UIGEA Hearing Held

The House Financial Services Committee held an informational hearing on HR 2267, a bill that would partially repeal the Unlawful Internet Gambling and Enforcement Act (UIGEA), and would license and regulate some forms of internet gambling. The report from Information Week on the hearing discussed testimony that stated both pro an con positions. What is important to note is the difference in the stature and quality of the opposing testimony. I'll give two examples of each.

On the pro side, there was the executive chairman of Youbet.com, a leading online gambling company based here in the US. Yes, you read correctly, there are companies engaged in online gambling right here, right now, in the US. Youbet.com handles online betting on horse racing, which is LEGAL in the US. This executive, Michael Broadsky, explained that technology that can properly regulate online wagering in the US exists today. That is obvious because how could this company process hundreds of millions of dollars per year in online wagers if the technology was insufficient?

The other cited example of pro testimony was the presentation of Professor Malcolm Sparrow of Harvard. He states, "combining a thoughtful regulatory scheme with education, technology tools, and support appears to be the most effective means of handling the realities and risks of online gambling," and "consumers in the United States would be better protected than they are now."

As opposed to the fact-based information provided by the pro-regulated internet gambling witnesses, the information provided by the anti-internet gambling witnesses was non-evidence based opinion and hyperbole.

The first example of this was provided by the head of the Morongo Band of Mission Indians, Robert Martin. Martin testified, "the legislation will do nothing but legalize off-shore gaming.” He further testified that this legalization would be at the expense of the "thousands of people" employed by tribal casinos. That sounds fine, at first, but his statement is false. You see, although offshore gambling firms may want to be licensed, the proposed legislation would mandate US-based facilities. US-based facilities imply US-based jobs, so Martin's opinion is only important if you care only about tribes, and not America as a whole.

There is more to the Morongo's position that you should know about. His tribe recently tried themselves to get ONLINE POKER LEGALIZED IN CALIFORNIA. So, within a few months, this tribe tries to get online poker legalized and then turns around and claims that online gambling should not be legalized and regulated. How does that make sense? It does if you are focused only on protecting your monopoly and not wanting competition.

At the Global Gaming Expo, some panel discussions regarding the online poker legislation in California implied that the proponents may have had a bill not well thought out...or was crafted too much to benefit a particular tribe or tribes. If that is the case, then the testimony is self-serving, not providing good data to provide informed decisions. I don't think tribes have a problem wanting legislative advantages at the expense of non-tribal casinos... Overall, this testimony isn't very helpful or credible. The story describing this in more detail is here.

The other anti-online gambling testimony of note was from the FBI. It is of note because of its stupidity. Quoting from the Bloomberg story:

"'There are several ways to cheat at online poker, none of which are legal,' Shawn Henry, assistant director for the FBI’s cyber division, wrote in a letter to Representative Spencer Bachus of Alabama."

"'Technology exists to manipulate online poker games in that it would only take two or three players working in unison to defeat the other players who are not part of the team,' Henry wrote. 'The online poker vendors could detect this activity and put in place safeguards to discourage cheating, although it is unclear what the incentive would be for the vendor.'"

Think about the genius that said this. There are ways to cheat at online poker and none of these ways are legal. As if there were LEGAL ways to cheat at online poker? You would think the word "cheat" would be a tipoff to the FBI? With mental giants like this fighting crime, I know I can sleep well at night. The FBI stated right after this that there were technology solutions that could detect and defeat cheating, so what's their point? However, they then claimed that they didn't know what the incentive for operators to implement these safeguards. They REALLY can't be this stupid, can they? Obviously, they are.

Let me help state the incentive since the FBI isn't bright enough to figure it out. Gambling operators can't survive if customers don't think the games are fair. Gamblers may win or lose, but they require fairly-run games. An online poker operator that is viewed as having unfair and manipulated games won't have customers and will be out of business. For the FBI to make this kind of statement is so vacant of logic that it is hard to believe that they have fallen this far with regard to talent.

Overall, the trend is that online gambling will be legalized and regulated in the next few years, with the exception of sports betting. My opinion is that all gambling should be legalized, but that will not happen. Poker will likely be legalized first, then other casino games. Sports betting will be legalized last. With the estimates of illegal sports betting being as high as $380 billion per year, it makes no sense to benefit offshore sportsbooks and illegal bookies by keeping this illegal. Now if the Morongo tribe wanted to make a cogent point, they could claim that keeping sports betting illegal benefits offshore operators. That would make sense.

For those interested in the topic, another article on the fallacy of prohibition can be found here.

Gaming Companies Cautious About Internet Gambling Legislation in the US

Rep. Barney Frank is proceeding with moving HR 2267 forward, hoping to replace the Unlawful Internet Gambling Enforcement Act (UIGEA) with a licensing and regulatory structure for online gambling. However, companies that would benefit are keeping a cautious stance and avoiding becoming too public in the discussion.

A Wall Street Journal report discusses the public positions and opinions of three gaming companies that would benefit from liberalization of internet gambling within the US. The consensus opinion is that if this moves forward, it is likely to happen no sooner than a year from now, near the end of this congressional session.

From discussion panels at the Global Gaming Expo, their consensus is that if any game is legalized online, it would be poker, followed by traditional casino games. No one is foreseeing the expanded legalization of sports betting online in the US anytime soon. However, given the estimates that only 1% of sports betting in the US is legal ($2.5B in Nevada casinos), that implies that $250B in illegal sports betting occurs each year. That's a lot of money not being regulated and taxed. I don't think many can make the logical argument that keeping something illegal is somehow going to make that $250 billion of illegal sports wagers disappear. It's still going to occur.

As a trend, the approach to legalize poker and other games of skill, then move to legalize other traditional casino games and slots makes sense. Don't make too much of a change at one time. Start with these games, learn how the regulatory structure responds, improve the process and then consider expanding the available games. Ultimately, people should be able to spend their money for the entertainment they desire, as long as it doesn't impact others. The US the last I checked was supposed to still be a free country, with a constitution that recognized the people's God-given rights to life, liberty and the pursuit of happiness.

Should regulations be instituted to keep minors from wagering? Absolutely. Should programs be in place to help problem gamblers? Sure. Reputable online gambling firms in other countries have been doing this for years. There isn't a reason that the same kind of protections wouldn't be effective here. There has been online wagering on horse racing in the US for almost 10 years and they don't seem to have an issue with gambling from minors or from problem gamblers.

How Far Off-Reservation Should Off-Reservation Indian Casinos Be?

The Associated Press reports on the cases of Indian tribes looking to off-reservation locales for new tribal casino properties. There have been some of these off-reservation locales applications in the past, usually involving tribes that have recently obtained federal recognition and needed to acquire lands for a reservation. Some of these locations could be located near lucrative population centers.

However, there are instances of tribes with reservations located great distances from population centers attempting to locate casino properties within close proximity to those sources of customers (i.e. you and me). The story discloses that the Bush administration decided that these off-reservation casinos could only be within commuting distance of the reservation. That seems like a reasonable restriction. The Bush administration, for example, rejected 20 applications for off-reservation casinos, one an astounding 1,400 miles from the reservation. Fourteen hundred miles? Well, you can't blame the tribe for trying!

Well there's a new administration in Washington, and the Bureau of Indian Affairs is reconsidering the commuting distance rule. If the rule is overturned, and tribes can extend their casino properties far from their reservations, tribal casinos could be even more of a threat to non-tribal casino properties. What if tribes could have off-reservation casinos on Fisherman's Wharf in San Francisco, the Gaslamp District in San Diego or Times Square in NYC?

There are two options in case this rule is amended. The first deals with the recently recognized tribes and tribes with no casinos yet established. The former will of course try and locate their new reservations as close to population centers as possible, but that wouldn't be required. The latter would be tribes with reservations in very sparsely populated, remote areas. It doesn't make sense to locate a casino on those lands as there is no customer base. They will be able to locate their new casino wherever they can obtain land.

The second option deals with tribes that have smaller, and perhaps not optimally located casinos. Those tribes might want to relocate their casino to a better location, closer to larger population centers. Why keep a location when a better location might be feasible? A recent post discussed the closing of a tribal casino, one not located in a prime locale.

If this change occurs, non-tribal casinos will be in even more peril. As discussed in a previous post, Nevada casinos have been suffering due to competition from California-based Indian casinos. Ceasar's Palace can't move from the Las Vegas Strip to LA, but tribal casinos might be able to do just that. This rule, if liberally modified, could open the door to Nevada casinos getting hurt to a much greater degree than what is happening now.

Further Evidence Smoking Bans Harmful To Gambling Revenues

Several months ago, I posted on the topic of smoking bans playing into the hands of online gambling operators, to the detriment of land-based casino operations. The data from Illinois showed gambling revenues down approximately 20% after the smoking ban took effect. Montana has recently implemented a similar ban and the gambling revenue impacts are similar. According to the story by MontanaNewsStation.com, gambling revenues across the state are down 16% to 18%, just after one month. This is in line with the experience from Illinois casinos.

In my original post, I made the point that online gambling venues may benefit as if someone could smoke in their home and gamble might be a more attractive option than traveling to a smoke-free casino. Play the same games at home and smoke if you want.

In Montana, the competition can be online gambling, but a more clearly defined alternative is the tribally-owned casino in Montana. Tribally-owned casinos are exempt from the smoking ban as reported by the Flathead Beacon. According to a related story by the Great Falls Tribune, "some businesses on the state's Indian Reservations, which are not subject to the Montana Clean Indoor Air Act, are now marketing to people who like to have a cigarette with their cup of coffee, meal or adult beverage or while gambling - indoors."

What Montana has done in addition to eliminating smoking in more indoor venues is actually provide a sustainable competitive advantage to the state's tribal casinos, to the detriment of the other gaming competition. That likely wasn't an objective.

Most legislative bodies are chock full of lawyers. But like most lawyers, there is one law that they haven't been schooled in and continually run afoul of - the law of unintended consequences.