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Thursday, December 29, 2011

Impact Of US Justice Department's Decision To Legalize Internet Gambling

The politics of US Internet gambling law are certainly intriguing. In 2006 it  became illegal (UIGEA) to gamble online resulting in the collapse of an entire industry. Six years later it is all of a sudden legal again! The bad economy, high debt loads for individual states and the rise of social gambling using virtual currency as a cover for real gambling have all contributed to pulling us back to 2006. The justice department has capitulated to the tremendous pressure it has been getting from bankrupt state governments and land based casinos that are feeling the heat from Internet gambling alternatives. So what does this news really mean for US consumers and for businesses involved in the gambling industry?

There are certainly major differences between the old days of US Internet gambling and where we will be in 2012. 

The Big Poker Rooms Are Gone - Back in the day Party Poker, Doles Room, Full Tilt and others dominated the Internet poker space. These business are all gone or merged with other businesses. Essentially there is no obvious online poker room that is ready to fill the void.

State By State Gambling Legislation - The way I read the new Justice Department ruling is that it gives states the right to run Internet gambling operations. I do not see an interstate component. If this is true the actual size of the opportunity and market is significantly less then (minus the growth in population) the 2006 market. Prior to UIGEA the US Internet gambling business was federal in the sense that Internet gambling providers target marketed the entire US market not individual states.

Learning For Europe - Gambling has been legal in most countries in Europe since the inception of Internet gambling. So what can we learn from the European experience?  Historically, Europe has had an odd relationship with Internet gambling. Its citizens were able to gamble online. However, the Internet gambling businesses were not allowed to operate in most European countries. This evolved into a bizarre situation where British protectorates such as Gibraltar , Isle Of Man and Alderney were allowed to host the gambling operations and not pay taxes.

Europe has since taken about face on this position with countries like Italy and France creating their own in country gambling legislation. The early assessment of this change indicates that a country by country Internet gambling is not nearly as lucrative as regional or international gambling operations. Social games like poker and bingo are the hardest hit by this change because they cannot command the "liquidity" necessary to drive and support a vibrant business.  The new European law is also resulting in a business consolidation forcing many Internet gambling operations out  of the business or into the "illegal" gambling category.

Social Networks And Social Gaming - Ironically Zynga runs the largest and most successful poker room in the world. Fueled by virtual currency and virtual goods(poker chips) it has steamed ahead to an IPO. Many of the main stream European gambling business are now fully represented on Facebook and launching social gambling games. Facebook has indicated that it will allow gambling operators the ability to offer Internet gambling to Facebook users.  Facebook was at its infancy in 2006 and did not even support applications like Zynga poker until 2007. Will social networks be the key to the success and perhaps the consolidation of the US Internet gambling business within Facebook or Google+?

US Land Based Casino's - The big US casinos have been flirting with traditional European gambling companies recently in the hopes of partnering with companies that have Internet operational gambling experience. The fact that casino's realize that they do not have the experience to operate an online gambling property is a wise assessment. However, what are land based casinos expecting from these relationships? The big problem with land based casinos is that they have little or  no Internet brand.  This begs the question:  What company will most benefit from the joint ventures. Will it be the European gambling Internet gambling operators or will it be the US casinos?

Indian Casino Operators - Will Indian casinos get any benefit from legalized Internet gambling or will they be hurt by it? Most of the Indian casinos are relatively small regional casinos. They thrive on addressing the needs and gambling interests of local communities. In many cases the tribes are not united and frequently compete with each other. In the Internet world consolidation and size matters. Regulation aside the US Internet gambling  space could consolidate very quickly with  a few players in each state owning the market. How will Indian casinos respond to this business dynamic?

We are certainly at the beginning of a new era for US Internet gambling with many hopes, dreams and aspirations for the industry.  Overall, it is a positive step that the US has decided it cannot control the Internet and must give US citizens the chance to decide for themselves if they want to gamble online. The big question is what business or businesses will be the winners of the Internet gambling game.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

1 comment:

Stark Raving Sane said...

Ironically the DOJ position that the wire act doesn't prohibit online poker (among other things), messes things up for new operators.

The IUEGA never touched game players or operators, only payment transactors. The operative word in this law is illegal, and if online gaming is not illegal, then the IUEGA has no teeth, at least with respect to poker. Online poker in the USA is currently legal!

The only state where online poker is specifically outlawed is Washington State. Washington D.C. has legalized online poker.

I'm sure the big players are waiting for something more definitive than the absence of prohibition to begin playing. Liquor, gambling and prostition purveyors rely on state and federal licensing to protect them from prosecution and competition. Package liquor sales in some US states are only conducted by the state itself (Utah for one).