Market changer: American Internet gambling regulation

A lot of people in the know are now talking about a regulated US online gambling market as more of a ‘when’ than an ‘if’ proposition.

While there’s not much happening right now on the draft legislation front compared with the later part of 2010 there’s certainly plenty happening on the corporate front with the industry’s big players jostling to be ready for when the market does open up.

Caesars and 888 have teamed up (with the blessing of Nevada gaming regulators), last week Steve Wynn did a big about-face on his previous anti-online gambling stance to announce a Wynn/PokerStars online partnership, and all the big European operators are busy merging (PartyGaming & Bwin, Ladbrokes & 888 maybe) to ready themselves for an assault on the American market.

So let’s assume it is going to happen…federally licensed and regulated online gambling in America.  What effect will this have on:

1. the current US online gambling market; and
2. the current US terrestrial casino market.

The online gambling market

The current US online gambling market is an interesting animal indeed.

In 2006 Congress tried to quash it with the UIGEA anti-online gambling law that sought to prevent payment processors from facilitating Internet gambling transactions.  The US Justice Department has maintained its illegality since day one and prosecuted a number of operators for accepting bets from US players.  With the exception of a few big brand poker-rooms (Full Tilt etc) every major online gambling organization has pulled out of the US and now declines US player registrations.

And yet despite all this it remains by far the largest online gambling market (by country) in the world.

UIGEA’s passing and then implementation a few years later had minimal effect on how much Americans bet online.  According to the Economist‘s article Shut up and Deal,

“After the ban some established sites closed down their American operations, but others filled the void. Americans are gambling roughly the same amount online as they did in 2006.”

Will regulation make it bigger?

Almost certainly yes.

Even in the period before the UIGEA was passed, all of America’s major gambling brands sat on the sidelines waiting for clear legislative direction before entering the market. As it turned out they never did.  Their eventual entry into the market would be very significant.

Gambling is about trust – and this notion is exemplified when the activity is taken online.  Now we players need assurance not only that games are fair, but also that operators are going to properly manage the information and money we have entrusted with them.  Household brands like Caesars, MGM, the Sands, Wynn etc go along way to satisfying players in this regard. More Americans will be comfortable playing online, and those that already do will be more comfortable raising the stakes.

Then you have the ‘clicks and mortar’ cross promotion capability of these large organizations. They already have massive player databases so their online marketing campaigns have a big kick start. They also have the ability to merge online promotions with their terrestrial offering…I can just see it now – “Play online and earn loyalty points toward free luxury Las Vegas accommodation!”

The US terrestrial casino market

You’d be forgiven for thinking that a green light for online gambling would cost American’s casinos patrons and dollars as some are lost to online.

That may well be the case, but at least one research firm doesn’t think the impact will be significant. Innovation Group surveyed a sample of US gamblers and posed the question whether online gambling legalization would change the amount they currently wagered at bricks and mortar casinos.  Those that already gamble online indicated they wouldn’t change bricks and mortar casino spend at all.  Those that do not currently gamble online indicated a marginal (2%) decrease in bricks and mortar casino spend.

Overall the results suggested a negligible impact. Although this is a single survey and not exactly oracular.

I’m sure that Caesars et al have done more than a little surveying of their own along these lines.  And interestingly their attitudes toward an open online gambling market have changed from strongly-opposing to now lobbying-for.  This would suggest that their market research indicates a smaller loss in bricks and mortar revenue than expected gains in online revenue.