Beef Jerky will be the presenting sponsor, and mainstream sponsors will include the likes of Miller Lite and Red Bull.

It is now up to the well-established tours to carry the torch for televised tournament poker in the United States, and the WSOP and World Poker Tour have every intention of moving forward, according to recent announcements.

World Poker Tour ratings on FOX Sports Net are up since Black Friday, and in addition to a new main event in Jacksonville, Florida, for Season X, more announcements are on the way. “There are going to be more expansion announcements for Season X, more televised events, more international events, more domestic events,” said Justin Simon, a PR representative for the WPT. The recent WPT Championship actually saw attendance increase from last year, with 220 players attending the $25,000 tournament at Bellagio, up from 195 players in 2010.

The WSOP television deal with ESPN is still a long-term contract that runs through 2017, and since Black Friday, ESPN has announced that not only will it increase its coverage of the 2011 WSOP, it will double it.

For six consecutive days, July 14-19, ESPN will offer unprecedented access to the 2011 WSOP main event, including live, unedited holecard coverage on a 30-minute delay. There will be more than 34 additional hours of coverage in high definition on ESPN, ESPN2, and ESPN3.com. “For the first time, viewers at home will have the best seats in the house for the World Series of Poker, poker’s premier event. Fans will see holecards post-flop and get an inside look at all of the strategy, angst, and competition of the world’s best players vying for a seat at the most prestigious final table in the sport,” said Matthew Volk, ESPN manager of programming and acquisitions.

Online Poker — Past and Present

Free online poker began in the late 1990s with IRC Poker, and it wasn’t long before Planet Poker dealt the first real-money online game on Jan. 1, 1998. Five years later, an accountant from Tennessee named Chris Moneymaker won the World Series of Poker main event and $2.5 million, after qualifying on a site called PokerStars for just $40.

Online poker was soon to see an explosion. In three short years, millions had flocked to try it, and the WSOP main event grew from 839 players the year that Moneymaker won to 8,773 players when Jamie Gold captured a first-place prize of $12 million.

Poker was still expanding in the summer of 2006, and it was unclear how popular it could become. The UIGEA put an end to the party when, on Oct. 13, 2006, President Bush signed into law the SAFE Port Act, which contained the UIGEA. The law effectively made it a crime for online-poker operators to perform transactions with U.S. financial institutions, which was necessary for receiving deposits and paying out players.
As a result of the bill, the biggest site at the time, the publicly traded company PartyPoker, left the American market. Within a couple of years, the void was filled by sites such as PokerStars, Full Tilt Poker, and Absolute Poker/UB. Now, with their departure, the poker world is at a crossroads, dealing with prohibition and fighting for regulation.

Fahrenkopf said that he supports the Department of Justice going after gaming entities that are violating federal law. However, he said that his organization is in full agreement with the notion of regulating poker on the federal level in order to obtain billions in tax revenue, and more importantly, to protect consumers and fight crime. Any future online-poker system, he said, would be held to the highest standards of licensing and regulation.

Road Ahead

According to Pappas, this post-Black Friday period of online poker was inevitable as long as the UIGEA remained alive and dormant. Pappas said that his organization will continue to educate people across the country, especially lawmakers, on the fact that online poker itself is not illegal, work to remove the “gray area” as it relates to poker and the UIGEA, and mobilize the estimated 1.2 million PPA members who think playing poker in the U.S. should not be considered a crime.

“Since the UIGEA passed, every bill that has been introduced has been a pro-Internet-gaming bill,” Pappas said. “There has been no anti-gaming bill; that’s not to say that there won’t be, but the PPA has been able to build support for pro-gaming bills.”
Richard D. Bronson, founder of California-based U.S. Digital Gaming, a casino developer who served with Steve Wynn as one of two inside directors of Mirage Resorts and New City Development, said competing business interests in the potential U.S. online-poker economy could continue to railroad efforts to establish licensed and regulated poker at the federal level.

“At gaming conferences, you hear people like Congressman Joseph Campbell, who is the co-sponsor of the Barney Frank online-poker bill, stand up and ask for a kumbaya moment and ask why everyone can’t get along,” Bronson said. “It is absurd, because you have all these different factions that have their own point of view, and there is no way you are going to get everybody on the same page. We all have our own stake in this, and we all have our interests in seeing certain things happen in a particular way.”

In addition to companies like Bronson’s that provide technology services, according to Pappas, other entities that have a stake in the online-poker debate are land-based casinos, tribal communities, Internet companies, and other Internet providers that may not provide the services directly, but want to be vendors.

While it is unclear which companies will emerge from the online-poker debate with what they want, Harvard economics professor and Full Tilt pro Brandon Adams sees the likely winners from Black Friday being PartyGaming (bwin.Party), Harrah’s, Zynga, MGM, and Wynn Resorts, which nullified its business deal with PokerStars following the federal indictments.

Despite the financial consequences of Black Friday and potential financial benefits of a regulated U.S. market, the legal aberration of poker’s place in the country is what the AGA is trying to clarify. “We have a strange anomaly where it is not against the law for me to place a bet on the Internet,” Fahrenkopf said. “I am not guilty of any crime, but there is no U.S. company or licensee that can accept the bet. It is all offshore people. There is a product a lot of people want, and there is no one in the nation that can legally provide the product. It is just insane, and prosecutions and prohibition just aren’t going to be successful.”

Industry experts around the country are in consensus that online poker in the United States will one day become a reality. With millions of players, common sense, and the dollars on poker’s side, the deck seems stacked in the game’s favor. ♠