A Look at a Future U.S. Online Poker Market

Six months ago, the largest offshore online poker sites were shut down in the United States. Since that time, discussions centered on licensing and regulating online poker have heated up at both the federal and state levels. Such regulations would put the United States in company with 85 other nations that have already chosen to legalize, regulate and tax Internet gaming. Industry estimates say legalizing online poker could generate $2 billion in annual tax revenue and create 10,000 high-tech jobs.

Now, more so than ever, politicians are taking a hard look at poker as a means to put a dent into high unemployment and record deficits. The American Gaming Association, the industry’s most powerful lobby, which once opposed online gambling, released a public statement in March outlining a stance that now supports online poker in the U.S.

Democrats and Republicans alike have introduced legislation to tax and regulate the industry. While bureaucrats are still working to figure out licensing and regulatory standards and revenue streams, these bills provide a glimpse into what the industry’s future may look like and identify what it will take for traditional gaming businesses to enter the market.

Most industry experts agree that Capitol Hill will not vote on a standalone poker bill. Instead, poker legislation will likely be tied to any upcoming deficit reduction or job creation bill. Ironically, it appears any legislation that lays the groundwork for the U.S. online poker industry will, like the legislation that crippled it (the Unlawful Internet Gaming Enforcement Act), be buried within a larger omnibus bill.

One industry insider told Card Player that “the chances of a poker bill happening in 2011 are 50-50 between Thanksgiving and Christmas.” If such legislation was approved, U.S. gaming companies, on sites such as WSOP.com, could offer real money poker by January 2013.

If the legislation is not taken up by end of year, things get interesting. States such as California and New Jersey, hungry for tax revenue to plug record deficits, could approve intrastate poker in early 2012. At the federal level, the issue, a controversial one to address during an election year, would likely remain dormant until at least 2013.

The Major Players

It’s likely that existing brick-and-mortar casino operations that currently operate large gaming facilities will have the first opportunity to stake their claim in the multi-billion-dollar online poker industry. Here, we take a look at the established casino operators who stand to benefit the most from online poker regulation.

Caesars Entertainment

Perhaps the biggest casino entity committed to online poker is Caesars Entertainment, the only company to hold on to their pre-Black Friday relationship with a non-U.S. gaming company. In fact, CEO Gary Loveman has been outspoken about the fact that the Department of Justice’s shutdown of online poker in the U.S. is an opportunity for his company to reduce its billions in debt. In an op-ed on CNNmoney.com, Loveman compared the current freeze of online poker to the Prohibition of alcohol in the 1920s.

“The goals of legislation are simple,” he said. “Let Americans play online poker in the privacy of their homes, and create jobs and revenues here in America. Only federal legislation can accomplish that, by creating a well-regulated system of online poker. And only federal legislation can clear up the current ambiguities in U.S. law and crack down on other online gambling like sports betting and casino games. One day, we’ll look back at 2011 and laugh at the folly of a ban on Internet poker, just like we now think about Prohibition.”

Loveman is one of the more influential chief executives in the business, and wants to position Caesars and perhaps more importantly, the World Series of Poker brand, as the biggest beneficiaries of a legalized online poker market. The company has already made a commitment to the game with their popular summer festival and unlike some other major casino properties, displays their large poker rooms with prominence as opposed to a necessary evil tucked away in a corner. Overall, the privately-owned company, formerly known as Harrah’s, owns and operates more than 50 hotels and casinos all over the country.

MGM Resorts International

A study conducted for the clients of Union Gaming Research concluded in December of 2010 that MGM Resorts had the most to gain from licensed and regulated online poker market in the United States, should legislation occur in 2012. The researchers believe that, of the over $1 billion in potential revenue taken in by licensees, between $100-200 million of that will go to MGM in earnings before interest, taxes, depreciation and amortization.

The study arrived at its findings because of the company’s large recognizable brands and an overwhelming number of physical venues. CEO Jim Murren is on record as stating that the company that owns properties such as Bellagio, Mirage, Mandalay Bay and Aria, is positioning itself for the inevitable post-Black Friday legislation.

“The indictments validated our position,” Murren said. “We believe that we have the proper approach and the only thing that’s happened in the last couple of months is to reinforce our position on how Internet gaming should be regulated and pursued.”

MGM Resorts has shown a strong commitment to poker over the past decade as one of the primary hosts for the World Poker Tour. The Bellagio plays host to the WPT Championship each season and four other MGM properties accommodate or have accommodated tour events in the past. In addition, long-time poker pro and four-time WSOP bracelet winner Bobby Baldwin now serves as CEO of Mirage Resorts, after stints as president of both Mirage and Bellagio.

Wynn Resorts

Even prior to Black Friday, CEO Steve Wynn felt that online poker in the United States was a reach. That made his partnership with PokerStars, the largest online poker room in the world, all the more convoluted.

“What happens if the government gets involved and they control it and interfere with our ability to run a business?” Wynn asked a reporter after the relationship had dissolved. “If [the U.S.] do[es] Internet poker, they are going to tax the hell out of it. They would only make it legal in America because they have this insatiable appetite for money in Washington.”

The Wynn Resorts brand would undoubtedly be one of the premier faces in a legalized online poker market, but it remains to be seen if Wynn himself hasn’t soured on the idea since Black Friday. The 69-year-old has stated his desire to be a big part of the equation, citing Harry Reid when saying, “Poker is as American as apple pie” and that “this is a business that cries for regulation.” However, he still believes there are some major hurdles with the current bills.

Las Vegas Sands

Another casino giant that is itching to get into the online poker market is Las Vegas Sands, a company that owns properties in Pennsylvania, Singapore and the booming gambling destination of Macau, as well as the Las Vegas-based properties Palazzo and the Venetian Resort and Casino, a property that makes no effort to hide its commitment to poker. With 39 tables, the Venetian poker room is the largest in Las Vegas outside of the annual WSOP and frequently grows beyond 50 tables during the popular Deep Stack Extravaganza series.

CEO Sheldon Adelson has been quiet about any possible federal developments concerning online poker.

The Others

The Union Gaming Research report estimates that initially there will be roughly 10 gaming companies that will be able to overcome the barriers to entry currently written into Rep. Joe Barton’s bill. MGM Resorts International and Caesars Entertainment stand to generate the most from the estimated multi-billion-dollar Internet poker pie, with Las Vegas Sands and Wynn Resorts taking much of the rest. There would still leaves room for companies such as Station Casinos, Boyd Gaming, Penn National Gaming, Isle of Capri Casinos, Ameristar Casinos and Pinnacle Entertainment to enter the market.

Even before Black Friday, online poker platforms were jockeying for position with brick and-mortar casinos in the United States, all in an attempt to be a participant in a licensed and regulated online poker market.

No place is more indicative of the trend than Las Vegas. In March, amidst an intrastate backed bill by soon to be indicted PokerStars, Wynn Resorts announced its entry into a “strategic relationship” with the Internet giant. The duo was planning to split profits 50-50 from a PokerStarsWynn.com. Casino boss Steve Wynn’s decision came after previously opposing legalized Internet gaming and calling it impossible to regulate, according to the New York Times.

While the business deal disintegrated, the Nevada Gaming Commission’s unanimous approval of the suitability of a relationship between Caesars Entertainment, owner of the World Series of Poker brand, with subsidiaries of Israel-based operator 888 has held to the present day. The arrangement allowed the U.S. land-based gaming company to operate a site in the U.K but not on U.S. soil.

The deal between Caesars Entertainment and 888 was the first of its kind for a Nevada licensee and was quickly followed by the Wynn-PokerStars alliance, and finally with Fertitta Interactive, an entity established and co-owned by Station Casinos’ founders, getting in bed with Full Tilt Poker. Full Tilt subsequently was unable to pay out balances to players, and is currently not operating.

In addition, rumors have surfaced that MGM and PartyGaming, parent company of the once largest U.S. facing poker site in PartyPoker. com, have formed an alliance to offer an online poker product. In April 2009 PartyGaming reached a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York. As part of the agreement, PartyGaming paid $105 million in fines with the assurance that the U.S. government will not prosecute the company or any of its subsidiaries “for providing internet gambling services to customers in the U.S. prior to the enactment of the Unlawful Internet Gambling Enforcement Act (UIGEA) on 13 October 2006.” While land-based casinos were acquiring new partners, some software providers were making moves in an effort to position themselves to offer online poker.

Nevada-based slot machine manufacturer International Game Technology (IGT) in early May announced its intent to purchase Swedish-based Entraction Poker Network for $115 million. Entraction, a 112-room network which includes a number of popular poker sites open to foreign players, provides IGT with a position in the online gaming realm, allowing the company to “partner with land based casinos around the world.”

In June, iPoker network owner Playtech, in a joint venture with the Scientific Gaming Corporation, signed an agreement with the California Online Poker Association, an organization backed by gaming interests such as Commerce Casino, Bicycle Club, Hollywood Park Casino and the Morongo and San Manuel bands of Indians in Southern California, to provide the state with “play for fun” poker. With its residents spending $13 billion a year in the past on Internet poker, California is actively considering an intrastate system, despite efforts stalling for 2011’s legislative session.

The Road Ahead

There are many hurdles to overcome before any form of legislation is passed. The finer points related to licensing, taxes, and detailing the regulatory framework for the nascent industry are all still in the works. Any legislation that gains momentum must also please its detractors. As such, the bill’s language must include provisions for offering U.S. citizens a safe environment in which to play online poker.

The AGA emphasizes a few points related to ensuring game integrity. Potential online poker operators must be able to properly police their players, prevent underage gambling, and ensure the integrity of the game by restricting access to any software that could create an unfair advantage. Perhaps most importantly in the wake of Black Friday, any operator must be held accountable for player funds, guaranteeing that deposits are not being used for money laundering or any other illegal activities.

“I view online poker legislation as an anti-crime-consumer-protection bill,” said Frank J. Fahrenkopf, Jr., president and CEO of the American Gaming Association. “Now the result is also that it will generate some revenue. It will generate some revenue for the states involved, the states where the bettors are, and revenue generated to the federal government because there will now be tracking on winnings.”

The powerful lobbying group could be joining current efforts to push a piece of online poker legislation through Congress. Fahrenkopf told Card Player back in May that his organization is working toward its own version of a bill, and as of July, the organization said it was still in the processing of drafting such a measure.

Online poker is a game that millions of Americans play. If the industry is to have any sort of longevity, then a system must be created that not only benefits the government in the form of tax revenue, but also protects the consumer by employing the historically accountable aforementioned brick-and-mortar operators we examined. Despite the uncertainties in its implementation, many players, politicians, and businessmen alike all want one thing: licensed and regulated online poker in the United States.