What derailed California's online poker dream?

European operators and suppliers planning to cash in on what would be North America’s largest online poker market will have to wait at least another year. On Wednesday, California Senator Lou Correa withdrew online poker bill SB 1366 with just weeks left of the state’s legislative session, claiming there was simply not enough time to refine the bill and get it across the line before the August 31 deadline.

Correa’s decision will be a huge blow to the likes of bwin.party, 888 and indeed PokerStars, who all have lucrative deals in place to supply California tribes and card rooms with an poker platform. For many, California going live would finally allow them to see a return on the millions of dollars invested in launching across the pond in Nevada and New Jersey, where revenues have been mediocre to date.

On the face of it momentum had been moving in the right direction in recent months, however beneath the surface trouble was brewing. Some felt the bill’s language and proposed licence fees were a ploy by the larger, richer, operators to limit competition and claim the market for themselves.

Opposition was particularly powerful from Morongo and its platform partner PokerStars, who spent the summer months lobbying lawmakers over the bill’s ‘bad actor’ clause that would have effectively barred the latter from being in the market.

While by themselves these issues alone were not enough to kill the California dream for yet another year, together they provide a significant obstacle to success. Here are four of the key challenges that stood in the way of California’s internet poker gold rush:

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1) Wrong side of the tracks

SB 1366 would have barred the state’s horseracing tracks from being awarded an online poker licence, despite current gaming law allowing them to offer online wagers. Leaving them out of the market would clearly have gone against those laws, with the racetracks rightly putting up a fight. How much weight and influence they carried in the decision to pull the bill is debateable, however.

“Whether they had enough clout left alone to kill the internet poker bill is something that remains to be seen,” says California egaming attorney Martin Owens. “I am personally surprised they have any political wallop left at all.”

It was believed that the tribes and card rooms were prepared to compromise with the horseracing tracks by offering them a percentage of total online poker revenues. This would have been an easy win for the tracks, as they would have received an additional revenue stream without incurring the significant costs and risks associated with launching an online poker room.

Perhaps, then, the tribes and card rooms were unable to offer the tracks something they couldn’t refuse.

2) Cost of doing business

The bill was designed to limit the number of players able to enter the California market. By setting the licence fee at US$5m ““ it is $500,000 in Nevada and $400,000 in New Jersey ““ only the largest, riches, operators could afford to apply for licensure ““ namely the 13 tribes and 25 card rooms that backed the bill.

Not content with setting licence fee at more than ten times the industry average, the bill went one step further by stating that all California licensed poker operations must be self-financed. So those smaller tribes and card rooms that were planning on raising the funds through outside investors were stopped dead in their tracks.

“The high licence fee was created as a barrier to ensure that there are a limited number of players in the market,” says egaming consultant Mario Galea. “However that fee is recoverable against the gaming tax. The bigger tribes have their land-based business to protect and are therefore going to limit the online operator’s activity in some way or another.”

They say that strength can be found in numbers. If the smaller tribes and card rooms banded together they would have had enough political might to derail the bill. Correa most likely saw this coming ““ the smaller operators were yet to come out in support of opposition of the bill ““ forcing his hand to withdraw SB 1366.

3) Prolonged stalemate

The biggest obstacle was arguably Amaya and its $4.9bn acquisition of PokerStars. Now that the deal is completed and licensure in New Jersey all but certain, PokerStars would undoubtedly be fired up for success in California. Its partners in the state ““ the Morongo tribe plus three of the state’s largest card rooms ““ have spent the summer lobbying against ‘bad actor’ language in the bill that would bar Stars from licensure.

“We and our partners have met with legislators, legislative leadership and the administration to let them know that the current bills would fail an inevitable constitutional challenge,” Morongo chairman Robert Martin told eGR NA.

“We fail to see the rationale for pursuing legislation that will not survive a certain legal challenge and we are imploring the legislature to adopt legislation that fosters competition, instead of legislation that illegally seeks to stifle it,” he added.

While Morongo says it is confident that a compromise can eventually be reached, the tribes are adamant that ‘bad actor’ language remains in any online poker legislation. The general consensus is that the tribes’ would rather not have online poker at all if the choice is between that and a market where PokerStars is present.

And with that trench warfare kind of attitude, a prolonged stalemate seems ever more likely.

4) All is not lost

If we have learnt anything from the last few years of regulated US egaming it is never say never. While Correa may have withdrawn his bill, companion legislation sponsored by Senator Reggie Jones-Sawyer remains in play. However AB 2291 has not moved through the committee process and no hearing date has been set.

Jones-Sawyer is staying quiet on his intentions, but even if the bill does stay in play it will still have to overcome the same hurdles as SB 1366. The drive and desire to get this done seems to have withered in the Californian summer heat, with most interested parties accepting that the opportunity to open up one of the world’s largest legal online poker markets has passed by for another year.

“Unless somebody pulls a major rabbit out of the hat internet poker licensing is dead in California for another year,” says Owens. “While it is possible to perform an administrative fast shuffle or two, the question is not whether anyone could, but why anyone would want to. There was never much broad-based pressure to pass the bills, and now the pressure is pretty much off altogether,” he adds.