gaming:

Online poker: What you need to know about the complex industry

A woman who wants to remain anonymous plays poker online.

As Nevada moves toward launching real-money online poker, there are several concepts to keep in mind about the complexities of the emerging industry.

Consider:

• It is unclear whether Congress will approve Sen. Harry Reid’s Nevada-friendly plan to limit American online gambling to player-to-player poker, horse racing and lottery tickets or whether legislators will favor a more comprehensive federal plan.

By limiting the scope of play online, Reid hopes to protect Nevada’s casinos from Internet competition while also boosting the state as a leader in the development and regulation of the national online poker industry.

Keep in mind: player-to-player poker is the game played at the World Series of Poker. It’s not video poker.

• Without federal action, Internet poker likely will be approved and regulated on a state-by-state basis, like the lottery. Poker operators likely will face different rules and taxes by state. There will be no federal oversight, and Nevada regulators may not play the important regulatory role Reid envisioned.

• While the American Gaming Association, like Reid, is pushing for limited online gambling, some casino and lottery industry executives already are advocating for more online games. They hope to see Internet play expanded to online video poker, slot machines and blackjack. Internet casinos with such games already operate in Europe. Advocates see them as the next logical step in the United States.

• It is unclear how Nevada’s existing brick-and-mortar casinos would be affected by online competition. Some analysts say as many as 9,000 jobs would be created here if limited online gaming is legislated and Nevada regulators take the lead in supervising it and its expansion. Nevada would be cemented as the center of the U.S. online poker industry.

On the flip side, experts differ in opinion about how the development of online casinos would affect visitation to Las Vegas’ resorts.

• It’s unclear whether the launch of Nevada’s intrastate online poker at the end of this year or early next year will be a big money maker. Some analysts say California and other populous states would have to authorize it and allow Nevada-based sites to serve those players in order for online poker to be a big business here.

The political situation

Nevada regulators have approved or given initial approvals to 16 companies that want to participate in intrastate online poker. But Congress so far has been reluctant to limit online gambling to just poker.

That means that while Nevada may start with online poker, other states could move forward with different types of Internet gaming. In fact, some already have, with online lottery ticket sales in Illinois and the approval of online casinos in Delaware.

States were given the right to legislate online gambling late last year when the Justice Department issued a new interpretation of a federal law that until then had blocked online poker and casinos, even in Nevada.

Critics see efforts to limit online gambling to poker as an attack on state authority.

“We urge you again to involve the states collectively in the development of possible legislation to regulate Internet gaming,” the National Governors Association wrote to Reid. “We oppose the draft Senate legislation in its current form as an unnecessary preemption of state authority.”

Gov. Brian Sandoval bucked his colleagues on the issue and issued his own letter supporting Reid’s approach.

“While many states have long-standing proficiency in regulating brick-and-mortar gaming within their boundaries, the advent of Internet gaming has introduced a borderless element that state regulation alone cannot address,” Sandoval wrote.

Sandoval’s position falls in line with most of the casino industry, represented by the American Gaming Association. They argue a federal solution is needed to keep minors from gambling online, prevent fraud and money laundering, address problem gambling and ensure that players aren’t being cheated.

“Without a federal overlay, there will be a patchwork quilt of rules and regulations that will prove confusing for customers and difficult for law enforcement to manage,” AGA officials said.

Some states see Reid’s plan as unfairly benefiting Nevada.

“This proposed legislation will primarily benefit the state of Nevada and the casino industry. The federal government should not encroach on states’ rights to implement and regulate Internet gaming within their own borders,” Kentucky officials argued.

“We can only assume that the act is a blatant, unwarranted and inappropriate attempt to secure first-mover advantage in the online gaming space for Nevada,” Massachusetts representatives wrote.

Casino executives, recognizing the political climate, have in recent weeks discussed with increasing frequency the likelihood that Internet poker will be adopted on a state-by-state basis with states potentially teaming up via compact and creating larger money pools to attract online players.

The expectations

Projections differ markedly about how Nevada’s intrastate player-to-player poker industry would perform once it launches.

Caesars Entertainment executive Jacqueline Beato called it insignificant in terms of profits.

“We think Nevada will be fairly insignificant to our results, but there’s more excitement about proof of concept and the fact that this can be done,” Beato told investors during a recent conference. Caesars expects online poker to go live in the first quarter of 2013. “Similar to land-based casinos, we think Nevada being first to market and showing this can be done is really going to help those other states that will likely provide more profits, like California and New Jersey. Those are big states that will have meaningful impact on the online gaming world.”

But Bob Boughner, a Boyd Gaming executive, told Nevada gaming regulators his company sees online poker as potentially doubling the state’s player-to-player poker market in brick-and-mortar casinos, a $132 million a year industry. That’s because online enthusiasts can play multiple games at once, something not possible in physical casinos.

“We don’t see this as job dilution, we see it as job creation,” Boughner said of online poker. Boyd further hopes the state will someday authorize online games besides poker.

And Dr. Tony Alamo, a member of Nevada’s Gaming Commission, said he can see tremendous potential for online poker, even if it’s limited to intrastate operations. He shared his thoughts after licensing approval for the Ultimate Gaming/Ultimate Poker, an online poker business that is likely to cash in on the popularity of its sister company, the UFC fighting league, and its affiliation with Station Casinos.

The UFC alone has 830,000 Twitter followers, while UFC President Dana White boasts nearly 2.3 million followers.

“With that gentleman just typing in there, ‘Play poker on Ultimate Gaming,’ that thing could probably take off, even within our state,” Alamo said. “I can see this exploding. I’m now beginning to see there is a return on investment just intrastate.”

But not everyone is convinced big money is to be made in Nevada, especially if poker is confined statewide.

“Poker doesn’t work in a small state like ours,” said Anthony Cabot, a local attorney and Internet gambling expert. “Poker requires liquidity. People only play on poker sites if there are a lot of people playing on that site and the game has the limits they want. House-backed games are different. It doesn’t make any difference if you have liquidity or not. It’s a person against a slot machine or a blackjack game.”

Expansion

Boyd Gaming isn’t alone in suggesting that online gambling in Nevada should not be limited to player-to-player poker.

Bally Technologies and SHFL entertainment last week announced a deal in which Bally will offer SHFL content online. Bally’s online and social gaming system now includes not just poker but other table games, as well as video slots and sports betting. If regulators approve applications beyond player-to-player poker, Bally can offer the games to partners.

Cabot added that if online casinos proliferate around the country, Nevada regulators may allow online casinos to operate here as well.

“If that (federal poker legislation) doesn’t work, I suspect they’ll be revisiting the games of chance,” he said.

Profit potential

Nationwide, the profit potential for online poker remains a big question mark.

Motley Fool writer and gaming analyst Jeff Hwang recently offered a sobering financial outlook in an article titled, “Sorry, Mr. Online Poker. Nobody Cares About You.”

In pressing for a federal online poker solution, the AGA argues that millions of Americans spend $4 billion a year to gamble online with unregulated offshore sites. The problem is, Hwang says, that the $4 billion a year represents wagers from all 50 states, while federal regulation of poker would apply only to a handful of states that allow online poker. That narrows the potential legal American market.

Hwang theorizes there will be no giant online national poker rooms with lots of liquidity and players. Instead, he envisions companies such as Caesars Entertainment, MGM Resorts International and Boyd Gaming competing for small pockets of players on a state-by-state basis.

“There are too many professionals in the online space and not enough fish,” Hwang wrote, suggesting that the best players will have difficulty finding rookies to win money from. “Online poker may more properly be viewed as a gateway to more lucrative, full-scale online casino gaming five to 10 years down the line, rather than as a boom in and of itself.”

Wall Street analysts at Fitch Ratings suggest that Caesars, with its World Series of Poker brand and online gambling operations already under way in Europe, is the land-based casino operator poised to benefit the most from broad legalization of online gaming. But even for Caesars, the addition of online gambling in the United States “won’t materially improve” its financial situation, Fitch said.

Jobs

As for jobs, no official statistics are available, but some online poker operators have announced hiring plans and there are educated guesses about the sector’s overall growth potential.

South Point Poker, for example, plans to launch with about 40 employees, including software developers, graphic artists, customer service representatives and investigators.

“It’s an incredible step forward for the state of Nevada,” South Point Poker COO Lawrence Vaughan said. “It’s going to bring a whole new intellect of workers here to assist in this new industry.”

Boyd Gaming’s online operation will grow from a handful of people to 20 or 30 people. Ultimate Gaming/Ultimate Poker expects to expand from 26 jobs to 100 jobs over the next year.

Overall employment projections have ranged from 1,000 jobs created to as many as 9,000, depending on whether poker operators, payment processors and support companies handle poker play from within Nevada, from multiple states or from international destinations.

On the other hand, if online casinos successfully emerge around the country, some gaming executives worry that physical casinos in Las Vegas could be devastated because people who favor playing slot machines and other games of chance online will have no reason to visit when they can play the games at home.

Not everyone agrees.

“From the time Nevada was the only jurisdiction where people could gamble and through the late ’80s and '90s with Indian gaming and riverboats where everyone said, ‘This would be bad for Las Vegas because now people can gamble at home as opposed to gambling here,’ they were confused,” said Andrew Pascal, a longtime gaming executive who has worked at Wynn Las Vegas, Encore and Playstudios, which runs the myVEGAS social gaming site that promotes MGM Resorts properties. “The Las Vegas experience isn’t about the purity of gambling. It’s about everything: the entertainment and dining and shopping. It’s about how it’s so concentrated in one place that’s unlike anything you’ll find anywhere else in the world.”

Paul Mathews, a member of Sandoval’s Gaming Policy Committee and a former IGT executive now also at Playstudios, cited successes in Europe, where legal regulated online gambling has been under way since the early days of the Internet in the 1990s.

There, online gambling has complemented existing casinos. The same thing is likely to happen in the United States, Mathews said.

“Just because you can play bingo online in Bakersfield doesn’t mean you won’t come to Las Vegas to see Garth Brooks or experience the other great shows and restaurants here,” he said.

Mathews said some states considering online gambling may limit licenses to those already operating land casinos. In that case, many local companies would benefit as they already have casinos all over the country.

Las Vegas casino operators also have learned from the mistakes of European land-casino operators, who for the most part aren’t big players in the online market. They were largely out-maneuvered by sports-betting operators and entrepreneurial companies that captured the bulk of the market despite not having well-known casino brands.

That’s one of the reasons American casino brands — Caesars, MGM, Wynn and Boyd — are interested in establishing an online gaming presence, even if it’s limited to player-to-player poker.

The technology

Industry officials say they are confident they can meet technical standards so online gaming is limited to states where it’s allowed, excludes minors and has systems to deter problem gambling, collusion and other types of fraud. The technology already works for mobile sports wagering in Nevada and in online casinos in Europe, advocates say.

The features work like this: Players sign up at physical casinos or by emailing a photo of their driver’s license to an online casino. Information is run through a database to ensure that the player is who he says.

Once play beings, the player’s physical location can be confirmed with cell-phone and computer technology. Poker operators also can send text messages to players’ cell phones and require them to text back.

To prevent problem gambling, players can set enforceable betting limits. Play also will be analyzed and every hand will be stored for later analysis to fight collusion.

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  1. Speaking from 15 years of experience in the online ID/age verification industry, it is my opinion that any claim of being able to prevent under-age participation in online gaming should be taken with a grain of salt, if not an outright call of BS!

    The same goes for any claim to be able to spot collusion. Brick and mortar gaming has a hard enough time of doing that, online gaming can't hope to stop it when it is trivial to engage in such in that environment.

    Don't get me wrong, I firmly believe that adults should be allowed to engage in many activities that some might call immoral, but I have real doubts about the claims made in this story.

  2. Poker players believe that poker is a life skill such as numeracy, probability, resource management, risk assessment, and ways to positively channel aggression. They believe that poker can be used as a superior means of teaching critical life skills such as negotiating, resource management and risk assessment.

    I am not a poker player but after reading articles about online poker I decided to research the subject. I logged on to my old friend Wikipedia the free encyclopedia and looked up the words skill and bluff.

    For the past week, I read articles about online poker. Then I slept on it to allow my subconscious mind to sort the information.

    This is my conclusion. Internet Poker is bluff on the American gambler. Without the bluff the game evaporates.

    There are millions of poker players who will disagree with my theory - you be the judge and decide what is right for your family when online poker is legalized and money begins to change hands.

    But, keep this in mind, don't allow your children to be pulled into the Internet gambling web.

    Illegal Internet gambling was a $30 billion a year business. The money used to be the gamblers now it belongs to the promoters.

  3. Boftx,

    Your point of monitoring and identifying, will be the main items that will stop online poker from being approved at the Federal level.

    Lawmakers in Washington will not approve online poker at the Federal level. The votes are not there, the support is not there! The larger casinos know this. This is not something that will not happen in our life time, if ever! Casinos companies are preparing for State approved online poker.

    Ponder this if you will, "if" the Federal Government were to approve online poker, this would open the door for Federal Oversight of Gaming throughout the United States. Again, "if" the Federal Government were to approved online poker this would open the door for the Federal Government to have power over gaming in any state with legalized casino gaming.

    Approval at the Federal level for any type of online waging, either between two parties, or against gaming company will open a Pandora's Box the gaming industry will regret. The Federal Government never gives something without receiving something.

  4. Just as underage players have always been able to play in brick and mortar casinos when they obtained phony IDs, there's no way to prevent them from playing on-line, especially if they're enabled by a cooperative adult (of the type where they would buy their phony IDs, or a family member who sees no harm in their playing). However, I suspect the underage player problem is not that significant with reasonable controls, but the issue is really a straw dog for those who oppose the concept of on-line play for ANYONE due to their personal moral or religious beliefs which they seek to impose on others.
    Collusion is not so much an issue in on-line tournaments, where the player doesn't control what table he sits at.
    I don't believe on-line poker will, perhaps ever, become what it was just a few years ago, where you could risk $200 in a Sunday tournament competing with 5,000+ worldwide players for a million dollar prize pool. There are too many greedy interests each pursuing their own selfish goals and ineffectually contesting the issue with die-hard zealots who want to impose their beliefs on the American people.
    Considering on-line poker is currently permitted in most of the free world (and a good part of the not-so-free world) it makes me ashamed as an American to have my governments behaving they way they are. The founding fathers must be rolling over in their graves.

  5. While there will always be people breaking every law in the book, for the most part regulations work. I was an avid online poker player prior to the Bush Administration outlawing it. From that day forward I never played online again because I do my best not to break laws, as do the overwhelming majority of Americans.

    Having said that I do believe online gaming has a long ways to go to build trust. Online gaming companies have had their card dealing algorithms cracked, organized team playing on high limit games, and rampant gambling addiction especially by legally aged college students chasing their rookie losses before mom and dad find out.

    I stuck to low limit (.05/.10) tables and freeroll (free entry tournaments with cash prizes) and was purely entertainment and training for live play. Keep limits low until solutions are found to the problems I listed. Nevada legislated its way out of mob control, and I feel can legislate online gaming over time to be just a safe and trusted as live gaming.

  6. Guaranteed to turn Las Vegas into a ghost town.