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Monday, March 11, 2013

Will Legalizing US Internet Gambling Result In Financial Benefits For US States And The Federal Government?

Legalized Internet gambling is well on its way to implementation in the United States. One of the primary reasons for legalizing Internet gambling in the US is the prospect of generating more revenue for state and potentially the federal government.  Now that New Jersey, Delaware and Nevada have legalized Internet gambling we will see if the predicted revenue/cost from Internet gambling proves to be correct.  There are also important questions related to the financial impact of Internet gambling on a community that participates in legal Internet gambling that need to be answered during the initial exploratory phase. Will Internet gambling create jobs in the places where it is legalized in the US? Will the residence of the community contribute the majority of the state revenue through their gambling play? Will the major benefactors of online gambling be offshore providers of Internet gambling content, marketing services, financial transactions and customer support related services?

American Internet Gambling Players Paying The Bills - Much attention has been placed on the licensing fees payed by the operators of Internet gambling  and the taxes paid by the operators on gambling  transactions as the primary source of revenue from Internet gambling. Certainly, these sources of revenue are welcome with the US still struggling with federal and state budget shortfalls and a primary reason for legalizing Internet gambling in the first place. It is true that the regulatory and accounting structure does look to the operators to actually pay the tax man. However, if the ultimate cost of supporting gambling in the US comes from US players in the form of gambling transactions what is the net/net upside of gambling in the US? After all, the players themselves will be indirectly funding  gambling operators through their transactions. Essentially, the citizens  will be paying a form of tax indirectly collected  principally through their play of online casino style games.  This results in money a citizen might spend in a different activity to be spend on gambling with a portion of that money being directed to state and federal governments.  

Will Jobs Be Created For Americans? - The essential model used by US politicians to justify Internet gambling in the US has been the land based gambling model. Land based gambling has had a profound positive economic impact on many of the communities where it has been introduced and has provided meaningful tax  and regulatory revenues for the places where land based gambling has been sanctioned.   It has also created jobs that would not have been present in the absence of a physical casino. However, the  land based casino business and operational model is very different from the Internet gambling model.   There are no physical facilities, no hotels, no restaurants, no transportation required, etc. Essentially, the job creation capability of Internet gambling is nothing like a land based casino operation. 

Yes, new and different jobs are associated with Internet gambling. However, many of them can be conducted remotely and not in the  places where Internet gambling is accessed. Online marketing, customer service, fraud detection, Legal support, payment processing , IT setup and support and software development can all be conducted in places other then the place where the online gambler is accessing gambling content. This would lead us to believe that there  is less upside for job growth associated with Internet gambling relative to the land based gambling model.

Job/ Revenue Creation Outside Of The US -  Internet gambling is actually a very old and a mature business model  having started in the mid 90's and continued on legally outside  of the US after 2006 primarily in Europe and   illegally in many other parts of the world.  The mature nature of online gambling has led to the creation of a robust Internet gambling services business that employs qualified people all of the world.  Currently, it appears that many of the operators seeking licences to conduct and support  Internet gambling in the US are not US companies and the majority of their employees are not in the US. Essentially, the legalization of Internet gambling in the US will be a big revenue and job creation opportunity for foreign companies and individuals that have the skills and know how to operate gambling operations and perhaps not a significant source of jobs for US citizens.

In point of fact many of the jobs and revenue generated from legalized US gambling will wind up in places like Tel Aviv, London, Stockholm, etc. unless provisions in gambling law insist that the support and development functions associated with Internet gambling reside in the jurisdiction where the players are gambling. This is very unlikely because this mandate would make it difficult for gambling operators to be profitable in the US market adding additional costs to gambling operations that are already becoming prohibitive because of the European regulated Internet gambling model and leading to severe consolidation of the Internet business in Europe. Ironically, European Internet gambling operators are desperately looking to the US to save their businesses given the increasing cost of operating in Europe.

Adding More Responsibility And Cost At The Governing Level - Inevitably,  more staff and or cost  will have to be added to governments where online gambling has been legalized.  Enforcement, licensing, investigation of allegations of fraud, auditing of gambling companies, hosting facility certification, transaction processing audits and reports of abuse from citizens will all require governments to either add staff or sub-contract to third parties. Certainly, many of these tasks can be outsourced by government. However, in the end governments will be paying the tab. Also, there is a danger in excessive outsourcing of Internet gambling functions and expertise. In the end state and federal organizations need to understand Internet gambling in order to properly regulate  and manage it. Complete outsourcing is a bad idea if a government wants to remain in control of gambling operators and to protect the citizens in their jurisdictions.

In conclusion,  the practical reality and details associated with operating online gambling need to be taken into consideration when a governing body decides they want to move forward with the legalization of Internet gambling. Determining the true cost and benefit for a jurisdiction is key. Also, determining the  economic benefit for citizens of a  gambling jurisdiction and a cost analysis for the principality should be undertaken.  The need for consideration of these factors  does not mean that Internet gambling should not be legalized. On the contrary, online gambling is already alive and well in the US despite the fact it is essentially illegal in most states. State and federal governments should step in and offer a "legal" solution sooner rather then later.  However, governments have to  understand what legalized Internet gambling really means to the bottom line and how it will impact tax payers.

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.



1 comment:

Josh Mason said...

The online gambling industry is one of the most profitable industry on the internet. Millions of people around the world are wagering on sports online, playing online poker, bingo and even slots online at any of the thousands of gambling sites available on the net.