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Lots of questions, few answers in online poker draft legislation

8 Dec 2010

By Vin Narayanan
Since news broke Friday that Senate Majority Leader Harry Reid (D-Nev.) was trying to attach online poker legislation to a must pass bill, I've been asked two questions repeatedly: "Is Reid's online poker bill going to pass? And if it does pass, what will happen to Full Tilt and PokerStars?"

And even though I've read a draft of the bill and talked to a number of stakeholders, my answer to both of those questions is the same: "I don't know."

I don't know the answer to those questions, in spite of the fact the Las Vegas Sun has a weirdly worded quote from Reid saying it's not going to happen, but they're working on it. And I don't know the answers to those questions, even though I've spent plenty of quality time examining a draft copy of Reid's proposed legislation (yes, I need to get a hobby).

Reid's bill is a moving target, so it's tough to say what's exactly in it at this point. The bill is evolving as lobbyists, legislators and the gaming industry try to exert influence on it.

In fact, Poker Players Alliance Executive Director John Pappas has been very upfront in trying to make this point.

"It is also important to note that this is an evolving process," Pappas said. "Draft bills that have been circulated are already outdated and the legislation continues to be refined."

The reason this is an evolving process is there are three big stakeholders in the U.S. when it comes to online poker. The two biggest stakeholders -- in terms of politics, money and power -- are the commercial casino industry and the Indian gaming industry. The third is the players, which the PPA represents to a large degree.

The large commercial casinos -- most of them based in Reid's home state of Nevada -- have to be pleased with Reid's draft proposal (or at least the copy I have). This is legislation clearly written to favor "Big Gambling."

For two years, licenses can only be issued to slot machine manufacturers or existing land-based casinos that have operated for at least five years and host 500 or more gaming devices. That clause freezes out the offshore competition like Full Tilt Poker and PokerStars from competing directly with the Vegas casinos on equal footing. Additionally, companies that have previously accepted American players -- like Full Tilt and PokerStars -- won't be able to get a license for a period of time that hasn't been specified yet.

That effectively shuts out those sites and others that have been accepting American players from operating on their own in the U.S. for at least a couple of years. But there is a path that the Full Tilt's and PokerStars of the world can follow to get into a licensed U.S. market quickly -- but the price will be high. Because they can't get licensees or "suitability" certificates as suppliers, the only way sites that have accepted American players can get into the market is if someone buys them out or acquires them. But in order for a big casino company to acquire them, the offshore site has to:

-- Stop taking bets from American players upon enactment of the law.
-- Within 30 days, return all outstanding money to their customers.
-- Place money that can't be returned due to changes in address or banking in an escrow account in an American bank for suitable disposition.

If those three conditions are met, then as a practical matter, you could see large casinos buying out offshore sites that have accepted American players. And Big Gambling has to love the prospects of that.

But don't assume this legislation will automatically prompt a reshuffling of the industry. Remember, this legislation specifies that sites licensed under this legislation can only offer services to American residents, and that changes the dynamics of the equation.

While Big Gambling has plenty of reasons to love this bill, Indian gambling interests have plenty of reasons to dislike it.

Reid's bill outsources the licensing and regulating of online poker to state and Native American gaming commissions. But according to an early clause in the draft legislation, the only states and tribes that offer online poker licenses are those that have regulated casino gaming for five years AND have "regulated casino gaming facilities involving gross gaming revenue of at least 5% of total U.S. casino gaming revenue for at least 3 out of the 5 years preceding date of enactment." (emphasis mine)

As a practical matter, the only authorities that meet that five percent requirement are the Nevada Gaming Control Board and the New Jersey Casino Control Commission -- unless there's a typo in the bill.

That's right. Right now, one of the biggest debates in the gaming industry is which section of the bill has a typo.

Later in the legislation, the bill refers to 0.5 percent of total U.S. casino gaming revenue as the qualifying number.

If the five percent number is correct, tribes will have virtually no shot at becoming a licensing authority. According to Casino City research, five percent of U.S. casino gaming revenue in 2005 was $2.67 billion. In 2008, that number grew to $2.96 billion. Tribes just don't generate that income individually.

Additionally, Reid's bill specifies that members of the regulatory body can't be "selected or controlled, directly or indirectly, by an entity that has any ownership interest in a facility that engages in casino gaming or that is an applicant, licensee or significant vendor under this Act." This would seem to rule out tribal commissions completely.

But Indian casinos have traditionally been licensed and regulated by Indian gaming commissions. So in addition to depriving Native American groups of a revenue stream from licensing, the legislation also chips away at their sovereignty as well. And I have a hard time seeing Native American gaming interests getting behind this bill.

That brings us to the political question. Will this bill pass? I don't know. But if I was forced to predict, I'd say the chances are unlikely. Too many things are working against it right now. Indian tribes are mobilizing against it. So are people who don't like gambling. And the political calendar just isn't cooperating.

This lame duck session of Congress is packed with items that need to be addressed. With tax cuts, immigration issues and a nuclear arms treaty on the agenda, there's hardly any time to perfect Reid's bill in time to attach it to must pass legislation.
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