IMPLICATIONS OF THE DOJ REVERSAL

What does the Department of Justice’s new position that the Wire Act 1961 only applies to sports betting mean for online (and offline) gaming in the US? 

Responding to Senators Reid and Kyl's letter seeking clarification on the interpretation of the Wire Act, the Department of Justice (DoJ) recently published an opinion that essentially amounts to a reversal of previous Justice stances.  We believe that this change in opinion can be the spark for some long awaited Federal online poker legislation which would have widespread implications for our sector.  However, it may take 18-24 months even in the best case scenario before we see anything really happen so the buzz and in some cases, euphoria this announcement caused may be premature.

While the new opinion states that only online sports betting is a violation of the Wire Act in instances of intra-state offerings, this doesn’t mean that other forms of intra-state gambling are legal.  Online gambling is illegal in almost every state (aside from Nevada).  State-based lottery and land-based casino wagering are specifically allowed where any form of gambling is legal.  In order for online gambling to happen without Federal regulation, each state would need to pass legislation – and in many cases change its constitution. 

There are a myriad of scenarios that can occur between now and when/if something passes outside of Nevada.  Some states will follow on Nevada’s heels and try to pass some sort of online gaming legislation – which can take the form of just lottery offerings online or actual online poker.  Given the recent Wire Act opinion, states that have legal online gambling laws will then be able to pool liquidity.  However, any state legalization of online poker (excluding Nevada) would likely take at least 2 years to materialize.  Online lottery offerings can happen sooner.  At the same time, Senators Kyl and Reid will likely make a push to get something passed on the Federal level.

Keep in mind that a Justice Department decision, particularly one that is controversial, can be reversed by the Courts or future Departments of Justice.  The only way to ensure the legalization of online gaming is to codify it into law.  

Federal route and potential outcomes


Our legislative sources do not believe that an internet gaming bill will pass on its own.  Senators Kyl and Reid will likely try to tack on i-gaming regulatory language to the new payroll tax bill which is scheduled to be voted on in February/March 2012.  The current Reid/Kyl language proposes that if operators are licensed through a proficient regulatory body (e.g. Nevada or NJ), then the operator will be allowed to offer online poker to other states where online gaming is legal, rather than having a national regulatory body that licenses operators.  The current language proposes that States can opt-out of on-line gaming and doesn’t allow lotteries to offer online poker.  Apparently, Republican Minority Leader McConnell supports the Kyl/Reid initiative so it is likely that the tack on language will pass muster in the Senate.  However, the House is a whole different animal.  It doesn’t help that Sheldon Adelson, who has been a major supporter of House Republicans, has been opposed to online gambling. 

The currently proposed language is being vehemently opposed by state lotteries which are against Federal gambling regulation and by tribal gaming which prefer to be regulated by the NIGC.  As a reminder, gambling has historically been a state regulated issue so any federal legislation is highly controversial to constituents which support state rights.  Should the legislation pass in 1Q12 then there still needs to be technology approval and rules vetting which we believe would take 18-24 months before everything is said and done.  There will also likely to be a flurry of States opting out – like Utah, for example.  

If the currently language doesn’t pass but still has momentum, then there is likely to be a heated debate over changing the opt-out provision to an opt-in provision.  Lotteries will want the same rights as other licensed operators, even though initially they are likely to just provide the sale of traditional products online.

State Route


Nevada is the first state to pass a regulatory framework to license and legally allow online poker.  Under the most aggressive scenario, licensed operators will be allowed to offer I-poker to players in Nevada within a year, although we believe that 18-24 months is more likely.  Even with the onset of online poker offerings in a year, we believe that the market size and opportunity will be fairly small and immaterial given that Nevada lacks liquidity on its own.  Technically, licensed operators like CZR, MGM, and BYD will boost liquidity by combining online play with land-based play.  However, until a large state like California or New York pass something, it’s unlikely that I-poker will be meaningful. 
 

Without Federal legislation, there could be a patchwork of state initiatives that are not compatible.  It also raises the question whether states where lotteries are the body through which gaming is regulated (e.g. New York, Maryland, Rhode Island, etc) would want to combine with Nevada to increase liquidity.  We believe that California and Iowa will want to pursue state legalization of I-poker regardless of what happens at the Federal level unless something passes in 1Q12.  However, even through a state-only route, it will likely that up and running online gaming operations will take a long time to materialize since licensed US operators will proceed cautiously without additional federal clarity on the topic.

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Who wants what?


Supporters of online poker legalization generally want legislation passed at the federal level since this is the best way to ensure a liquid market with a uniform regulatory structure.  Federal legislation is also by far the fastest path to building a US market of any material size.  While not all of the casino operators want internet gaming to be legalized, most will agree that to the extent it is legal, they would prefer federal regulation.  LVS is the only operator that we are aware of that is vocally opposed to internet gambling at this point.  

The slot guys support online gaming legislation at the federal level but will likely not really benefit much from just I-poker legalization.  The hope for the manufacturers is that the legalization of I-poker becomes the stepping stone for legal online casino gambling.  International gaming operators, especially online operators, all support Federal level legislation for obvious reasons.  Tribes are split on the issue of online gaming, but most would prefer to be regulated by the NIGC if something is approved.  Lotteries oppose federal legislation and prefer state legislation.  However, if something is passed at the federal level, lotteries want states to be able to opt-in vs. opt-out of the legislation and they want to have the same rights to introduce online games as other licensing bodies (Nevada/NJ).

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