December 07, 2010

A Long December for Online Poker

A long December and there's reason to believe
Maybe this year will be better than the last ...

—"A Long December" by Counting Crows

The poker world has been abuzz recently with news that Senator Harry Reid, trying to deliver some pork to his political donors/masters in the casino industry, is attempting to backdoor an online poker legalization bill in the current lame-duck session of Congress.  The best summaries of the bill's legal provisions as it evolves have come from F-Train, who incidentally co-exists as a brilliant lawyer in the ethereal plane of an alternate universe (his summary of the initial bill, and his summary of the revised bill).  Breaking news updates on the Reid bill can be found by following the Pokerati crew (Twittering as Dan Michalski and Scarlet Robinson), and by keeping up with Bluff Magazine's Kevin Mathers and gaming law expert Stuart Hoegner.  Good commentary has been offered by Shamus, Bill Rini, BJ Nemeth, and Poker Grump (with a refreshingly contrarian take on events).

At this point, I really have nothing to add to the analyses offered by these esteemed members of the poker media.  Also, it's still unclear whether this bill has a reasonable chance of passing.  So much of what happens in these lame-duck sessions is a matter of horse-trading and nose-holding.  But, as written, it seems likely if the bill passes, online poker as we know it will undergo a seismic change that may dwarf both the Moneymaker boom and the UIGEA ice age.

A few of the significant provisions of the current version of the proposed bill essentially will require current online poker sites (e.g., PokerStars and Full Tilt) to cease operations within 30 days of enactment of the law, and refund all deposits to customers.  Then, there will be a 15 month blackout of all online poker in the U.S. while regulations are promulgated.  Next, current U.S. land-based casinos will be able to request licensing from state gaming boards, most likely limited to only either Nevada or New Jersey.  Finally, two years later, current non-U.S. and non-casino companies can request licensing.

The upshot of this bill is that current mega-sites like PokerStars and Full Tilt will need to go dark for a little over three years—a lifetime in the online poker industry.  Further, eventual licensing would likely be considered by the Nevada or New Jersey gaming commissions, which at least appear beholden to the land-based industry heavyweights such as Harrahs/Caesars, MGM, Las Vegas Sands, and Wynn.  So, licensing at a later time is no guarantee; all the gaming commissions would need to do is enact a regulation barring licensing to online gaming sites which violated any state or federal gaming laws in the past decade—not that they would ever act in a protectionistic manner.   Thus, this bill would place current sites between a rock and a hard place.  Comply with the rules, and they give up three years of U.S. revenues, with no guarantee of reentering the U.S. market, and after giving Harrah's/Caesar's, MGM, et al. a two-year head start in building client bases under the new regulatory regime.  Defy the law, and not only is licensing forfeited permanently, but current federal investigations into the legality of online poker sites and their monetary transactions would intensify exponentially, with new, easier to prove criminal acts and penalties in the federal prosecutor's quiver.

If the major sites do go dark, what will happen to all the online poker players?  I suspect many of these online players live within a reasonable driving range of a live poker room or casino.  But, online poker—with its microstakes, rakeback, multi-tabling, sit-n-gos, non-hold 'em games, guaranteed tournaments, etc.—is a far different beast than a typical live poker game.  Further, the skills and game strategy needed for successful live game play are different than for online play.  There are plenty of great live players who are donkeys online, and vice versa.  Also, many online players simply cannot fit live play into their schedules the same as they can online play.  So, will live games see an influx of online players?  Will live games become tougher?  Would this have a detrimental effect on live poker?

With a blackout period, there's also no guarantee that when online poker returns, it will be the same sort of game as it is currently, or as it was in its post-Moneymaker, pre-UIGEA, Party Poker heydays.  Will many current casual players move on to new hobbies, never to return?  Or will the easier—and legal—deposit structures, combined with regulatory controls over cheating and "name-brand" sites (e.g., WSOP, Venetian, etc.) bring in tons of new fish?  Has the poker boom passed for good, and will the new sites wind up battling for the scraps of hardcore players?

Along similar lines, will online poker become less lucrative for all but the most elite players? Regulated online poker means that online poker will be run by companies that already rake live poker cash games at up to $5+$1, and charge exorbitant juice on low buy-in tournaments.  Can online poker players say goodbye to rakeback as they currently know it? Regulated online poker also means that the IRS will be sniffing out whether poker players report their winnings, which means poker players will need to take taxes into account when playing, and which in turn will cut into profits as well as the money available in the poker economy.  Yes, I agree, poker players should already be completely compliant with tax laws—and they should also refrain from speeding.  The reality is that tax reporting requirements will have a real and noticeable effect on the online poker economy.  Online poker regulations may also prohibit data-mining software; how many online poker players need such "heads up" software to show a consistent profit?

The new online poker universe would also change the online poker economy, likely sounding the death-knell for the current "affiliate" referral model, where websites get paid bonuses based on the activity of the players they refer to the poker sites.  The land-based casinos—Harrah's/Caesar's, MGM, Venetian/LVSands, Wynn, etc.—already have large databases of poker players.  They can market directly to these individuals, as well as targeting new players through online advertising.  They have no real need to rely on referrals from online poker media sites, poker blogs, etc.  So, the passage of the Reid bill might mark the beginning of a shakeup in the poker media, and a significant change in the poker media business model.

Now, fully legal and regulated online poker offers many advantages over the current—and likely untenable—system.  Regulations can put legal teeth into prohibitions against cheating in all its forms—whether by players or the house—ensuring accountability and a fair game for all players.  Legalization would also bring a measure of respectability to online poker, taking away some of the stigma of being an outlaw form of gambling.  Of course, legalization would also make money transfers to and from poker sites a relative breeze compared to the current byzantine maneuvers required to avoid legal traps.

There's no question that legalization and regulation would bring a sea change to online poker as we know it.  Yet, somehow, the current proposal leaves "the feeling that it's all a lot of oysters, but no pearls".


  1. I wonder if Caesars knows what they're doing - do they understand that the large fields at the WSOP over the past few years are a direct result of online poker? I can guarantee the numbers will be at least halved next year if this bill passes. Yeah, they may have their own site, but that won't go live until at the earliest Summer 2012. I like nothing about this.

  2. Does the proposed bill set up the big U.S.-based casino operators, once licensed by Nevada (or maybe N.J.) to then buy the established online poker sites? Seems logical to me.

  3. @ Andy: I agree, this year's WSOP would likely take a noticeable hit. I suppose some players would satellite in via live tourneys, either at home or in Vegas. But I think that option would only make up a fraction of the players who would usually get their WSOP bankrolls via online play. I suspect Caesars is assuming that business will rebound after legalization, with plenty of "captive" players via an official WSOP poker site offering official satellites. But, I'm not entirely convinced that the same level of interest will still be there. A bit of "killing the golden goos" syndrome in play here.

  4. Interesting article. I provided a link from my blog to share your insights.

    I enjoy your writing. Keep up the good work!

  5. I think the online sites for brick and mortar places will charge less rake because they do not have to pay a dealer. They can have many many tables up and no pit boss, dealer, etc.. after the startup costs and maintenance everything else is cake.

  6. @ Jeff Simpson: My understanding of the current bill is that asset purchases or similar restructuring loopholes will prohibit Full Tilt or PokerStars from simply aligning with or selling out to the land-based new big boys on the block. From the perspective of the Caesars, MGMs, and LVSands, why pay Full Tilt or PokerStars for their customer lists or software, when they can just start up on their own with their own poker player lists and a wide open market free from competition from the current sites?

    Look for the new kids to use the old "PokerStars and Full Tilt should be denied licenses because they broke the law" argument to try to prevent them from ever getting licensed in the U.S.

    I would encourage you to read F-Train's coverage of the bill provisions and revisions, as well as Bill Rini's commentary on the scheming of the land-based giants to use licensing to clear the field of competition.

  7. Thanks, Grange95, for your response and your blog (and welcome to the Big Ten next season, Nebraska fans, from an Ohio State fan).
    I've been reading F-Train's blog and the gaming lawyer he spoke to seems to think a possible bill would allow FT and PS to be acquired by US-based casino operators.
    To me the advantages seem to outweigh the disadvantages:
    -- If FT and PS (and others) are barred from the US for years their profits and (private)share values tumble. By selling out, owners get decent returns with no further risk.
    -- For US casino operators, they buy state-of-the-art software, the biggest customer lists and strong overseas presence.

    The downsides:
    -- The possibility that US regulators in NV or NJ would object to a purchase, but I doubt they would object, since the former owners would presumably be gone from the business.
    -- Imposing a tax and regulatory framework (better regulation should be a plus for players but tax reporting and possibly collection would seem to be a negative).
    -A short period with no play for US players whule US states set up regulatory regimes and license operators for online poker.

    Being left out of the US market didn't work out too well for prior industry leaders Paradise and Party. A long prospective absence from the US market might be enough incentive for online poker operators to revise their valuations and sell.

  8. If this hasn't been attached to the Tax Cut bill then its likely dead, what can Reid horse trade to the GOP? Harry Reid isn't exactly a popular figure amoung Republicans.

  9. More relevant to the matter at hand, what would he be horse trading to the MAJORITY OF MEMBERS OF CONGRESS OF HIS OWN DEMOCRATIC PARTY who oppose online gambling and have continued to do so throughout their overwhelming control of both chambers throughout 2010, 2009, 2008, and 2007, including the current Speaker of the House, just as they did on a "clean" floor vote on a more restrictive original version of UIGEA unencumbered by any other attached legislation on July 11, 2006?



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