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Online Casinos Intend To Make A Game Of It

Amid a 6-month-old law prohibiting online gaming in the United States, gambling sites insist they hold the stronger hand.
Indeed, in late January, despite the passage of the UIGEA, the Justice Department continued making arrests based on the Wire Act. It charged two former executives of Neteller, a publicly traded U.K. online money transfer company, with moving billions of dollars of illegal gambling proceeds from U.S. citizens to Internet gambling companies located overseas. Neteller, by far the largest online gaming transaction processing concern in the world, had more than $5.1 billion go through its hands in the first half of 2006. There were also press reports that Justice had issued subpoenas to a number of global banks that had participated in the underwriting of the IPOs of overseas gambling sites, causing stock prices of online gambling concerns registered on the London Stock Exchange to tumble.

Americans can also continue to play classic casino games like roulette at Bodog.com.

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Roulette and craps are available to U.S. gambers at Bodog.com.

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Neteller promptly released a statement that it would no longer process gambling revenue from U.S. customers, but other payment processing options abound, such as ePassporte, ATM Online, and Click2Pay. When PayPal withdrew from the online gambling payment processing market five years ago, the impact on the industry was temporary before other companies leaped in.

What happens over the next few years depends, among things, on what payment mechanisms remain and what new ones arise, says Tom W. Bell, a professor at the Chapman University School of Law and adjunct scholar at the Cato Institute. Already, the most dedicated online gamblers are establishing offshore bank accounts and using phone cards to pay for their activities. The "killer application for the gambling industry, which is sure to eventually emerge, will be a perfectly anonymous and untraceable form of digital cash," Bell says. Such forms of payment will replace the legitimate businesses of highly regulated companies with more dubious ones. The result, Bell predicts, will be a "regulator's nightmare."

STRANGE BEDFELLOWS
A driving force behind recent anti-gambling activities is the land-based gaming industry, Bell says. "It's the politics of the bricks-and-mortar gambling interests, who don't want to see their customers going to their more convenient gambling venues," says Bell.

What eventually will happen is that the U.S. industry will become regulated and legal, and the land-based casinos with the strongest brands will become the leaders in this domain, says Michael Pollock, managing director of research firm Spectrum Gaming Group.

Traditional casinos already are starting to test online gaming. In December, the Sands launched an online casino in the United Kingdom, and in February, Playboy followed suit. "Over the next two years, we're going to see things like an Internet-based MGM and a Bicycle Casino, where there is a great deal of brand cross-promotion going on," says Aaron Todd, a reporter with online gaming portal Casino City.

In the meantime, it's reasonable to worry that the only online gambling services that remain will be those that are less reputable, Bell says. "If regulators had consumers foremost in mind, if they were really attempting to protect consumers, they would recognize that people will continue to play online, and it doesn't make sense to drive out of the market the people who are the most credible and legitimate," he says.

Many companies anticipated the moves by the U.S. government. CryptoLogic, a Toronto provider of software and networking infrastructure for online gambling sites, prepared for more than five years for the eventuality that the United States would make online gambling illegal. When the UIGEA was passed, it notified all its customers still allowing U.S. gamblers that they needed to find other vendors.

"We've been in this industry for more than a decade and have always lived with the uncertainty of what the United States might eventually do," CryptoLogic CFO Steve Taylor says. "For that reason, years ago we started focusing more on Europe and other global markets."


Full Contact Poker, which decided to stay in the United States market, allows people to play with no limit.

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Full Contact Poker remains in the U.S. market with (gulp) no -limit games.

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Business is good: CryptoLogic recently signed deals with Playboy Enterprises and the government of the Netherlands to help develop casino and poker sites. CryptoLogic just reported its best fiscal year, with revenue up 21% over the previous year. Taylor expects online poker to grow at a 20% compound rate over the next 20 years, and casino operations at 12%. "As broadband and e-wallet solutions become more available and acceptable, we believe we can meet or exceed those numbers," says Taylor. "We think there's an awful lot of room for growth even without the U.S. market."

FIGHT GOES ON
Organizations hoping that online gambling eventually will be legal in the United States aren't going away without a fight. The European Union is challenging the UIGEA through the World Trade Organization, charging that the U.S. ban on Internet gambling is a blatant attempt at protecting domestic gambling revenue. The WTO brought suit against the United States on behalf of Antigua and Barbuda. In February, the WTO ruled against the United States in those countries, then in late March issued a 215-page decision that charged the United States with failure to comply. Commercial sanctions against the United States could be next.

The Poker Players Alliance, a lobbying group, in February named former New York Sen. Alfonse D'Amato as its chairman to spearhead the fight for an exemption for poker within the UIGEA.

Indeed, many legal scholars doubt whether the UIGEA forbids anything not already illegal under the Wire Act. There's even controversy about how far the Wire Act itself can be used to prevent online gambling; the U.S. Fifth Court of Appeals ruled against the Justice Department's assertions that the Wire Act forbids all online betting, instead deciding that the act pertains only to online betting on sports events.

"There are a number of court cases pending that are creating reasonable doubts about how far the current laws go in forbidding anything other than sports betting," says professor Kelly.

Ironically, a UIGEA provision actually legalized new online gambling venues by stating that individual states have the ability to regulate Internet gambling within their borders. That "theoretically opened the door to a great deal of online gambling activity as long as companies can come up with ways to verify exactly where players are geographically located," says Todd. California, Nevada, and New Jersey could be among the states to legalize, regulate, and tax Internet poker within the foreseeable future, says professor Rose.

Researcher Pollock points to the trajectory of how other industries respond to new technologies that threaten the status quo: First fight it, then accept it, and ultimately embrace it. Pollock expects the same pattern to play out here. "After efforts by the DOJ to put a lid on it, it will be highly regulated and controlled, and handled with integrity," he says. "No one can realistically put a lid on it. The economic case is too compelling."

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Brian T. Horowitz, Contributing Reporter
Samuel Greengard, Contributing Reporter
Nathan Eddy, Freelance Writer
Brandon Taylor, Digital Editorial Program Manager
Jessica Davis, Senior Editor
Cynthia Harvey, Freelance Journalist, InformationWeek
Sara Peters, Editor-in-Chief, InformationWeek / Network Computing