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Monday, February 18, 2013

What US Regulators Can Learn From European Internet Gambling Regulations

In anticipation and preparation for legalized Internet gambling in the US, US state and federal online gambling regulators, legislators and government advocates are closely studying  enacted European  Internet gambling law. There is certainly much to be learned from how European nations have enacted Internet gambling legislation and how the EU officials in Brussels have overseen the evolution of  country by country gambling law.   However, enacting European legislation verbatim without looking at the consequences of the  European Internet gambling regulatory models could result in a less then  optimum  Internet gambling experience for US consumers,  states and the federal government. A better approach is to evaluate European gambling law as a precursor to US gambling law understanding that the two do have their differences as well as similarities. Also, it is a great opportunity to study the first mover in any business/regulatory space and objectively determine what is working and what could be done differently. 

The most controversial part of EU Internet gambling legislation is the abandonment of a pan European Internet gambling model. Under extreme pressure resulting from the deep European recession many of the EU countries decided to enact their own gambling law independent of any  pan EU gambling legislation. The goal, of course, is and was for these countries(Spain, Italy, France, etc.) to directly capture tax revenue and regulatory fees from the control of Internet gambling within their borders. 

The fact that individual countries in the EU have enacted their own online gambling legislation does not mean that a pan European Internet gambling regime will not emerge. The existence  of a "legal" Internet gaming framework has great advantages for countries like the US that are moving ahead with their own legislation and debating the same topics that Europe has addressed. The following are important experiences and outcomes of the years of legal and not so legal  Internet gambling in Europe that the US and, for that matter, any country grappling with this issue can learn from.

 Country By Country/ State By State Model? -  The fundamental question in anticipation of legalized Internet gambling in the US is should it or will it be regulated at the  state or   federal level.  Europe has temporarily abandoned a federated Internet gambling model because individual countries in the EU perceived  that their was a greater opportunity for them to generate revenue from a country model as opposed to a federated model.  European countries where also frustrated by the lack of substantive  gambling legislative actions on the part of Brussels during the worst recession Europe has seen in decades. They were and still are looking for other revenue stream for their governments. Regulated Internet gambling is an attractive  source for that revenue.

Country By Country Revenue/Expense Model - Spain, France and Italy are certainly generating revenue from Internet gambling licenses and transaction fees. However, it is unclear  what it is  "costing" these governments to regulate the gambling industry and if that cost/revenue balance works for the each country? The experience in France, Spain and Italy has prompted many other countries in Europe such as Denmark and Norway to move ahead with the country model assuming that there will be upside for their countries. In the US,  Nevada and New Jersey are moving ahead with a similar model. However, do these states  really understand the economics of this and are their projections for Internet gambling revenue correct?   Have they really studied what is  happening in Spain, Italy and France?

Creation Of Gambling Monopolies - The high cost of complying with the country by country model in Europe is leading to a consolidation of the industry with licenses only being granted to the organizations that have  funds to obtain and maintain a license. This is leading to fewer legitimate gambling operators in the online European gambling sector. There are also additional consequences including,  limited gambling content for consumers and the propensity for the monopolies to consolidate their positions in other countries as quickly as possible. This is very similar to the way land based lotteries are operated in the US  and could be a model that the US indirectly creates through a state by state Internet gambling model.

Growth Of Gray Market And Illegal Gambling - The limited amount of certified legal gambling operators in each country  is leading to the creation of a robust alternate "gray" and illegal  gambling market. Essentially, consumers want options and the freedom to make online content choices.  If the legal choices are so limited then alternatives will emerge. This is already happening in Europe.

Potential  End Of Liquidity Dependent Gambling - In the US poker has been and will be a significant source for online gambling and online gambling revenue provided there are enough simultaneous players accessing poker rooms. In a state by  state model it is difficult to envision a robust and healthy poker market outside of California.  European poker operators have been licensed in the individual European countries. Yes, they are operating profitability. However, the number of surviving poker rooms is dwindling and the enthusiasm for poker in Europe is dwindling. It could be argued that poker is not as popular in Europe as it is in the US. However,  this is debatable and the lack of popularity is more likely related to decreasing liquidity. Bingo, if managed properly can also be  true multi player experience and is subject to the same dynamics as poker.

Interstate Gambling Pacts - To my  knowledge there is no active inter-country Internet gambling pacts in Europe. However, the US has already realized that for liquidity dependent games, and in the case of  states with small populations that want to attract enough players to their Internet gambling  venues, interstate gambling pacts are essential to support a robust Internet gambling economy. This is a good sign, preemptive in nature and important to make America's game of poker a success in the absence of a federal solution.

Social Casino - The success of the "social casino" has come as a surprise to European gambling operators and regulators. The initial though was that it's low revenue per player, no pay-out and fun factor would not make it a rival or option for "real" gambling. However, the social casino business model has proven to be much more resilient then originally thought.  Almost every European Internet gambling operator has a social casino alternative! This phenomena will need to be addressed in any US online gambling environment. The issues with social casino  go well  beyond age and access and cross the line into what is actually valuable in cyberspace. Are virtual currency and virtual goods valueless or is their some value subscribed to them? Should they be regulated?

Social Casino To Real Gambling -  Facebook and big named social casino and European gambling operators are now working out the conversion mechanisms form social networks/games and "real" gambling venues. Social network adoption rate is very high in the US and almost a given for every online consumer. How will America deal with this and what if any regulation will be enacted to harness this form of gambling player acquisition?

The years of experience in Europe regulating and managing Internet gambling has tremendous value for US regulators pondering how best to regulate the industry in the US. However, some of the programs  implemented in Europe and the member countries should be scrutinized before enacting them in the US.   The US should also not verbatim enact the European country by country legislative model. It is important to have competition and innovation in any business sector and the current European country operating model appears to be undermining this form of free enterprise resulting in  rapid consolidation of gambling operators and the disappearance of options for consumers.  Important liquidity dependent games such as poker will force the US to seriously consider interstate regulation or a federal solution. Poker can not be ignored in the US.  In the current environment illegal US Internet gambling is alive and well jeopardizing consumers and lost revenue for state and federal governments. Europe's illegal gambling is growing as a result of constrained access to "legal" Internet gambling content. In the absence of US laws governing Internet gambling social casino entrepreneurs have filled the gap for consumers seeking to play gambling games over the Internet. This sector is not going to disappear if Internet gambling law is enacted in the US.

Kevin Flood is the CEO of Gameinlane, Inc. Gameinlane works with companies in the social, Internet gambling and land based casino sectors developing game content and online gaming strategies. Kevin is a frequent speaker at social game, Internet gambling and casino events and conferences in Asia, Europe and the US. Kevin is currently working with organizations to determine their acquisition and merger strategy as it relates to the growing interdependence of the various game content and delivery platforms.

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