April  2006

The Online Gambling Debate: How Interest Groups are Shaping a Young Industry
By Lucas M.

The Online Gambling Industry

            People like to gamble – it has been an extremely popular vice throughout the course of United States history.  Beginning with the use of lotteries to help pay for the revolutionary war, American culture has found numerous ways to incorporate, embrace, and vilify gambling.  Social and political acceptance has gone through many phases in this country, with legalized gambling in Nevada, Atlantic City, and Native American reservations being the latest compromise lawmakers have made to appease American’s insatiable appetite for “action” {FN1}.
            The internet has fundamentally changed the world, and has given us the ability to connect with people from all corners of the globe who share our interests.  Forward thinking entrepreneurs have used the onslaught of technology to permanently alter how business is done.  And gambling is no exception - internet gaming has exploded in popularity in the past 5 years.  Why wouldn’t it?  It combines the lure of gambling with the ease, speed, and flexibility of internet use.
            Today, online gambling is a $15 billion dollar a year industry – and growing rapidly.  Christiansen Capital Advisors, who specialize in tracking gambling data, estimate that revenues will top $25 billion by 2010.  Internet poker, which accounts for $4 billion in revenue a year, has used a surge of media exposure to grow from a $400 million industry in 2003 – a tenfold increase in business in only 3 years{FN2}.  More hands of poker are now played online than all of the world’s brick and mortar casinos combined.  The United States is the largest consumer of the internet gambling product, accounting for over half of all of the bets that are placed – American consumers spend 20 times more on gambling than on music downloads and 10 times more than online pornography{FN3}.  These figures are shocking considering internet gambling is illegal in this country.
            If gambling online is not allowed in the US, then how do we account for almost $8 billion in revenue?  All of these virtual casinos are located offshore, in places such as Antigua and Barbuda, and they take advantage of the many loopholes in Internet law to export their product to my living room.  After a 2004 ruling by the WTO saying that US policy outlawing internet gambling was a breach of international trade law{FN4}, opponents of internet gambling have resorted to alternate methods to push their agenda.  There have been a slew of bills up for vote in congress in the last few years, and the debate rages on, fiercer than ever.
           
The Major Players

            As the online gambling industry continues to expand at an alarming pace, the stakes grow larger for those involved.  Many different interests are represented in the increasingly intense debate over what to do with this ambiguously regulated industry.  The politicians in Washington are bitterly divided on the issue and various influential interest groups push their agenda that is in line with their financial or social missions.

Groups For Legalization in the US

• The Online Gaming Sites :  Contrary to conventional wisdom, the major internet gambling companies desperately want to be made legal in the United States and be regulated according to our vice laws {FN5}.  These are legitimate big businesses and like most growing companies, they crave access to the US capital markets.  PartyGaming, which operates PartyPoker.com, the largest internet poker site, quit waiting for US legislation and decided to IPO on the London Stock Exchange in 2004.  With a market cap of $10.75 billion dollars, PartyGaming is almost as large as the brick and mortar gaming behemoth Harrah’s, and until a recent dip in stock price, it was worth $2.4 billion dollars more {FN6}.  Internet gaming is an extremely profitable business for those with player volume – the only overhead involves a skeleton staff, tech support, server power, and a legal team.  Because the marginal cost of supporting extra gamblers is so low, and revenue is solely based on the volume of players, these businesses work hard to attract new gamblers and use bonuses to encourage playing at their site.  The main benefit to these virtual casinos of being legal in the US is, beyond the access to our capital markets, the ability to advertise to the American consumer.  They feel that if they could promote their product to the US media market, player acquisition costs would go way down and they could reach more potential gamblers – offsetting any tax losses that would result from US regulation.  Their influence in domestic policy, however, has been limited by the fact that owners of these businesses often find it difficult to reenter the United States.  They rely on a loose coalition of lawyers, a few congressional democrats, progressive business organizations like the WTO, and a few interest groups that I outline below to voice their concerns {FN7}.  They use other forms of legal online gaming (horse racing, state lotteries) as examples of the “hypocritical” rules that govern the ban {FN8}.

• The Milton Freidman Libertarians: These proponents of the free market understand the demand for internet gaming and want the industry to shake out naturally, without government intervention.  They have very little to gain financially from potential regulation, rather they see the government’s actions as the latest attempt to disrupt the natural market and control the lives of its constituents.  Scholars at the libertarian think tank and interest group, The Cato Institute, have written lengthy articles outlining the libertarian stance on a potential ban on internet gaming.  They compare the potential online gaming ban to that of prohibition in the 1920’s, when the US government last tried to outlaw vice that was already “out of the bag”.  They argue that if internet wagering is outlawed, as in the prohibition era, the persistent demand for illegal vice will create a black market dominated by mobsters and other shady characters.  Only US protection, they argue, will keep the businesses clean and provide tax revenue for the nation’s economy.  Their fight is mostly intellectual, and they believe market forces will inevitably lead to this growing industry becoming legal in the United States {FN9}.

• Big Business – Brick and Mortar Casino Conglomerates: This is a very surprising ally for the online gaming industry because these corporations are in direct competition for gamblers and would seemingly benefit from the abolition of internet gambling.  However, they realize that the demand is present and see an overwhelming opportunity for growth.  Casinos like MGM, Harrah’s, Bellagio, and Wynn have an enormous brand presence among the general public and they feel they could easily be dominant forces in the internet gaming industry if given the freedom to do so.  The CEO of MGM-Mirage Terry Lanni has recently said that his company could easily double their $6 billion revenue figure if they were enter the web gaming business {FN10}.  However, the fact that these large corporations are based in the US and have so much to lose by violating the law, makes the brick and mortar casinos wait until they have explicit legal clearance to set up operations on the internet.  This is a fascinating economic scenario to me – a whole industry (brick and mortar casinos) that should be threatened by a new business model that potentially sends its product into partial obsolescence has openly campaigned for its legality.  They are sure they would have a competitive advantage in the online sphere and that medium is growing so quickly that they believe the piece of the pie it could take would offset any potential losses in its actual casinos.  This is a true testament to the power, size, and growing influence of the web gaming industry.

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Groups Against Legalization in the US

• The Christian Right:  As with every other major issue in the US today, conservative Christian groups are the most powerful and influential player in the game.  Not only do they have key congressmen representing their interests, but they are well funded, tenacious, and organized.  They have many problems with online gambling (and everything else).  First, they make a case that it is easy for minors to become gamblers.  They claim that offshore casinos offer “free children’s games to lure youth to their sites” {FN11}.  Second, they argue that the ease and speed of online gaming threatens to create a generation of gambling addicts who will do nothing but accumulate heavy credit card debt and ultimately cost society more than the tax revenue that it provides.  John Warren Kindt, a University of Illinois economist, calls internet gaming the “crack cocaine of gambling” and estimates that for every $1 collected in tax revenue, there are $3 in costs to society {FN12}.  Finally, many conservative Christians view gambling as a sin, plain and simple.  They fight gambling on every front, not just through the internet.  The leader of this movement in congress is Senator Jon Kyl (R-AZ), author of the “Kyl Bill”.  After numerous failures (The WTO ruling in 2004 for example), Kyl and his allies no longer are trying to shut the gaming sites down, rather they are focused on making it impossible for US citizens to deposit money in their accounts.  Kyl’s bill, for example, is an attempt to stop the flow of money to offshore gaming sites and is still bouncing around the Senate floor {FN13}.  Kyl is only one of a handful of extremely outspoken opponents of internet gambling.  Rep. Bob Goodlatte (R-VA) and his bills have been instrumental in banning the transfer of funds to and from US based financial institutions – you can no longer use your credit card or debit card to deposit money, you must go through a web-based “cyber bank”, like Neteller (Pay Pal does not partner with gaming sites) {FN14}.  Through electing like-minded representatives in congress, the religious right has had an enormous effect on today’s internet gaming landscape.

• Horse Tracks : Unlike brick and mortar casinos, who love the idea of legalized gaming on the web, horse tracks have become increasingly worried about the industry’s increasing popularity.  No longer needing to go to the track to watch the race and place bets, fans are increasingly staying home.  Attendance and wager volume are way down, causing some tracks to close and sending others to the brink of bankruptcy.  The National Thoroughbred Racing Association has formed an uneasy alliance with the religious right, even donating $10,000 to Rep. Goodlatte’s latest campaign fund {FN15}.

• Major Sports Leagues:  Every major sports league worries about the increase in sports related gambling.  The NBA, NHL, MLB, NFL, and especially the NCAA have all been extremely supportive of the Kyl Bill and Rep. Goodlatte’s legislation, not because they worry about thirteen year-olds becoming addicted to gambling, but because they fear for the integrity of their leagues.  The NBA was almost ruined by bookies and players fixing games in the 1950’s and is extremely wary of something similar bringing down their league when the stakes are so much higher today.  Despite the fact that increased gambling has resulted in more casual fans watching, (people who have money riding the outcome) resulting in higher advertising revenues and more lucrative TV contracts, the leagues are so worried that gambling will destroy their games that they are adamant about curbing the action and have been very active in lobbying congress {FN16}.

What I Think the Future Holds

            I will never underestimate the power of the religious right again.  They’ve managed to squeak Bush into the White House twice and be on the radar of every large American corporation who fears their wrath.  But in this debate, I think they are fighting an uphill battle, one that will result in gambling eventually becoming legal in the United States.
            I think it is impossible to “rebottle” vice.  When Americans have already become accustomed to, even addicted to, a guilty pleasure that they enjoy doing legally, it is impossible to take it away from them without severe repercussions.  Despite the fact that I am certainly no libertarian, I think their argument holds water with myself and many others (an informal Wall Street Journal poll found that 85% of Americans think Congress should not ban online gaming) {FN17}.  The prohibition comparison is valid in my mind, partially because I think lawmakers are also aware of the similarities and would be extremely wary about completely taking the privilege away from US consumers.  Additionally, if conservative lawmakers have had no success with banning online pornography or any other internet related vice, how can I expect them to succeed with gambling, a vice that is much more popular?  I can’t see it happening.
            As the online gambling industry continues to grow as projections suggest, the lure of potential tax revenue will be too great for lawmakers to ignore.  As corporations like PartyGaming attract new players and become bigger businesses, they will begin to carry serious weight with US lawmakers – and will be a presence that no longer can be ignored.  With a broad based coalition consisting of everyone from libertarian academics to CEOs of gaming corporations to democratic lawmakers who wouldn’t mind the extra tax revenue, internet gambling should be legal in the United States before 2010.  

Footnotes

1. Roger Dunstan.  Gambing in California.  Chapter II
2. Tim Lemke, Odds favor Internet Gambing.  The Washington Times.  March 19,2006
3. Matt Miller, Matt Miller on Digital Entertainment.  Forbes.com.  December 30, 2005
4. Matt Richtel, US Online Gambling Policy Violates Law, WTO Rules.  The New York Times.  March 26, 2004
5. Miller
6. Bloomberg.com
7. Richtel
8. Should Online Gambling Be Banned?  A WSJ Online Debate between Rep. Jim Leach (R-Iowa) and David Carruthers, CEO BetOnSports PLC
9. Tom Bell, Internet Gambling: Popular, Inexorable, and (Eventually) Legal. Policy Analysis – No. 336
10. Miller
11. The ‘Perfect Storm’ of Harm.  The National Coalition Against Legalized Gambling (NCALG)
12. House Judiciary Debate Hots Up on Banning Issue. Online-Casinos.com
13. NCALG
14. Peter Barnes, Net Gambling Debate Rages.  Tech Live.  July 5, 2002
15. Rodney Balko, GOP Misses Mark on Internet Gambling Ban, FoxNews.com. March 15, 2006
16. Leach and Carruthers
17. Leach and Carruthers

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