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Sherri Cruz

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Investors Gambling on New Federal Rules

Sherri Cruz, Business Journalist 1/13/2012 26 comments
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It may not be a royal flush, but the gaming industry is excited about its hand. Should investors be excited, too?

Historically speaking, casino stocks have had a lot of volatility. They lost most of their value during the 2008 recession. They're up now from their 2009 lows, but they have yet to come close to their 2007 highs. But a recent ruling by the Department of Justice paves the way for states to license and regulate intrastate Internet gambling and to sell lottery tickets online. Two days before Christmas, the department modified its interpretation of the Wire Act of 1961, removing prohibitions against many games, including poker. By ruling that the Wire Act specifically applies to sports-related gambling, the department threw open the door to opportunities for the online gaming industry. Some observers see the ruling as the first step toward the legalization of online gambling in the United States. Revenue-hungry states could not be more excited, and online gambling could be a way for wellknown casino operators -- and new entrants -- to leverage their brands. "What it means is that there's no impediment to a state regulating Internet gambling within its own borders," says James Kilsby, Americas editor for Gambling Compliance Ltd., an online information service that monitors global gaming news and interprets regulations. The ruling was a response to questions from the lottery agencies of New York and Illinois. The states had been pushing for a couple of years to sell lottery tickets online, Kilsby said. According to the Nevada Gaming Control Board, the online gambling industry is worth around $30 billion worldwide and generates $6 billion of annual revenue in the US. That revenue goes mostly to "offshore" companies operating in places such as Antigua. The ruling could spur federal legislation that would help established gaming companies such as Caesars Entertainment Corp. (owner of the World Series of Poker franchise), MGM Resorts International (NYSE: MGM), and Boyd Gaming Corp. (NYSE: BYD). Caesars has restarted its IPO. Boyd and MGM plan a partnership with Bwin.Party Digital Entertainment plc of Gibraltar, though that plan is subject to "enabling legislation." Caesars has been lobbying Congress for years to legalize online gambling. It says legalization would create jobs and revenue for state and federal governments. Other companies that stand to benefit include Scientific Games Corp. (Nasdaq: SGMS) of New York and International Game Technology (NYSE: IGT), a Las Vegas maker of gambling machines and software. "We believe it's a step in the right direction toward legalized online gaming," says Peter Laverick, director of marketing for IGT. His company would prefer federal legislation, but if customers move to operate in states that pass legislation first, it has to respond to customer needs. "Our interests are aligned with the land-based casinos in the US." Any legislation -- federal or state -- would likely focus on poker first. The US is undoubtedly the largest poker market, and many lawmakers see the game as more palatable. Industry watchers say online poker could be legalized this year. Nongaming companies such as Google (Nasdaq: GOOG), Apple Inc. (Nasdaq: AAPL), and Facebook Inc. could get into the market. Facebook, which plans an IPO this year, already has millions of online poker players.

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Las Vegas Sands Corp. (NYSE: LVS) might not get into online gambling. Sheldon Adelson, its chief executive, has said online gambling can lead to underage gambling. (His copmany owns the Venetian and the Sands Expo and Convention Center.) Internet gambling has come a long way. A decade ago, casinos viewed letting people gamble at home in their jammies as a threat to their brick-and-mortar business. Now they see the Internet as another source of revenue -- and one with a lot of potential for growth. It also took time for the technology to get up to speed. States with anemic budgets aren't blinking. They've already begun drawing up online gambling legislation. Gov. Chris Christie of New Jersey, who vetoed such a bill last year, now says he wants to make the state the epicenter of online gambling. California, Iowa, Florida, and the District of Columbia are also considering legislation. The industry would prefer federal legislation, which would make compliance easier. But states won't wait for federal legislation. Neither will companies. The ruling appears to make the Unlawful Internet Gambling Enforcement Act moot for anything but sports betting. The 2006 law makes it illegal for banks to process unlawful online bets. The Wire Act and the UIGEA need to be reconciled. Federal legislation would likely let states opt out of legalized gambling. Utah and Hawaii have expressed a desire to do so. Online gambling is already legal in many countries, including France, Italy, the UK, and Denmark. Italy and France first licensed poker and then legalized other online games. Canada also has legalized online lotteries and betting. Spain is in the process of legalizing online gambling. IGT's interactive division has been getting revenue from Europe for 12 years. "We've invested heavily in our interactive division," Laverick says. The company has made a series of acquisitions in online gaming. It acquired WagerWorks in 2005, Million-2-1 in 2008, and Entraction last year. Despite the optimism in the industry, there are hitches. It's anyone's bet as to whether legislation could be passed. A small but growing bipartisan contingent in Congress supports legalizing online gambling. Sen. Harry Reid, D-Nev., former chairman of the Nevada Gaming Commission, is a linchpin of this contingent. He once opposed online gambling but has warmed to it. Supporters include the presidential contender Rep. Ron Paul, R-Texas, and the retiring Rep. Barney Frank, D-Mass. Rep. Joe Barton, R-Texas, has proposed a bill to legalize online poker. The National Council on Problem Gambling and other groups are fighting to prevent the legalization of Internet gambling. They say the social costs outweigh the benefits. Another hitch: Without federal laws, a new administration's Justice Department could interpret the ruling differently and effectively stop states in their tracks. It's all a roll of the dice. But gambling always is.
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new market, not canibalization impactnow 1/23/2012 1:44:34 PM

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USER RANK IRON

I agree it will be a new market for those that need a fix but I don't think it will erode the physical casinos that are multiplying far beyond the traditional gambling locations to places like NYC and PA.
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Re: Gambling away mInvestor 1/21/2012 1:53:36 PM

USER RANK IRON

I think they are going to create a new sector in gambling industry. The people who prefer going to casino will still go there, and more people will join in online because it's convinient and different. That's why everybody is betting on the new revenue. Well, how does it pan out? We will see.

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Re: Gambling away Broadway 1/19/2012 10:28:44 PM

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USER RANK PLATINUM

Perhaps online lotteries would help invalids lose their money quicker. But I don't think your "normal" gambler needs any help going out to the local convenience store, holding up the line, while they buy 100 tickets and 20 scratch games. And New Jersey is surrounded by "real" casinos. You have Atlantic City to the south, the tribal casinos in NY and Conn. to the north, and now casinos in PA to the west.
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Gambling away impactnow 1/19/2012 1:53:17 PM

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USER RANK IRON

Online gambling could prove very dangerous for the overall economy since it take the trip aspect out of a gambling expeditionwith all that convenience those with tendencies toward gambling could find themselves spending much more than anticipated when their credit card bills arrive. However I do think that some gamblers want the experience of going to a casino and would not be interested in gambling alone in their home.
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Re: How to regulate? Bargain Bin 1/16/2012 2:27:48 PM Not to mention decades worth of Jets fans broken dreams, mine included.
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Re: How to regulate? driven 1/16/2012 11:57:07 AM

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That meadowlands property is haunted by the ghosts of all the people buried in the swamps beneath it. that's what i think anyway.
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Investor Uprising 25 Agrium, Inc. 1045.17 +10.88 (+1.05%) 83.79 24.73 585.78 38.18 34.66 65.93 48.81 59.93 42.50 13.16 14.47 50.21 4.84 28.04 24.21 29.84 50.85 14.24 673.50 56.77 36.83 27.93 28.58 33.26 31.62 +1.62 (+1.97%) +0.62 (+2.57%) +11.65 (+2.03%) -0.76 (-1.95%) +0.38 (+1.11%) -0.23 (-0.35%) -0.17 (-0.35%) -0.57 (-0.94%) +0.23 (+0.54%) +0.30 (+2.33%) +0.52 (+3.73%) -0.08 (-0.16%) +0.01 (+0.21%) -0.17 (-0.60%) -0.66 (-2.65%) -0.18 (-0.60%) +0.57 (+1.13%) +0.13 (+0.92%) +14.09 (+2.14%) +0.27 (+0.48%) -0.02 (-0.05%) +0.55 (+2.01%) +0.18 (+0.63%) -0.02 (-0.06%) +0.61 (+1.97%)

Re: How to regulate? Drivewaygirl 1/16/2012 11:46:32 AM It seems like it would be very difficult to keep things fair.
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America Movil S.A.B. de C.V. ADS Apple, Inc. Atwood Oceanics, Inc. Broadcom Corp

Gambling and fair should never be used in the same sentence.

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Re: How to regulate? Noreen Seebacher 1/16/2012 11:30:20 AM

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On a brighter note, perhaps the state could transform the whole ill-fated American Dream Meadowlands -- better known by its former name, Meadowlands Xanadu -- into one big Internet cafe for online gamblers with slow net access at home.
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Re: How to regulate? tokyogai 1/16/2012 11:19:49 AM

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Wow- that could enhance New Jersey's reputation of being the armpit of the East!
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Re: How to regulate? Noreen Seebacher 1/16/2012 11:09:42 AM Good question. But states aren't wasting any time.
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Massachusetts is already forming a task force to consider online sales of lottery tickets. Steve Grossman, state treasurer, said the recent federal opinion was "a surprise that accelerates the urgency of dealing with online lottery sales and online gambling in general.'' But NJ wants to move even faster. State Sen. Raymond Lesniak told The Associated Press on Monday he'll try to get a bill through the Legislature and on Gov. Chris Christie's desk by next week. The goal is to make New Jersey the national leader in online gambling, now that the federal government says in-state bets do not violate the law. "We can be the Silicon Valley of Internet gaming," said Lesniak, a Democrat from northern New Jersey.

Now there is a goal to aspire to...

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