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USA LEGAL UPDATE by I. Nelson Rose 07/26/2007
The latest news in the United States Department of Justice's war against Internet gambling is not good news for online poker players.
Up until 2006, most of the attacks by law enforcement were against sports betting sites. The DOJ has publicly taken the position that the Wire Act, the main federal anti-gambling law that might apply to the Internet, outlaws all forms of gambling. However, a couple of courts have ruled the Wire Act is limited to bets on sports events and races. The DOJ does not want to lose its power of intimidation by losing a case, so it has not brought any charges against pure poker sites.
But in April 2006, the House of Representative's Judiciary Committee and later the full House approved a bill to amend the Wire Act to cover all gambling, including poker.
At least it was limited to operators not players.
But in June 2006, the state of Washington passed a law to clearly make it a crime, even a felony, to merely play poker online.
Then there were the dramatic arrests. The CEO of BetOnSports, flying from England to Costa Rica, was nabbed while changing planes in Dallas and charged with violating the Wire Act. Then the CEO of SportingBet was arrested at JFK for violating a Louisiana state law, which seemed broad enough to cover poker.
In the last days of the Republican-controlled Congress, then-Senate-majority leader Bill Frist rammed through the Unlawful Internet Gambling Enforcement Act, designed to stop any "game subject to chance." Although the UIGEA, which I call "Prohibition 2.0," was the faulty act of a failed politician, it has scared everyone remotely connected with the industry.
The sites of the largest publicly traded operators, like PartyGaming's PartyPoker, immediately announced that they would no longer accept players from the U.S. Online poker players were forced to switch to one of the many privately-owned sites which continued to take bets from Americans.
Getting the money to the operator became more of a problem with payment processors like FirePay also cuting off the U.S. Fortunately, Neteller, the largest e-wallet, announced it would wait to see what the eventual regulations looked like.
Now Neteller is gone. Its founders, who no longer had active roles in the business, were arrested in the U.S. The company announced that, "Due to recent U.S. legislative changes and events, effective immediately, U.S. members are no longer able to transfer funds to or from any online gambling sites." This left the company's 640,701 Amercian account holders supposedly able to get their money back from Neteller, but unable to get their money back to Neteller from the gambling sites.
Neteller claimed this sudden change was due more to the timing and content uncertainty of future regulations. But a few days later it was also disclosed that the financial banks, attorneys and accountants responsible for companies like Neteller going public had received subpoenas from the DOJ. Even Google was told to stop taking paid ads from Internet gambling sites (Yahoo had quit three years ago). Another payment processor, Citadel, read the writing on the wall and also cut off Americans.
The most recent skirmish was timed to coincide with the SuperBowl, by far the largest betting event of the year. And it worked: Pinnacle, the leading sports betting site, also pulled out of the U.S. market. American bettors now have to struggle to find a site they trust, and then figure out how to get the money there.
The only good news is that prosecutors will never go after mere players.
And in the long run, the government's war against Internet gambling will be merely a blip. The first Prohibition did not stop people from drinking. Prohibition 2.0 will not stop players from betting.
© Copyright 2007. Professor I Nelson Rose is recognized as one of the world's leading experts on gambling law. His latest books, GAMING LAW: CASES AND MATERIALS and INTERNET GAMING LAW, are available through his website, www.GAMBLINGANDTHELAW.com.
Mobile Gambling: Will the US Join a Growing Market?
By Paul Korzeniowski, TechNewsWorld
Placing bets and buying lottery tickets via a mobile phone is projected to grow into a $16.6 billion industry by 2011. Europe and Asia currently lead the way, but American carriers and lawmakers have been reluctant to climb on board. Could careful regulation and better age verification approaches give the U.S. a toehold on the market?
Handheld computers have simplified many activities. Individuals can surf the Web, text message their friends, buy a new pair of pants, and, increasingly, try to hit the jackpot in the lottery.
Market research firm Juniper Research expects the worldwide mobile gambling market to grow from US$1.35 billion in 2006 to $16.6 billion by 2011 -- and the increase is coming outside of the U.S., which currently prohibits the activity.
"The mobile channel will push gambling services out to a broader, lower stake market than existing channels, offering significant opportunities for market growth," Bruce Gibson, research director at Juniper, told TechNewsWorld.
Convenient Casinos
Mobile gambling is rising because of the ubiquity of handheld devices as well as the convenience these devices offer. In 2006, the number of handheld devices sold worldwide passed the 1 billion mark, indicating a gigantic pool of potential users.
Mobile gambling functions rely largely on text messaging, which has become simple to use and quite popular. These features gel with the impulsive nature of playing games of chance and allow gamblers to go online and wager when they are sitting in a restaurant, waiting for a bus or even working at their desks.
These gamblers find a growing number of gambling outlets. Sports betting is currently the largest sector in mobile gambling, and fans now wager on a variety of professional leagues, with soccer being the most popular. Lotteries are the second most popular segment, but Juniper Research forecasts it will take the top spot by 2010 as related games, such as bingo, become more widely available. Casinos offer virtual games like poker, blackjack, roulette and craps, and they have also achieved wide popularity.
Europe, Asia Lead the Way
Gambling services attract a variety of customers, according to Gibson. "The typical mobile gambler will be [a] young, upwardly mobile professional with disposable income," he said. While most gambling has been male oriented, the availability of games like bingo and skill games will attract more women and make it popular to both genders.
Mobile gambling enterprises started to evolve at the turn of the millennium and have become well established in certain areas. Europe has been a hotbed for mobile gambling, with Juniper Research estimating that users placed $665 million in bets there in 2006.
In the Netherlands, Sweden, Germany, Britain and Austria, mobile phones are regularly used to buy lottery tickets, bet on sporting events or enter sweepstakes for prizes. These services are also rapidly gaining ground in Asia. In fact, Juniper Research expects Asia to become the market's largest segment, accounting for $6.7 billion by 2011.
Vendors have had to address various technical issues in order to spur market acceptance. Security is at the top of the list. After people dial in and enter their wagers, wireless e-mails are sent back asking them to confirm all the details.
Typically, winnings or losses are logged into an account the bettor has set up, and more authentication is required in order to make changes to the account. Content monitoring and filtering technologies enable cellular operators to monitor gambling traffic as it passes over their networks, and additional checks are in place in case of suspicious activity, such as unusually high numbers of bets.
Age Verification
Sequestering these services has been another concern. "Regulators want to make sure that young children do not take part in these services and then become gambling addicts," Neil Strother, an industry analyst with market research firm The NPD Group, told TechNewsWorld.
Technological advances and new processes have been put in place to address this issue. Around the world, mobile network operators have imposed age verification procedures to ensure that users are old enough.
"Sometimes age verification is implemented by operators as part of a voluntary code of practice covering mobile content, such as in the UK," Juniper's Gibson noted. Many operators issue users PIN numbers to access special accounts, which are based on credit cards.
Because it is electronic and instantaneous, mobile gambling presents new logistical challenges, such as making sure that odds are fair. Betting equipment now includes software that determines dynamic odds, or odds that change as the betting process progresses.
Illegal Since 1934
Currently, the biggest inhibitor in the mobile gambling market has been a reluctance to offer these services in the U.S. In the summer of 2006, federal legislators put in place restrictions to keep mobile gambling illegal. U.S. regulators have been disinclined to embrace online gambling and are now thwarting mobile gambling as well.
The main problem is how the wagers are made -- a 1934 law makes betting over a phone line illegal, and that law has halted gambling expansion in the online world.
This restriction has also made it more difficult for gambling companies to get paid. As part of its purchase of online bill payment service, for example, PayPal discontinued its online gaming business due to the uncertain legal status around online gaming.
Financial service companies such as Citibank followed suit and no longer processes credit card payments from offshore gambling operations. Gibson sees this as a short-term rather than long-term problem and projects that North America will account for 6 percent of the mobile gambling market in 2011.
As the mobile gambling market takes shape, the question arises -- how will it impact the current state of gambling?
"Initially, mobile gambling will be an additional channel for existing gamblers," concluded Gibson. "In the longer term, the market will attract a significant number of new users as the inherent advantages of the mobile channel become apparent and as mobile gambling develops into a mass-market application.
Europe's Online Gamblers Will Outlast U.S. Ban: Matthew Lynn
Mergers are usually presented as an opportunity. Yet there is no way the possible tie-up between the world's two largest Internet gaming companies could be spun as anything other than an act of desperation.
888 Holdings Plc and PartyGaming Plc have been floored by U.S. moves to restrict online betting in that country. They are now struggling for survival after their plans were ripped up overnight.
Their merger may help them weather the worst crisis in the industry's brief history, though it probably isn't necessary. Both companies would prosper regardless of the U.S. challenge.
The U.S. stance on Internet gambling is illogical and misconceived. Like most bad decisions, it will be reversed one day -- the issue is whether the companies can wait until then.
``Whatever our American friends try to do, gambling is a legitimate industry and it is here to stay,'' Andrew Poole, online-services coordinator of the London-based gambling- counseling group GamCare, said in a telephone interview. ``While there are potential problems arising from online gaming, with the right regulatory approach we believe they can be dealt with.''
In September, the U.S. Congress enacted legislation to prevent credit-card companies from collecting payments for online bets. The result? Internet gambling companies lost $7 billion of market value in a day. PartyGaming, which came from nowhere to become a member of the U.K.'s benchmark FTSE-100 index, has dropped to about 1.25 billion pounds ($2.4 billion) in market value from more than 9 billion pounds at the end of 2005.
$12 Billion Market
More than 7 billion pounds of shareholder wealth has disappeared -- which even the toughest of roulette players might regard as a bad day at the office.
The U.S. accounted for half of the $12 billion Internet- gambling market last year. When half of your customers are told they are no longer allowed to trade with you, it is no surprise when your share price collapses. It will be a hard slog to regain that business from other countries. An industry that is missing the world's biggest economy will always rest on shaky ground.
A merger of the big players is one rational response. It is, however, also worth posing the question: Can the U.S. ban hold?
Probably not.
It is legitimate for the U.S. to prohibit Internet gambling if there is evidence that it is socially harmful.
Gambling isn't an innocent pastime. Like alcohol, it can be damaging when people go too far. If it becomes an addiction, it can lead to heavy debts, depression and family hardship.
Three Flaws
Given the Internet's global reach, it is easy for lawmakers to shrug their shoulders and say: ``We can't control it.'' U.S. legislators can at least be commended for not saying that. If they want to control the Internet, they should.
Even so, there are three flaws in the U.S.'s reasoning.
First, it isn't consistent.
If gambling is so damaging, why is Las Vegas still flourishing, while companies such as PartyGaming are getting hit? The U.S. gaming business has never been run by men who were narrowly turned down for sainthood. If it's acceptable for others to profit from U.S. gamblers, then U.K. listed companies, which are respectable and backed by solid investors, should be allowed.
Second, Internet gaming is no worse than other gambling.
True, it's right there in your own home -- you just have to log on, and you are in a casino. And it operates 24 hours a day, seven days a week. Yet that isn't the whole story. ``A lot has been done in terms of self-regulation,'' GamCare's Poole said. ``The responsible operators have strong policies for limiting the harmful impact.''
Wrong Target
Spot on. It is easier to monitor a virtual casino than a real one. All the transactions use credit cards, so the operator can check precisely who people are, and how old they are. They can set limits on how long people play, and how much they lose. Try doing that on a racetrack or over a crowded roulette table.
Third, the U.S. has chosen the wrong target.
Lots of bad things happen on the Internet. It is awash with hard-core pornography, fraudsters, illegal file-swappers and spammers. All of those have the potential to do a lot more social and financial harm than a few people playing virtual poker. Why pick on the gaming industry?
Europe is taking a very different route.
The European Union appears set on allowing Internet gaming to continue. The U.K. shows no sign of reversing its relaxed attitude to gambling. That means there will be a substantial online gaming industry. In time, U.S.-based gamblers will find a way to play -- even if it means getting credit cards from a new breed of offshore banks.
The companies that go the distance will flourish in due course. Bad laws are repealed eventually -- it is just a matter of staying in the game until you can collect your winnings. The pummeled share prices of the main operators seem like a steal.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net .
Online Poker and the Future
Everyone wants to know where online poker is heading.
The short answer is that online poker is just going to be another IGaming product; although we may see a huge pop if China adopts the game.
Here’s the longer answer – Poker has pretty much inundated the mainstream North American marketplace, and the growth that we have been seeing cannot withstand the pace it has. Europe is not as big a market as everyone thought, with the Scandinavian countries being the best market for online poker already being saturated.
A key event was the announcement by the Travel Channel in April of 2006 said that ratings for its "World Poker Tour" had fallen 36 percent in the last two years. If Television audiences are dropping, then it’s because there are too many other channels providing poker shows or interest is waning.
The larger sites are dominating in such a way that some of the smaller sites and networks are seeing their revenues drop. It’s a simple case that the little guys cannot compete with sites that have millions to spend per month on branding through mainstream media.
And as the smaller companies start to see their numbers dwindle, fewer players are likely to compete on these sites. A site needs a minimum of 5000 players at any given time to be appealing. That means that the same site must have at least 50,000 active depositing players. Given that it costs anywhere from $200 to $300 per player acquisition in the Americas, then a start-up would have to spend $10 million (Incidentally, this was the number that was recently bantered at a coffee house in Costa Rica between experienced IGaming executives as the minimum needed to start up any IGaming operation).
Today, 80% of players are likely to only stick around for 90 days before heading to a new site, so that means online tables must continually advertise and market on the best media channels available.
There are now a number of smaller poker sites who are now in dire straits and will fail. And given the dropping values of their databases, it makes sense for the larger companies not to buy them out, but rather commit more funds into marketing.
So what is the growth of online poker for 2006 industry-wide? It’s fair to assume that we will see at least 75% growth over 2005. In 2007, the growth will slow to 25% over 2006’s growth.
Of course, these numbers do not include Asia.
Sheldon Adelson commented in Fortune Magazine on October 17, 2005 that, ”For Westerners, gambling is about entertainment and probabilities. For the Chinese, it's a battle with Destiny.“
Asians have a propensity for gambling. As an example, a recent article suggested that Macau's gross gaming revenue is already almost on the same level as that of the famous Strip, the 6.5 kilometer string of hotels and casinos in Las Vegas. Official figures show that last year, Macau's casinos had revenue of about $5.6 billion, compared with the $6 billion the Las Vegas Strip casinos made.
Macau has some way to go before catching up to Las Vegas as a whole. The total gaming revenue for Las Vegas, including areas such as Clark County and the Boulder Strip, was $9.7 billion. Macau has reached its current level with less than half as many gaming tables, and only six percent of the slot machines, found in Las Vegas.
Mary Ellen Olson, an analyst in Hong Kong for credit rating agency Standard and Poor's, says the number of mass market gaming tables and slot machines in Macau is also growing quickly and Macau could soon overtake Las Vegas as the biggest gaming market in the world. She predicts that the city's annual gaming revenue could exceed $10 billion within the next five years.
However, there are two major issues at play besides the often bantered legal questions.
The 'major' Asian countries – China, Japan, Korea and India – currently represent almost 25 per cent of the world's internet population, with 168.1 million users. Combined, these four countries have a larger internet user base than the US, which has 152 million users, the largest of any single country. China comes in second, with 74.7 million users, followed by Japan with 52.1 million.
And while we all know these metrics and projected growth rates like the back of our hands, comments from eMarketer Senior Analyst James Belcher ring home some of the difficulties that operators face. He said, ”In spite of an overall red-hot economy, getting e-commerce to grow inside China has been slow going. The country is physically huge, and even Chinese Internet users are not great believers in credit cards. As a result, the simple act of paying for goods is not easy. Getting them delivered is no mean trick, either.“
That comment doesn’t seem to cut mustard with the fact that at the end of 2005, 16 million of the 25.5 million online video gamers in China paid subscription fees totaling in the hundreds of millions of dollars. And China's online video gaming population of 25.5 million will grow to 61 million in 2010, according to a report from market analysis firm In-Stat.
Online games are among most widely used internet services in China.
So, paid subscriptions are common and these are usually done with prepaid cards or direct cash payments through the Internet Cafes.
The best payment methods for IGaming are yet to be seen, however, prepaid telephones are extremely popular and the most sensible route would be to mirror something along those lines. And e-wallets may do extremely well in the Chinese market, and will also be prevalent as an option for funding accounts.
The second point is will they play Poker online? Although a good number of top ranked professional poker players are of Asian descent, poker is not a game commonly played in China.
MMORPG* type games are extremely popular, and they entail combatants opposing each other in one-on-one and in group situations. In fact, the government of China has had to limit the hours that people play and the minimum age at Internet cafes; a very popular place to go online.
There is neither published research nor published focus groups into online poker adoption in China, but if you extrapolate the popularity of MMORP’s and gambling as a common pursuit, then you can logically map out the potential.
The wisdom from the ‘Industry“, is that poker will be a huge hit in places like China and that its popularity will eclipse that of North America.
Sheldon Adelson also noted, ”In a Caesar salad, the anchovy is the first thing to get chopped up. That's what we foreigners are in China: the anchovy.“
Let’s hope the companies that make the first moves into China are able to step up to the challenge.
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* MMORPG = massively multiplayer online role-playing game. A massively multiplayer online role-playing game is an online computer role-playing game (RPG) in which a large number of players interact with one another in a virtual world. As in all RPGs, players assume the role of a fictional character (traditionally in a fantasy setting) and take control over most of that character's actions. MMORPGs are distinguished from single-player or small multi-player RPGs by the game's persistent world, usually hosted by the game's publisher, which continues to exist and evolve while the player is away from the game.
MMORPGs are immensely popular, with several commercial games reporting millions of subscribers. South Korea boasts the highest subscription numbers, with millions of users registered with the more popular games; see list of MMORPGs for a list of the most prominent MMORPGs.
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