Understanding the biggest market in the world

Market Barriers
US Internet Gaming

1 © GamblingCompliance
Executive Summary
Executive Summary
In 2009, the United States witnessed an
alignment of forces that can finally bring
long-awaited clarification to the status of
online gambling in the country. The US has
already shown itself to be the world’s most
valuable single market for online gaming, and
one where the market for Internet poker has
continued to grow even since its prohibition
in 2006. But a combination of falling state tax
revenues and economic turmoil has focused
legislators’ attention beyond land-based casinos
and racinos, and towards the benefits of
expanding online gambling.
Still, there is unlikely to be any blanket
liberalization of online gaming, either at the
state or federal level in the US. Internet poker
will find itself favored above online casino
gaming and sports betting which, thanks to the
overwhelming political influence of the sports
leagues, will remain outlawed except at a very
localized state level.
State lotteries – which have proven their revenue
generation abilities and settled their online
payment concerns – will lead the next wave
of US developments towards regulated online
gambling in 2010. They will take their lead
from European national lotteries and Canadian
provincial lotteries, which are already exploiting
their respective online markets.
Lotteries Leading on Tax
The taxation position of US state lotteries is
a known quantity for state politicians and
budget comptrollers. By contrast, reliable and
non-contentious revenue estimates for privately-
operated online gaming are elusive, as a
recent state-level study on Internet poker
in Florida concluded.
The endgame for online lotteries is Internet-
based video lottery terminals (VLTs). Certain
state lotteries already operate slot machine-style
gaming via VLTs in land-based outlets. Shifting
these games online would effectively open up
lottery-operated Internet casinos and maximize
© GamblingCompliance
revenues for cash-strapped state governments.
Among the more progressive lottery states, online
ticket sales will prove a halfway-house towards
offering these VLT games over the Internet.
Following the request for an opinion from the
Illinois Lottery, the US Department of Justice (DOJ)
is considering the legality of Internet lottery sales
under federal law. However, with formal online
legislation already passed, all indications suggest
that Illinois is ready to proceed in the absence of
outright DOJ opposition. At the same time, the
state lottery in the largest lottery market in the US,
New York, is also preparing to launch Internet ticket
sales, followed quickly by online casino games.
GamblingCompliance’s resounding conclusion
from the October 2009 North American
Association of State and Provincial Lotteries
(NASPL) convention was that other state lotteries
– including those in California and Minnesota –
are already charting moves towards interactive
casino-style games. Others are poised to follow
their example if they prove successful.
Casino Sector Divided
A recent report by the US Congress Joint
Committee on Taxation (JCT) made chilling
reading for the Nevada-based casino sector. It
estimated that online gambling could raise $41bn
in federal taxation revenues over the next 10
years. Land-based casinos have the expertise and
customer loyalty to succeed online. But to do so
will bring the heavy burden of federal taxation
and the risk of exposure to a new group of
regulators that might not understand the industry
they are taxing.
The Las Vegas industry is divided between those
operators that welcome online expansion such
as Harrah’s and those, including Wynn, which
doubt its value. As such they can find no formal
consensus. Consequently, the land-based casino
industry finds itself isolated between a lottery
sector that already operates successfully under
tax conditions commercial casinos could not
accept, and the prospect of federal licensing
accompanied by unprecedented federal intrusion.
It is a predicament that will stifle action.
Executive Summary
Online Tribal Gaming Still Distant
There is a widespread belief in Europe that state-
level measures to implement an online poker
network in California run by tribes and card
rooms are close to success. This will not prove
to be the case. Efforts by Californian politicians
to introduce legislation to facilitate online poker
demonstrate the perils of proceeding without
tribal consent. At the same time, California’s
gaming tribes are far from united on the subject
of online gaming.
The prospect of federally-sanctioned online
gaming has stirred much activity, as some tribes
such as the Morongo look to secure a dominant
state-level position before any national legislation
takes effect. However, other tribes have very
different positions, which look no further than
the maintenance of their land-based franchises.
The bruising disagreements over distinctions
between class II and class III gaming machine
types that have overshadowed Indian gaming
for many years now look set to find resolution
under a newly appointed National Indian Gaming
Commission chairman. Yet, exploring the status
of online gaming, with its uncertain position
under the Indian Gaming Regulatory Act,
presents far too much risk for tribes to accept.
Fears over creeping state and federal control and
taxation – the so-called ‘camel’s nose under the
tent’ – also underscore tribal skepticism.
Enforcement
Far from witnessing a decline in federal
enforcement activities, the three years since
the passage of the Unlawful Internet Gambling
Enforcement Act (UIGEA) have seen the net
widen to include non-sports betting activities
such as poker, and delve deeper to include
seizures of funds from payment processors. In
all cases, lawmakers have applied a wide range
of enforcement tools and will continue to do so,
even as they struggle toward a definition of what
constitutes “unlawful Internet gambling”.
The DOJ and its long-standing opposition to
interstate gambling remains the biggest barrier
© GamblingCompliance
for any operator attempting to conduct online
business in the US. But in the past three years one
principal change has occurred – the spreading
of a realistic belief that state-level regulation
of Internet gambling is viable and that the
once-chilly regulatory environment for federal
legislation is thawing.
The principal drivers of these changes are:
UIGEA: Passed as an addition to a port security
bill in October 2006, this hastily-drafted act has
unexpectedly focused legislators’ minds on the
exemptions and carve-outs that remain available
under imperfect legislation. While moves to
repeal UIGEA are underway, its legacy will ensure
something similar is still required to ensure the
exclusivity of licensed operators in a regulated
gambling environment. Yet greater clarity over
what constitutes “unlawful Internet gambling”
is an absolute pre-requisite prior to any such
legislation proving effective.
State Budget Deficits: While California is in
the worst position in terms of financial plight,
recent analysis from the Pew Centre for the
States suggests that at least nine other states are
following close behind. Although the economic
slump has savaged land-based casino revenues,
states continue to license new VLT facilities. This
same momentum has led them to investigate
the possibility of state lotteries or tribal entities
offering online gambling to provide additional
revenue sources.
The chilling effect of the DOJ’s 2005 warnings
to North Dakota remains, but it is not enough to
halt the drumbeat of states looking to emulate
Illinois in passing legislation to enable their
lotteries to go online.
Obama Administration: The November 2008
change in government has prompted far-reaching
recalculations in many sectors. While there are no
obvious indications of a softening of approach
in DOJ policy toward online gambling, tribal
gaming is seeing a reconsidered approach, with
a commitment to address the vexed issue of off-
reservation gaming.
Executive Summary

Foreign Interests Face Frustration

While European and Canadian investors remain

intently focused on developments in the
emerging US online market, their hopes are
set to be frustrated. In 2007, as a consequence
of unfavorable judgments at the World Trade
Organization’s (WTO) appellate body, the US
opted out of the WTO’s General Agreement on
Trade in Services (GATS) commitments regarding
gambling. This cleared the way for the US to
shape its trade policies on the issue of gambling
as prohibitively as it chooses, with no recourse to
external bodies for excluded investors.

Private operators scored a notable moral victory

when they sided with the Antiguan government
at the WTO. But this consequently ensured a
protectionist position from the US, which will limit
opportunities for non-US gaming companies to
– at best – business-to-business (B2B) or business-
to-government (B2G) deals. Operator licenses
will likely be reserved for US companies. Gaming
companies that have attracted the attention of
the DOJ in the past will also have their work cut
out to obtain any legal market presence.

Foreign observers and suppliers have kicked

up a great deal of dust through their lobbying
strategies. But their principal focus has been to
support the federal initiatives of Barney Frank,
which, in the current election cycle, have scant
chance of progressing until at least the non-
election year of 2011.

© GamblingCompliance
GamblingCompliance

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