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June 30, 2014

Why Is Casino Gaming Excluded from Online Gaming Proposals?

By: Ifrah Law

Now that three states—Delaware, Nevada, and New Jersey—have successfully launched online gaming, there is a flurry of proposed legislation as other U.S. jurisdictions seek to get in on the action.  A surprising number of the proposals seek to limit gaming to poker alone, forbidding real-money online casino games such as slots and blackjack.  Such proposals have been floated in California, Pennsylvania, and even by the federal government.

From a financial perspective, a poker-only restriction is a puzzling choice because internet casino games consistently generate more revenue than internet poker games in the states where both types of gaming are offered.  For instance, in May 2014 New Jersey online casino games generated $8,196,276 in revenue, whereas online poker only generated $2,273,657 in revenue.  While Delaware initially saw a stronger start for online poker than online casino gaming when it launched igaming in late 2013, that trend has reversed and over the past three months casino games have posted higher revenue proceeds than poker.  The May 2014 figures reported $72,537 for Delaware internet table game revenue, and $57,469.87 for Delaware internet poker proceeds.

Legislation prohibiting casino style games seems to be following the lead of Nevada, which currently only allows real-money poker within its state borders.  Interestingly, Nevada’s underlying legislation legalizes “interactive gaming,” a phrase which encompasses all types of online games, however Nevada’s implementing regulation only allows for online poker.

Nevada’s regulatory restriction to poker-only online gaming appears to have been in response to competitive factors also present in states like California and Pennsylvania.  Casinos profit less from poker than they do from casinos games, since poker is a player vs. player game in which the house only takes a rake but cannot win, whereas casino games offer the potential for the house to win substantial sums.  Since the poker rooms at land-based casinos do not generate significant profits for casinos, the casinos are less concerned about “cannibalization” of the industry—that is, the possibility that online gaming will cut into land-based revenue for the same games.  The casinos see that online poker is more likely to expand its current revenue pool beyond the existing clientele, especially by bringing in a younger audience of players who are likely to play online but not visit a casino.  (Numerous studies have shown that online casino games would not cannibalize land-based casinos either, but the fear remains that the land-based industry would suffer if these cash cow games went online.)

State-run lotteries may fear that online casino games will compete with sales of scratch-off lottery tickets, which often mimic popular casino games. When the federal Reid-Kyl legislation was pending, the lottery industry lobbied against the poker-only bill because it would prohibit online instant-win lottery sales as well.  The lottery industry may be more supportive of a poker-only bill which prohibits private entities from offering casino games, while allowing the lotteries to offer scratch-off sales online.  The convenience store industry has supported poker-only legislation which prohibits any type of internet instant-win games because it keeps scratch-off customers coming to their stores.

California’s push for poker-only online gaming legislation is significantly influenced by the tribal nations within the state, which are the exclusive providers of electronic gaming machines, blackjack, and other house-banked card games.  The tribes are concerned that if patrons could play these types of games over the internet they will not come spend money at the land-based casinos, especially those that are not conveniently located.  Non-Indian card rooms already provide competition on player vs. player games such as poker, so poker-only online gaming legislation presents little risk to the tribes’ bottom line.

The player vs. player/ player vs. house distinction is also key to a proposed federal bill which has recently been circulating on Capitol Hill.  The Internet Gambling Prohibition and Control Act of 2014 proposes to expressly permit online poker as between players in states where it has been legalized, because it is a card game “in which the success over the long run is influenced by the skill of the player” and which players wager against each other rather than the house.  The proposed Act would, however, prohibit other forms of internet gambling in which chance plays a material part in the outcome of the game—thus rendering even intrastate online casino games illegal.  Federal bills have been floated for years with no action, however, and we expect that nothing will come of this proposal either.  For now, the federal government seems content to let states decide gambling issues on a state-by-state basis, as they have historically.

Some states considering poker-only legislation view it as a test run to see how the well the state can implement online gaming safely and responsibly before adding casino games to the mix.  Nevada and Pennsylvania have said that they see online poker as a potential first step into online gaming rather than a final one.  We believe that many poker-only states will find themselves adding casino games down the line when they see how much potential revenue they’re leaving on the table.