Conquering the US: bringing US players back on shore

THE FRANK AND MENENDEZ bills to regulate online gaming in the US are low on the priorities of an administration focused on the wider economic crisis and unclear on whether non-US companies would be or should be licensed.

However, Europe’s leading egaming operators and software providers are honing in on the opportunities emerging in individual US states that are considering regulating online poker within their borders.

It is well known that many of the leading players such as Bwin, William Hill and Playtech, have met with lobbyists, legislators and potential licensees regarding operational opportunities in California.

Along with Florida, the most populous state in the US is looking at legislation to establish intrastate online poker systems and regulations as permitted by an exemption under the Unlawful Internet Gambling Enforcement Act (UIGEA). This explicitly declares that online intrastate wagers do not constitute “unlawful internet gambling” if expressly allowed by the laws of a state.

The desire of these companies to win the contracts to provide the operational infrastructure for cash-hungry states to monopolise the gaming revenues generated within their respective borders is however about more than immediate revenue and liquidity.

They could give those companies key strategic positioning in the single most lucrative egaming market in the world ahead of when it finally does regulate at the federal level.

The political and legal landscapes in several large states with land-based operating and regulatory expertise are arguably more hospitable to new gambling platforms than the federal political structure.

But working out the size of regulated state markets and the number of states that are viable as intrastate gambling systems is complicated by the fact that the true size of the US poker market is distorted by the current UIGEA gambling ban.

Projections on the size of intrastate markets are further complicated by the lack of clarity over whether offshore sites such as PokerStars and Full Tilt will be allowed to retain their US liquidities as egaming licensing regimes emerge at state and federal level in the US.

A numbers game

Indeed, according to Poker Players Research (PPR), which provides the poker industry with regular reports and analyses, almost everyone who is playing online poker for money is now playing in online poker rooms with over a million registered money players, on either one of the large standalone sites or networks, with PokerStars and Full Tilt having more than four million registered players.

An intrastate poker site or network would therefore need to get close to one million registered players before it could offer an equal choice of games and size of tournaments as the offshore sites, according to PPR. “This does not seem realistically achievable in a competitive environment,” says director Glenn Flackett.

If one takes the one million registered player mark as the baseline for an intrastate gambling system able to hold its own against the offshore sites, Flackett says that: “Any site in California [which according to PPR has around 1.5 million online money players, compared to New York’s one million and Florida’s 500,000] would need to get what seems to be an unrealistically high percentage of that state’s players to create a viable alternative to the established online poker rooms that players are currently using.”

Flackett’s reasoning is that there are more online players in the US now ““ 10 million ““ than prior to the passage of UIGEA. In other words, real money players in the US are unphased by the legality or otherwise of the sites they are currently playing on.

“Unless the ability of players to play on the sites they currently choose is substantially changed, liquidity advantages of the existing rooms will outweigh any safer, more legitimate benefits and few existing players will switch,” argues Flackett.

In addition, attracting a whole raft of new players will not be easy. “Any new players are likely to be less frequent and stake less; and will be far less profitable and will not build liquidity levels that are high enough,” adds Flackett.

The Swedish model

However, Simon Holliday, director of gambling data business H2 Gambling Capital, cites Swedish national monopoly Svenska Spel’s 2006 example of how a platform can be built on leisure-oriented players only comfortable with playing on state-licensed sites with a brand they recognise. All this achieved in a country with a population of 9.3 million, just over a quarter of California’s and half Florida’s, with nothing done regarding offshore sites.

According to Holliday: “This shows us that wherever there is a regulated alternative to bet, with at least close comparable value available, the vast majority of players will choose the regulated option,” with concerns such as legitimacy and the safety of player funds coming to the fore.

Having said that, H2 has calculated its US intrastate poker numbers assuming offshore poker site activity will be eradicated. Holliday explains: “Governments have never moved to regulate an industry without offering it some protection. Who would be willing to pay millions of dollars in licence fees and taxation while others were allowed to carry on tax-free?”

So H2’s baseline for the number of players needed for sustainable, regulated intrastate gambling in the US is lower than PPR’s, citing the need for approximately 500,000 unique active players in Year 1 in California, rising to one million by year 10. While for New York, the corresponding numbers are 250,000, rising to 550,000 and in Florida, 200,000 rising to 650,000.

Holliday thus also believes the US authorities’ seizure of payment processor bank accounts used by offshore sites such as PokerStars and Full Tilt in May this year will continue, and US authorities will also look at other methods of curbing player activity on offshore sites used in countries such as Italy, which has a GDP level just above California’s.

In Italy, a combination of IP blocking, a 3% tax rate, tournaments-only and restrictions on advertising dot.net sites channeling players to real money poker rooms has led H2 to predict regulated tournament buy-in fees of €274m in 2009, equating to over 80% of the total value of the poker market, from zero at the start of September 2008. When ring games are introduced next year, H2 says it expects the remaining offshore market to be virtually eradicated, now the likes of PokerStars are operating within the licensed framework.

Support system

“The combined impact of moves in the US could dent player confidence in offshore sites and, as we have seen over the past two and a half years, liquidity can gradually move from one site or set of sites to others. And once the direction of the flow is set, there is a snowball effect,” argues Holliday.

Indeed, with offshore activity eradicated, H2 thinks there are between 10 and 15 US states which could accommodate one or more standalone or ‘intrastate’ platforms of the same scale or larger than Svenska Spel’s.

So while the intrastate model could offer significant opportunities for egaming companies and state governments, its viability also appears to rest upon the ability and will of federal government to support individual states in bringing US poker players back within onshore, regulated regimes.

With the federal government having its own tax-raising aims for egaming, it remains to be seen how this plays out.

This article first appeared in the October issue of eGaming Review.