A nation awaits

In August, as sweltering waves of heat crash over the United States, the egaming industry is sweating not because of high temperatures, but in anticipation of a legislative push that, if successful, will finally open the world¹s largest economy to regulated internet gambling.

From the moment an industry was switched off within a matter of hours in October 2006 by America¹s least-liked president, regulation has been a long time coming. And with catalysts now in abundant supply, the outlook among market aspirants is increasingly glass-half-full. So far in 2010, four states have considered whether or not to legalise some combination of online poker, casino gaming and sports betting, while in the nation¹s Capitol, a House committee approved legislation that would authorise egaming between and among participating states and Indian nations. ³We are seeing things from a legislative perspective that are quite exciting for us,² says Jim Ryan, chief executive of PartyGaming, whose comments undoubtedly reflect the mood of a growing contingent of gambling operators on both sides of the Atlantic.

Although Champagne and party poppers would be a touch premature these days, a stiff drink and a sense of hope are not unwarranted. Indeed, the news flow has not been this positive since 2001, when Nevada and the US Virgin Islands enacted legislation that positioned both as licensing hubs for interstate ­ even international ­ internet gambling. Alas, the federal Department of Justice advised both jurisdictions that to pursue egaming activity would be to risk violating laws dating to 1961.

So why the sudden shift in momentum? Principally, companies in and associated with the gambling industry are leveraging a ravaged US economy to their advantage; egaming, they tell election-wary lawmakers, is a multi-billion dollar, job-generative reservoir just waiting to be tapped.

With the nationwide unemployment rate at 9.6%, 48 of 50 states facing budget shortfalls, and a federal deficit approaching US$1.3trn, the economic backdrop against which to promote regulation and taxation of internet gambling has arguably never been more favourable. The federal government¹s non-partisan accountants, the Joint Committee on Taxation, have estimated egaming could generate between US$10bn and US$42bn in new revenue by 2019, depending on the number of states and tribes that opt into a federal regulatory programme, while data specialists H2 estimate that within three years of a ban being lifted, a nationwide regulated US internet gaming (casino, poker, bingo and other gaming) market would have the potential to return a gross win of US$18bn rising to US$24.4bn by year five, generating 32,000 new jobs. At the state level, however, estimates of annual fiscal impact from online gaming vary widely -­ anywhere between US$11.5m (Iowa) and US$988m (California).

Moreover, some of America¹s top commercial and tribal casino operators now endorse the introduction of internet games, having jettisoned their fears (although not completely) about both revenue cannibalisation and the efficacy of internet gambling regulatory technology. “All the major commercial gaming companies are very, very interested in internet gaming becoming legalised, as long as the regulatory and tax framework is one that they are comfortable with,” says Frank Fahrenkopf, who heads the country¹s most powerful bricks-and-mortar interest group, the American Gaming Association. At the same time, many of the world’s biggest online firms, both European and Caribbean, are racking up hefty lobbying bills to ensure against their exclusion from, or discrimination under, any prospective licensing regime. Even American politicians have begun to beat the internet gambling war drum, although none with as much zest as Congressman Barney Frank, who is campaigning to legalise egaming on a platform of “personal freedom”.

As internet gambling businesses in Europe negotiate non-prosecution agreements with the federal Justice Department and seek US partners, as more US casino operators and equipment manufacturers invest in online business development, and as more and more governmental bodies look to expanded gambling for a tax-revenue windfall, the momentum gathering behind egaming regulation in America is set to continue growing apace.

Federal level

In St Louis, on the blistering afternoon of 28 July, my mobile phone rang; dulcet British accent – a stock-exchange analyst.

“Has Congress just legalised internet gambling?” the voice on the other end enquired, excitedly. The answer, of course, was no, but the occasion, I told him, will still be marked as an historic one. It was that day that the House Financial Services Committee voted 41 to 22 in favour of Frank¹s egaming regulatory Bill, HR 2267. Significantly, the vote was the first on any such bill in Congress ­ ever.

“Europe really needs to get its head screwed on straight about this stuff,” joked Joe Brennan Jr, chairman of the Interactive Media Entertainment & Gaming Association (iMEGA), a Virginia-based trade group funded by US-facing operators in Costa Rica and elsewhere.

Indeed, HR 2267 still has a long way to travel before becoming law. By early December of this year, the bill must be approved by majority vote in the House and Senate ­- a very tall order. Between now and then, special interests pushing Frank¹s Bill ­ and its tax companion, HR 4976, which has yet to clear the committee stage ­ will have the accelerator to the floor.

Looming large for those interests are the mid-term elections in November, where political pundits expect the Republican Party to regain majority control of the House (not all Republicans, it should be noted, oppose egaming, but party leaders often argue against it to win support from America¹s increasingly large moral-conservative voting bloc). “If Republicans win back the House, things get a lot tougher for internet gambling in 2011,” says a lobbyist representing large US casinos on the issue, who declined to be named.

As casinos go, Harrah¹s, the world¹s biggest casino operator, is chiefly driving the lobbying campaign for egaming regulation in Washington. Jan Jones, its senior vice-president of government relations and corporate communications, says the company supports HR 2267 because it “addresses the reality of what is happening on the internet”.

During the first half of 2010, Harrah¹s spent approximately US$1.92m lobbying Frank¹s legislation, according to expense reports. For perspective, this tops the bill¹s 28 or so supporters in Washington.

But there are other interests on Capitol Hill with money to burn and influence to peddle. UC Group, the London-based egaming payment processor, has also spent handsomely to back HR 2267 ­ US$1.01m during the six months ended 30 June 2010. So, too, have members of the offshore internet gambling industry like PokerStars and Full Tilt, which donate to the Interactive Gaming Council (IGC) and the Poker Players Alliance (PPA). Together, the IGC and the PPA spent approximately US$1.76m lobbying Congress for internet gambling regulation in the first half.

With so many interests to balance, and so little time in which to do it, accurately handicapping whether Frank¹s Bill will pass this year is the stuff of nightmares for political oddsmakers. Many say the bill¹s only realistic chance of succeeding is to piggyback on another piece of legislation. However, even then there could be multiple obstacles, particularly in the Senate, where it is unclear whether Majority Leader Harry Reid will support the initiative.

But for more than a year Frank has said he will not attach his bill to an unrelated one just to get it passed. He has not been shy, moreover, in accusing egaming opponents of political skullduggery for affixing the Unlawful Internet Gambling Enforcement Act (UIGEA) to a must-pass port-security bill in September 2006. “I don¹t believe in those shenanigans,” Frank said pointedly at a hearing for his bill in July. “This is much too controversial to slip through without a vote.” Frank has not said how he intends to proceed after the congressional recess period ends in early September, and his spokesman, Harry Gural, declined to be interviewed for this article. Further complicating matters is the tax companion to Frank¹s bill, HR 4976. Its sponsor, Democrat Congressman Jim McDermott, has yet to schedule a markup in the House Ways and Means Committee, where he is a senior member.

State level

With the recent committee vote on Frank¹s Bill in Washington, the popular perception in egaming industry circles is that regulatory initiatives at state level have been relegated to the back burner. PartyGaming¹s Jim Ryan, for instance, said during Party¹s last results announcement: “The state efforts seem to have stalled as the federal efforts have gained momentum.” There is some basis for this view, of course. In 2010, efforts to legalise internet poker in Iowa (January-March) and Florida (March-April) fell short, while efforts to legalise egaming in California ­ which began in 2008 ­ continue to be slowed by in-fighting among members of the state¹s vast, politically powerful Indian gaming industry.

The same cannot be said of New Jersey, however, where internet gambling, under consideration by lawmakers there since 2001, is finally receiving serious consideration in the Legislature. Two bills in the state Senate, which would legalise internet sports betting and casino gaming respectively, have already passed the committee stage this year.

“With Atlantic City struggling, internet gambling is receiving its due consideration,” says William Pascrell III, a lobbyist in Trenton who is retained by iMEGA.

It would not be politics, though, without in-fighting, and in the Garden State, there is certainly no shortage of it. iMEGA and its political allies that support in-state regulation of egaming, are trading jabs with Harrah¹s, owner of four of Atlantic City¹s 11 casinos and an unflinching supporter of a nationwide regulatory solution.”If the federal government moves, then the state should move thereafter – that’s the position of our company,” Joseph Tyrrell, a regional vice-president of government relations for Harrah¹s, said during a state Senate hearing on internet gambling legislation in April.

Unsurprisingly, that view has earned the company enemies in the Legislature, principally state Senator Raymond Lesniak, a Democrat who argues that New Jersey should not wait on Washington to reap the financial returns from egaming. “Harrah¹s is not going to get its way,” says Lesniak, who is sponsor of both egaming bills in the state Senate. “I won¹t let it shut the door on us.” As the state considers a sweeping plan to revitalise Atlantic City (the worst-hit US gaming market between 2008 and 2009), it remains unclear whether internet gambling will feature as part of the fix.

Still to weigh in on the issue is New Jersey¹s newly elected Republican governor, Chris Christie, who is orchestrating the revitalisation project. Insiders close to Christie have refused to comment on whether he will endorse Lesniak¹s legislation. In what remains of the legislative session, which runs through autumn 2011, Lesniak and a small number of lawmakers in both chambers of the Legislature will be pitted against Atlantic City, whose members, although financially strained, still wield considerable political power in Trenton.

What does the future hold?

So, with the drive to regulate internet gambling in the US having picked up a head of steam this year, will it be smooth sailing to the finish line? Definitely not. Much has still to be done.

If egaming regulation is to take root here, stakeholders will be forced ­- grudgingly, no doubt ­ to strike a balance between their interests. In Washington, offshore operators want a “pathway to citizenship”, while US land-based operators desire a “level playing field” (buzz-phrases that are popular among both camps).

A poker-only bill (with a stand-down period built in for offshore operators, as France has undertaken to implement) could well be a place for both sides to land in the near-to-medium term.

Such a bill could keep the fragile coalition of Las Vegas operators at the bargaining table, and, depending on the suitability requirements contained therein, could leave offshore operators with enough wiggle room to press their case for ‘citizenship’ before a federal licensing commission.

That prospect, assuredly, will nauseate some members of the egaming industry. For now, however, the land-based and offshore gambling lobbies possess enough firepower to run interference on any bill that grants one side too big of an advantage over the other.

In New Jersey, meanwhile, in-state egaming supporters (iMEGA) and opponents (Harrah’s) remain firmly at loggerheads over how best, and when, to regulate internet casino gaming and sports betting.

Because their positions admit no middle ground, the governor¹s decision on whether to include Lesniak’s legislation as part of Atlantic City’s reboot is one that could tip the scales for either side.

Ongoing political deadlock, clearly, poses a real threat to regulatory efforts at all levels of American government. But even as gambling industry stakeholders duke it out in the halls of Legislatures around this country, the very fact that the conflict between them is intensifying unequivocally signals that interest ­ and investment ­ in pushing for egaming regulation is rising.

With billions of dollars out there to harvest and market share to win, the issue will not fade from view anytime soon.