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The State of Online Gambling

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Just a few years ago, some brick-and-mortar casino operators feared the possibility that the legalization and regulation of online gambling in the United States would cannibalize their businesses. But as the 10th annual Global Gaming Expo (G2E) began Monday here in Las Vegas, virtually every big player in the gaming industry is now embracing the potential for online gambling as the primary growth engine of the industry.

In order to address that potential, this year marked the first iGaming Congress at G2E.

In the kickoff conference session, "Internet Gambling: Here & Now," Frank Fahrenkopf Jr. -- president and CEO of the American Gaming Association -- noted that the global online gaming market has now reached roughly $30 billion. He said Europe is by far the biggest market at $12.5 billion, or more than double the size of the $5.4 billion U.S. online gaming market. Meanwhile, Asia holds a lot of promise for the future. The AMA represents the interests of U.S.-based gaming companies including MGM Resorts International (NYSE: MGM  ) , Harrah's Entertainment, Wynn Resorts (Nasdaq: WYNN  ) , and Las Vegas Sands (NYSE: LVS  ) .

On the home front, Rep. Barney Frank (D-Mass.) has sponsored H.R. 2267, which would legalize, regulate, and tax online poker at the federal level. The legislation has worked its way through committee just as Congress has entered a lame-duck session. Adding to the intrigue is speculation that movement -- however unlikely and however unpredictable -- could happen on this front before the end of the 111th Congress.

At the same time, California and Florida are moving to legalize online poker at the state level, while the state of New Jersey appears close to passing legislation that would allow companies who operate brick-and-mortar casinos in New Jersey to operate online casinos offering any game that is legal in New Jersey -- including blackjack, baccarat, and poker -- to New Jersey residents and to international gamblers as well.

Let's start with the obvious question.

Will the Frank bill pass during the lame-duck session?
The short answer is that it is very unlikely, but anything could happen.

That said, panelist Lloyd Levine of Filament Strategies noted in a session titled "Charting the Course: Legalization of Internet Gaming in the U.S." that if the Frank bill does not pass during the lame-duck session, it is unlikely that anything is going to happen at the federal level over the next two years. This is a function of the shift in power in Congress as a result of the midterm elections.

In addition, if the Frank bill were to pass during the lame-duck session, it would not pass as a stand-alone bill, but rather would have to be attached to another bill much in the same way that the Unlawful Internet Gaming Enforcement Act was attached to the Safe Port Act of 2006 at the last minute.

States first, federal later?
The general sense I get from listening to the conference panelists and talking to people in the online gaming industry is that:

  1. We are still a ways away from making real progress on the federal front.
  2. We will see several individual states get the job done first, which will serve as the catalyst that will ultimately spur federal online gaming legislation.

On Monday, the New Jersey Senate bill S490 cleared the Senate Budget and Appropriations Committee by a whopping 10-1 vote, and could go for a vote by the full Senate by the end of the year. It could be that New Jersey beats both California and Florida to the punch, though it is possible that all three states could pass online gaming legislation in the next five years.

Interestingly, Harrah's Entertainment has been in staunch opposition of the effort in New Jersey. Despite the fact that Harrah's operates properties in Atlantic City and thus would benefit from such legislation, Harrah's has naturally been more in favor of federal regulation.

But as we start to talk about federal regulation, there are a lot of complications that need to be sorted out. One is that there is a difference between legalizing online gaming in general and legalizing online poker specifically. While Harrah's and MGM are interested in full-scale online gaming regulations that would allow them to leverage their brands and customer databases and offer casino games such as blackjack, baccarat, craps, and slot machines in addition to poker, there are complications on a state-by-state basis.

For example, the state of California would have little problem if only online poker was legalized at the federal level, as proposed in the Frank bill. However, full-scale online casino gaming is another issue, as the state has contracts in place with Native American tribes that allow the tribes to operate slot machines on an exclusive basis, and as such precludes the state from offering such games online.

Taxation is another problem. Do we tax the deposits, as is currently being proposed (but doesn't make much sense) in Rep. Jim McDermott's (D-Wash.) companion act to the Frank bill? Or do we tax gross gaming revenues, which makes more sense?

In addition, if the distribution of tax money to the individual states does not appear as if it will add up, larger states such as California and Florida might decide that it is in their best interest to opt out of the federal regulation from the get-go -- as would be allowed by the Frank bill -- and keep their tax revenue to themselves.

The legalization, regulation, and taxation of online gaming in the United States is a very complicated issue in general. And the fact that it is much more complicated at the federal level than at the state level means that it is quite probable that we see several individual states go online before anything gets accomplished at the federal level.

For more background:

Fool contributor Jeff Hwang does not own shares of any of the companies mentioned above. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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