The federal government's decision to allow states to offer Internet gambling is likely to lead many cash-hungry state governments to turn to the Web as a new source of tax revenue and brings with it a host of questions and concerns.ATLANTIC CITY, N.J. — With legal gambling now moving beyond the casinos and onto the Internet, the industry is bracing for the most far-reaching changes in its history.
A Las Vegas firm, Ultimate Gaming, on Tuesday became the first in the U.S. to offer online poker, restricting it, for now, to players in Nevada. New Jersey and Delaware also have legalized gambling over the Internet and expect to begin offering such bets by the end of this year.
And many inside and outside the industry say the recent position taken by the federal government that states are free to offer Internet gambling — as long as it doesn't involve sports betting — will lead many cash-hungry state governments to turn to the Web as a new source of tax revenue.
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Ten other states have considered some form of Internet gambling so far this year, but none has legalized it yet. Efforts to pass a national law legalizing online poker have sputtered, leaving states free to pass laws as they see fit.
"It's no longer a question of if Internet gaming is coming; it's a question of when," said Frank Fahrenkopf, president of the American Gaming Association, the trade organization for the nation's commercial brick-and -mortar casinos. "Unless there is a federal bill passed, we are going to have the greatest expansion of legalized gambling in the United States. I don't think that's what anyone intended, but it is what we're seeing."
The brave new world for gambling brings with it a host of questions and concerns. Will letting people bet online result in fewer visits to casinos, and therefore fewer dealers, beverage servers and hotel and restaurant workers at the casinos? Will Internet bets create a new revenue stream from new players, or will it simply redirect money from gamblers who otherwise would have visited a casino, and might have eaten dinner and seen a show, as well? And will it create even more problem gamblers?
Michael Frawley is chief operating officer of The Atlantic Club Casino Hotel, perhaps the most endangered of Atlantic City's 12 casinos. A deal for it to be sold to the parent company of PokerStars, the world's largest online poker website, is up in the air. The Atlantic Club's owners said Wednesday the deal was dead, but PokerStars said the next day it still wants to salvage the purchase. It was not immediately clear whether the deal will ultimately get done.
Frawley said the Internet's vast reach could help double business at his casino, provided the right balance is struck between the online and physical gambling experiences for customers.
"If you go to the movies, you can watch one at home, or you can watch one in the theater," he said. "Both of them can be a great experience."
Regardless of whether PokerStars buys The Atlantic Club, Internet gambling is expected to take off in New Jersey before long. The Borgata Hotel Casino & Spa has said it is preparing to offer online gambling later this year, and Gary Loveman, CEO of Caesars Entertainment, has also said he expects his company's four Atlantic City casinos to grab a large share of New Jersey's online market.
Geoffrey Stewart is general manager of Caesars Online Poker. Parent company Caesars Entertainment's World Series of Poker brands, as well as its 37 casinos across the U.S., make it an early favorite to be a leader in online gambling. He said brick-and-mortar casinos such as Caesars Palace can use Internet play to complement their physical casinos.
"Someone comes to play with us online, we will be able to offer them seats to the real World Series of Poker, or offer them hotel rooms at Caesars Palace," he said. "Like any other business, you're always looking for what is the next distribution channel."
Not everyone in the industry is all-in, however.
The American Gaming Association conducted a study a few years ago on whether poker-only Internet gambling — which it supports — would cannibalize the existing brick-and-mortar casinos. The study determined that it would not. But when Internet gambling allows for casino games, such as in the bill recently adopted by New Jersey, the traditional casinos could suffer, Fahrenkopf said.
The most popular form of Internet gambling is online poker.
When the Justice Department charged executives of three online poker sites in April 2011 with conducting illegal transactions, it was a $6 billion a year industry. After the crackdown, it was largely on hiatus, because at the time, taking online bets from U.S. customers was illegal. But not long afterward, the U.S. Justice Department revised its stance, allowing states to take online bets so long as they didn't involve sporting events.
Eric Baldwin is a professional poker player who's eager to get back online again now that poker is once again available over the Net.
"The money's good when things are good," he said. On the other hand, he acknowledges, "Most people don't go to work for 12 hours, do their best and come home down a couple thousand dollars."
He plans to at least try out legalized Internet poker to see if the player pools are big enough to make it worthwhile.
Lawrence Vaughan, chief operating officer of South Point Poker, one of the first Nevada online licensees, said legalizing Internet poker removes the stigma some people had associated with it.
"You had to move money in shady ways around the world to even play online," he said. "Now it's the sort of thing your mom could sign up for."
Ultimate Gaming CEO Tobin Prior, whose firm started taking poker bets Tuesday in Nevada, added, "Players won't have to worry if their money is safe. They are going to be able to play with people they can trust and know the highest regulatory standards have been applied."
PokerStars, one of the parties charged in the 2011 crackdown that came to be known in the industry as "Black Friday," later bought Full Tilt Poker, another defendant, and reached a settlement with the federal government, paying $547 million to the Justice Department and $184 million to poker players overseas to settle a case alleging money laundering, bank fraud and illegal gambling. It admitted no wrongdoing and says it is in good standing with governments around the world.
Its parent company, The Rational Group, based on the Isle of Man in the U.K., would not say whether it plans to try to buy another casino or partner with one to gain entry into the U.S. online gambling market.
Introducing new players to poker over the Internet makes it less scary and potentially more popular, said David Schwartz, director of the Center for Gaming Research at the University of Nevada Las Vegas.
"It was mostly old guys with cigars," he said. "It was very intimidating to walk into a poker room and see a guy who's a thousand years old, smoking 10 packs of cigarettes a day, giving you dirty looks because you're taking the wrong card," he said. "What online poker did was let people get familiar with the game, feel a little bit of confidence and then they said, 'I want to go to Vegas and do the real thing.'"
Every week, it seems, a new study comes out touting the promise of Internet gambling for cash-strapped casinos and even more cash-strapped state governments.
Gambling Compliance, which tracks the online gambling industry, predicts Internet gambling in New Jersey will bring in nearly $262 million in its first year and nearly $463 million after four years. The group said that figure could go as high as $575 million after four years if online gambling takes off in New Jersey.
H2 Gambling Capital, a U.K. consultancy for the Internet gambling industry, predicts 17 states will have approved Internet gambling by 2017, led by New York, California, Florida, Illinois and New Jersey.
And Morgan Stanley predicts that by 2020, online gambling in the U.S. will produce the same amount of revenue as Las Vegas and Atlantic City markets combined bring in today: $9.3 billion.
Indian tribes are also moving to get into the online gold rush.
Two groups of tribes have already formed alliances to explore offering Internet gambling, and in April, the Cheyenne-Arapaho Tribe reached a deal with Oklahoma allowing the tribe to offer Internet gambling to customers outside the U.S. through its pokertribes.com website. The Shoshone tribe in Nevada has a deal with an online company to offer similar Internet gambling to foreign customers in a venture that could go live in May.
States across the country are also turning to the Internet to boost sales of their lottery tickets. Twelve states have either approved or are considering selling lottery tickets online, and Georgia and Illinois are already doing it.
What types of games can be played for money online varies by state.
New Jersey will offer people within the state all the games patrons can play in physical casinos. Delaware will do the same, along with bingo. Nevada only offers poker. A proposed Internet betting law in Massachusetts would prohibit online slot machine games.
But in most cases, the games can be accessed through computers, portable tablet devices and smartphones — putting a casino or a card game within reach at 3 a.m. in the kitchen, in the middle of the day at the beach or on a crowded commuter train.
With the Internet putting legal gambling directly into so many more hands, some are concerned about an increase in problem gambling, particularly when social media sites offer real-money gambling in the U.S., as some do already in other countries. Zynga, for instance, began taking real-money bets earlier this year in England, and its stock price jumped 15 percent in a day.
"Compulsive gambling is an impulse disease: You get an urge, you jump in your car and drive to Atlantic City or you call your bookie and then wait to see the result of the game you bet on," said Arnie Wexler, the former chairman of New Jersey's Council On Compulsive Gambling and himself a recovered problem gambler. "Now you have Internet gambling and you wake up in the middle of the night and in your birthday suit, you can blow a lot of money. I know one guy who lost $30,000 in one night of Internet gambling."