Fallout From Anti-Gambling Legislation

Things have been crazy the last couple days in the online gaming world. The response from various companies ranges from "maybe we can survive this" to "man the lifeboats". Party Poker has announced that if the president signs the bill (which is inevitable, and will likely happen in the next day or two), they will suspend all accounts of American players. Since over 80% of their business comes from Americans, this is a huge hit to them. Others look likely to follow suit. Poker Stars has made no decision yet that I am aware of. Full Tilt Poker, on the other hand, has made public noises that they intend to fight the legislation. Lawsuits are probably inevitable.

Nolan Dalla has a very pessimistic article on the subject and he makes some good points. This legislation also does enormous damage to the World Series of Poker, since a huge percentage of the players now qualify online. The number of entries will go down substantially. It also puts prominent players who endorse online sites at great risk of being arrested for aiding and abetting criminal activity. It looks as though most of the online gaming sites are going to follow Party Poker and block US residents from playing.

This article in Business Week, however, points to a different possibility.

But U.S. casinos hoping for a slice of the $12 billion online market aren't so sure the party is over. They see a reason to celebrate in the language that ended up on the Senate's cutting-room floor. Unlike the version that passed the House earlier this year, the approved legislation does not explicitly outlaw betting on online casino-style games, such as poker and blackjack. The bill does bar financial institutions from accepting "illegal" bets, leaving the question unanswered as to whether some forms of online gambling are permitted. To date, sports betting is one of the only forms of gambling explicitly outlawed in the act.

The American Gaming Association, which lobbies for the U.S. casino industry, took a neutral stance on the bill, even though several prominent members, such as MGM Mirage (MGM), have said they would like to start online sites. AGA president and CEO Frank Fahrenkopf says the organization does not believe the act eliminates the possibility for U.S.-based casinos to open online sites, regulated by states or the federal government, in the future. "This bill did not make anything legal or illegal," says Fahrenkopf. "What it did was affect the mechanism by which Internet gambling takes place...and there is some question as to whether or not that will be effective."

Indeed, Nevada Congressman Jon Porter introduced a bill in May that would study whether online gambling sites, run by U.S. companies, could be effectively regulated. Fahrenkopf believes that bill is likely to be considered early next year. The measure is backed by the casinos and still gathering support. "It is still Congressman Porter's intention to move ahead with this bill," says Trevor Kolego, the congressman's legislative director. "We hope to pass it, if not by the end of this session, then next session."

And it also notes some skepticism as to the effectiveness of the law in stopping online gambling:

Other analysts disagree. If the bill becomes law, they say that U.S. gamblers will still bet on these sites. But rather than using credit cards, they'll employ other e-wallet payment services based outside the U.S., such as NetTeller and FirePay. Frank Catania, former director of gaming enforcement in New Jersey and president of Catania Consulting Group, calls the law "a sham" that won't stop online betting in the U.S. "There are so many alternate means of payment that it is not going to stop what is happening here," says Catania. "We are going to be spending a lot of money for enforcement, and it is going to be worthless."

Either way, I can tell you that the online poker sites are taking this very seriously and at least some of them are preparing an immediate pullout from the US market, at a cost of billions of dollars in revenue. The only thing that is absolutely certain is that the legislation will only drive out the legitimate sites and end up doing the opposite of what it allegedly intends to do. Radley Balko nails it:

The major gaming sites -- that is, the legitimate companies regulated by British law and traded on the London Stock Exchange -- announced over the weekend that they'll cease offering service to U.S. customers the moment President Bush signs the bill. What does that mean? Well, it means the shady, fly-by-night sites that aren't regulated or publicly traded will now thrive with U.S. customers. These gray and black-market sites are more prone to fraud, more likely to be involved in organized crime, and don't include the child-protection measures the major sites have implemented.

For all the talk from Sen. Frist, Sen. Kyl, and Rep. Goodlatte about the dangers of this "unregulated" industry, the bill they've just passed will actually put the well-regulated gambling sites out of reach of U.S. customers. The end result? Online poker and other gaming sites will soon be even less regulated, more likely to induce children, and more likely to defraud U.S. consumers than ever before. Meanwhile, one of the most addictive forms of gambling -- state lotteries -- will soon make an en masse move online, thanks to an exemption in the bill that effectively creates an online monopoly for them.

In short, in an intrusive, big government effort to protect Americans from themselves, Congress has passed a futile, hypocritical, counter-productive, protectionist piece of legislation that will make it more difficult for millions of Americans to engage in an activity most participate in responsibly and moderately. For those people, the bill will probably work. But it'll do little to prevent problem gambling, children's access to gaming sites, or online fraud.

Bingo. Oops, sorry. That's a form of gambling. But since it takes place at churches and VFW halls all the time, I'm sure the government won't be going after that.