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Internet Gaming: Too Lucrative Not to Legalize?

6/3/10 - Reno Gazette-Journal - View Source

By Ray Hagar

The debate about Internet gaming is intensifying in Washington D.C., and some lawmakers said it has become too popular and too lucrative to remain an outlaw business in the United States.

"We are sending a multibillion industry offshore and underground," U.S. Rep. Jim McDermott, D-Wash., told colleagues in Congress recently. "As a result, we are making tax criminals of Americans who can't declare their online winnings to the IRS."

Americans spent $5.9 billion on offshore sites in 2008, H2 Gambling Capital of the United Kingdom reported. That despite a federal law that bars offshore sites from accepting money from U.S. bettors.

McDermott said that annual amount has risen to $12 billion. His bill, which would tax online gaming, was recently presented to a Congressional committee.

Some believe it is time that it is taxed, legalized and regulated. Others aren't so sure.

"The industry itself is trying to figure this out," said U.S. Rep. Dean Heller, R-Carson City. "First of all, they know that billions of dollars are being lost overseas. They know that Internet gaming goes on all of the time. They are trying to figure out how do we get into this? How to we take a piece of the action and bring it back into this country?"

Heller recently participated in the debate over McDermott's bill -- one of four currently proposed in Congress to legalize some form of Internet gaming.

Gaming experts said there's not much time to pass any online gaming legislation during this Congressional session. Yet discussions about of the impact legal Internet gaming would have on Nevada's gaming and tourism industry are taking place among major and minor casino property owners, gaming-machine manufacturers and advocates for gambling addicts.

Major gaming properties in Nevada, such as Harrah's Entertainment and MGM Mirage, are developing strategies for how to monetize its legalization, experts said.

"Obviously, every Nevada casino out there would probably have a site, if they legalize it," said Larry Woolf, CEO and president of the Navegante Group, which manages casinos in Nevada resorts, including the casino at the Grand Sierra Resort in Reno. "I'm sure MGM would have a site, and Harrah's would have a World Series of Poker site. Probably a lot of the smaller casinos would buy into a platform where you could play at the Siena or the Peppermill by just clicking on that icon.

"It is definitely coming. It is just a matter of time. Poker will come first, then Internet gaming. It will be a little bit more expensive for the small guys to compete, but that's the real world."

Internet gaming also is a potential money-maker for gaming-machine manufacturers, which stand to benefit from the development of online gaming software, others said.

"Most of our manufacturers, without quoting companies to you, are extremely supportive of Internet gaming," said Frank Fahrenkopf, who is president and CEO of the American Gaming Association, the industry's lobbyist group in Washington, D.C.

Gaming manufacturer International Game Technology, one of Reno's largest private employers, declined comment on its Internet gaming strategy.

"But we do know everyone in the industry is looking closely at Internet-based gaming, including IGT," spokeswoman Kate Reil said.

Blow back

Not everybody in Nevada's gaming industry is gung ho about the idea.

Smaller operators fear it will have a similar impact California's tribal gaming, which has contributed to Reno-Sparks' market share decline over the past decade.

"We have lost 30 (percent) or 35 percent of our market since there are now casinos in California," said Jeff Siri, president and CEO of the Club Cal Neva in downtown Reno. "So if Internet wagering was to occur, you would have another form of competition out there, which will further decrease gaming in these (Nevada) facilities.

"It might create more gamers. California itself created more gamers. But in the long run, it will hurt the tourist facilities we have built in Reno."

Heller, who has yet to offer support to any Internet gaming legislation, is concerned that it could harm Nevada's tourism industry.

"Certain members of the gaming industry may want this, but what is the impact on Nevada if someone sits home in Los Angeles at their computer and plays 21 at Caesars?" Heller said. "If they are playing in their home, that means that they don't travel to Las Vegas, they don't stay in a hotel, they don't eat at the restaurants and they don't go to the shows. So, I've raised those questions. What impact is that going to have on Nevada's economy if tourists are not there in person?"

Gordon Absher, vice-president of public affairs for MGM Mirage, disagreed: "Our corporate revenue, across the company, averages about 60 percent nongaming. So no, I don't think that (loss of visitation) is a concern."

The key to any legalization during this Congressional session is U.S. Sen. Harry Reid, D-Las Vegas, Fahrenkopf said.

Reid has historically opposed Internet gaming because of his experience as a former Nevada gaming regulator. Fahrenkopf said Reid is concerned about proper regulation, which would be a significant undertaking.

Yet reports in gaming business magazines and websites suggest that Reid is considering a bill to legalize online poker. A Reid spokesman told that any whispers about Reid pushing an online gaming bill are "greatly exaggerated."

Reid's aides would not answer specific questions pertaining to Internet gaming.

"Sen. Reid's priority is to protect the jobs of Nevadans, protect minors, and to continue to position Nevada as our nation's leader in gaming," Reid spokesman Jon Summers said. "Taking into account these things will serve as the framework for any potential Internet gaming legislation."

Reid appears to be keeping Washington guessing about what he will do.

"No one knows," Fahrenkopf said. "He has not told anybody what he is going to do. But he is the key.

"Even if the House were to pass over the Barney Frank bill (which would legalize online gaming and set up a regulatory agency) to the Senate, Reid, as the majority leader, has the say over what gets heard and what gets voted on. So right now, there is a big unknown as to what is going to happen this legislative session."

Heller said Nevada's delegation must present a cohesive front.

"At the end of the day, our delegation has to work together on this," Heller said.


Siri sees online gaming promoting gambling addictions and decreasing workplace productivity.

"The bigger thing is, how do you control it?" Siri said. "How do you make sure that the person is of gambling age? How do you deal with a person who is a problem gambler? There are certain things we have to do if someone has been identified as a problem gambler. But I don't see a way to control that if they go online."

Siri also wondered how Internet gaming would be moderated at the workplace, where many employees use computers for activities unrelated to work.

"Instead of sitting at your desk working, you could be making a wager or playing poker, at the risk of losing your job," Siri said.

The Internet can lull participants into an addiction, said Denise Quirk, CEO and clinical director of the Reno Problem Gambling Center.

"People are using it as a form of entertainment and don't understand that the warning signs are happening. If they are spending a longer time than intended playing, spending four or six or eight hours on it and start moving interest away from school work, relationships and toward this great new goal of being the greatest poker player, those are all early warning signs of an (online) gambling problem."

Legalization would exacerbate the problem, Quirk said.

"They are already doing it," she said. "People are just using an offshore account. This is already a problem for some people."

Big profits

Major Nevada companies have the potential to reap big profits via Internet gaming because established brands such as Harrah's Entertainment or MGM Mirage offer instant credibility to potential customers, Woolf said.

"If you are playing on a legitimate site, like MGM, Grand Sierra or Harrah's, you will have a reasonable comfort level that whoever is running the site is not cheating," Woolf said. "But if you play on Frank Smith's Internet gaming site and he is offering better odds than MGM or Harrah's, you are probably taking your chances with that. MGM is not going to cheat. They are not going to jeopardize their (gaming) license."

Multistate gaming companies also can engage their players' reward programs online.

"Here, Harrah's has the advantage," Woolf said. "Harrah's has all of these casinos around the country. They are not just Nevada-orientated. And if you would play on one of Harrah's sites, you are going to get (player) points. So if you live in Louisiana, you can go to your local casino and cash them in. You don't have to fly to Las Vegas to use them."

Congressman McDermott said legalization of Internet gaming could create an estimated 30,000 U.S. jobs within the first five years of its legalization.

Yet few in Nevada believe that.

"The right political answer is yes, this will create jobs and revenue," Woolf said. "But the reality is that obviously, the Internet is not a labor-intensive thing, so the number of jobs would be minimal but the revenue could be huge."

Opposition to Internet gaming is dwindling, Fahrenkopf said. Internet-based entertainment is only growing as young Americans mature.

"In this world, the young people live in a digital age," Fahrenkopf said. "They do most things on the Internet. They shop on the Internet, so it seems fair to say that sooner or later, legislation will pass that will legalize Internet gaming because it is growing across the world."


There are four Internet gaming bills currently before Congress:

1. U.S. Rep Barney Frank, D-Mass., has sponsored a bill that would legalize online gaming and establish regulatory provisions.

2. U.S. Rep Jim McDermott, D-Washington, has sponsored a bill to tax online gaming and customers' winnings. It is estimated that the bill could net as much as $72 billion in taxes during 10 years, with $42 billion going to the federal government and $30 billion going to state governments.

3. U.S. Sen. Robert Menendez, D-N.J., has proposed the legalization of poker and other games of skill. This bill is commonly called the poker carve-out bill.

4. U.S. Sens. Ron Wyden, D-Oregon, and Judd Gregg, R-N.H., have introduced a bill that would restructure the Internal Revenue Service code. A subset of the bill would legalize Internet gaming as a new source of tax revenue for the federal government.

Sources: American Gaming Association, Las Vegas Sun, Global Gaming Business magazine

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