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State-by-state, America keeps betting on online poker and gambling
With millions in potential tax revenue on the line, who says no to legalization?
Aurich Lawson
It wasn't always this way. Among online poker players, Black Friday refers to the infamous day in April 2011 when the United States brought federal criminal charges against the founders of three major overseas online poker companies: PokerStars, Full Tilt Poker, and Cereus (under the brand name Absolute Poker). The move targeted companies accused of illegally catering to US players, and it shut down easy access to real-money online poker for American players.
Federal prosecutors alleged that the 11 defendants violated the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 and conducted notable bank fraud between financial institutions, poker companies, and players. In parallel, a civil case sought the forfeiture of $3 billion worth of company assets, many of which were overseas.
Eight of the 11 named were out of the country when the indictments came down, but the others either pled guilty, settled with the government, served time, or experienced some combination of it all. The UIGEA (PDF) summary, as written by the United States Treasury Department, specifically "prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law."
One of those convicted as part of the Black Friday roundup was John Campos. He pleaded guilty to one count of "dealing in bets used as a means for participating in a lottery by a state nonmember insured bank" and served three months in federal prison. Campos remains on probation until November 2013.
The government accused Campos, then-vice chairman of the board of directors at SunFirst Bank in St. George, Utah, of agreeing to process gambling transactions in exchange for a sizable investment in the bank from these poker companies. In a sentencing memorandum (PDF), the prosecuting United States Attorney, Preet Bharara, wrote that SunFirst Bank processed more than $200 million in payments from November 2009 to November 2010.
"My perspective on it is that [the law for online gambling] is still not clear," Campos told Ars by phone. "Until some of the states start to actually pass the laws and the banks start processing, it's still pretty nebulous. I think there are still some questions as to implementations. I'm afraid to do anything in that area, because the federal government is scary."
Major poker sites will no longer do business with American residents for fear of running afoul of federal law.
"Everybody hates [the United States government]. You know why? We're like the sovereign of the world. [Internet poker] has come out and we're seizing people's money in France!" Jeff Ifrah, an attorney who represents PokerStars, told Ars recently over coffee in San Francisco. "Half the money [seized on Black Friday] was in France, Spain, and Italy. Players don't want to deal with US law enforcement [and risk] their accounts being seized or extraditions."
Players who had money on one of the targeted sites have largely had their assets frozen—the US is still trying to repatriate the money.
"I had about $12,000 on [Full] Tilt, so I still haven't seen that money and am hoping to get it back from the Department of Justice in the next year or two, if I'm lucky," Matthew Stout, one of the world's top poker players, told Ars. As a result of Black Friday, Stout decided to employ the services of PokerRefugees.com and relocated to Costa Rica, and later to the Netherlands, where he can play 15 to 20 tables at once online, all day long. (Stout noted that he still files taxes with the Internal Revenue Service.)
Now two years after Black Friday, the outlook for online gambling has changed dramatically. Collectively, the American market for online casinos and poker could be worth as much as $12 billion, according to a 2009 estimate by Goldman Sachs. At present, "traditional" (that is, offline) gambling revenues in the US total $35 billion annually, roughly the size of all foreign online gambling sites. With depressed economies nationwide, state governments increasingly want a piece of that revenue—and they are willing to license online gambling to get it.
There's just one problem: how do website users prove—really prove—that they are physically located in states like Nevada?
Welcome to Nevada
The big question for the new online gaming companies is exactly how are they going to limit online gambling on a geographic basis. The Internet is by nature borderless, though some applications do enforce IP geoblocking to limit the consumption of various forms of intellectual property (Hulu uses this). But to anyone who knows how to use a virtual private network (VPN), such blocks are trivial obstacles.Under Nevada's new regulations, players using a Nevada-based poker website need to be physically present within the Silver State while playing, but they do not need to reside there nor have financial assets there. They simply need to prove that they are located within the state's geographic boundaries.
Nevada has not said precisely how it will determine a poker player's geographic location, but it does make clear that simply checking the IP address isn't going to cut it. "People do use IP geolocation, but it could not be a sole qualifier," Jim Barbee, the chief of the technology division at Nevada's State Gaming Control Board, told Ars.
If a company came to the board trying to get its poker product certified and was only using IP-based geolocation, Barbee said he would respond this way: "Why are you wasting our time? My nine-year-old can spoof that."
So what does Nevada require? "It would involve multiple data points, incorporating IP address, registration information, street address—we would be marrying all the data points together," Barbee said. "In order to do location information you're going to have to do an algorithm and weigh the variables. Based on the sum of those variables, you'll make a decision: is this person located in this area or not? One of those would be IP geolocation information. Another could potentially be where they were when they created their account. Another would be GPS information, and another would be cell phone or Wi-Fi triangulation. Overall, a solution will be multi-factor—it will include several of those data elements."
Find my phone
The gaming companies are working on the problem. They've hired serious tech talent to develop solutions and build out their infrastructure. Ultimate Poker's chief technology officer, for instance, is Chris Derossi. He once upon a time led the design of Mac OS 7.1. On an April 30 conference call with reporters, Derossi only briefly described how the location system would work."They include [everything from] your network to the location of your mobile phone device and some stuff that we can't talk about," he said. "We do require that players have a mobile device that we can locate through the mobile networks."
Locaid, a San Francisco startup, claims to be best-poised to act as a geo-location verification partner for these online casinos—it's the partner for Ultimate Poker, for example. "We're the location platform for lots of industries—we can locate 4.8 billion devices," CEO Rip Gerber told Ars in his downtown office.
Derossi later clarified that his company was indeed partnering with Locaid to authenticate a player's location.
Locaid acts as a one-stop middleman, replete with an API call, for any company that wants to determine the location of a particular phone or to figure out whether a user is within a defined geographic boundary. Locaid works by first pinging a phone with the user's consent. Based on the nearest tower information acquired directly from the carrier, it then returns the phone's location. (You can try this on your own phone, for free. I tried it and it worked with stunning accuracy. When I attempted to input a Google Voice number, Locaid simply returned an error.)
"I'm the Costco of location—I can buy in bulk, put a margin on to you, and pass it on to you," Gerber added. He noted that his company is typically hired by other middlemen like GambleID, a verification company that would then directly operate under the online poker sites.
Nevada gambling operators already have experience with using mobile devices to limit bets based on location. For the last two years, the state has allowed sports bets via smartphone apps as long as the smartphone holder is physically inside the state's borders.
Of course, pinging a phone isn't the only way that a site could determine whether or not a player is in Nevada. "[You could] ask them what the weather is right now or what the nearest cross streets are—it could be contextual," JD Garner, CEO of GambleID, told Ars.
Beyond the location restriction, Nevada imposes other requirements, such as forcing online poker outfits to partner with existing state casinos. Online operators must also submit their code and setup to the Gaming Board's tech division, or to one of two state-sanctioned labs, for an evaluation of their fairness and security.
Most poker players aren't sophisticated enough to even try outsmarting Nevada's system. They may just drive across the border, fire up their laptop at the nearest Wi-Fi hotspot, and go. But it's all but certain that someone will try to spoof an IP address and a GPS location to make it appear that he or she is in Nevada. For now, it's unclear just how effective the system will be.
Show me the money
The dramatic shift in the fortunes of online poker actually began after Black Friday back in 2011 when the Department of Justice released a famous memo (PDF) that opened the door for states to allow online lottery ticket sales and online gambling within their own borders. Nevada did so in February 2013 after the legislature voted unanimously to approve the idea; the state's first legal online poker website launched in April.New Jersey and Delaware are expected to follow suit with a suite of casino games (including poker) sometime around September 2013.
"We don't actually know how popular it's going to be," said Vernon Kirk, the director of the Delaware Lottery. Kirk's agency also regulates the state's online gambling setup. "It's trying to be competitive, but the goal is to try to create a new group of customers and push them into the casinos. I don't think anybody understands what the dollars and cents are going to be."
New Jersey—with its 8.8 million people—is expected to take in anywhere between $40 and $180 million in tax revenue annually, depending on which estimate you believe. In April 2013, Fitch, the credit ratings agency, accounted for an 85 percent ($200 million) growth in casino revenue "resulting from the introduction of Internet gaming tied to Atlantic City casinos."
"Atlantic City's revenues have been declining for four years now and they're not going to get any better, because of competition from surrounding states that hadn't been present before," Raymond J. Lesniak, a New Jersey state senator, told Ars.
"Without additional revenues from online gaming, we know that two casinos would close. That's 6,000 jobs just to begin with in the state that has one of the highest unemployment in the nation. That's a significant loss. Online gaming can bring hundreds of millions of dollars in revenue."
Still, while the state may be taking in tens of millions per year, it's relatively small compared to what New Jersey normally takes in from all tax revenue collectively—around $30 billion annually (PDF).
Other states, including California, Illinois, Michigan, and Connecticut are also looking at legalizing online gambling.
This could result in a patchwork of states where online gambling is legal—but only for casinos based within those states. For a New Jersey visitor to gamble with an online Nevada casino, for instance, more is required. Industry and legal experts believe that states have the right to enter into agreements or "compacts" with other jurisdictions, which could create a set of states where it's legal to gamble online in other states. No one's quite sure how these will be defined, but many believe that compacts could pave the way for one state to partner with another, or possibly with an Native American tribe, or with a foreign province, state, or country.
The consensus at a recent Internet gambling conference held last month in San Francisco was that it is only a matter of time. More states are likely to follow Nevada, New Jersey, and Delaware—or a theoretical federal regulation could standardize online gambling nationwide.
"What matters is creating a framework where the customers are going to feel comfortable," David Schwartz, director of the Center for Gaming Research at the University of Nevada Las Vegas, told Ars. "I'm in my late 30s and I can't sit at a slot machine for more than 10 minutes before I go berserk. You don't see people at slot machines under 50. [Casinos] need to do stuff that is going to be different than what they have. The idea of sitting in front of a box and watching things spin, that's not going to be compelling to people—an ATM is more interactive."
Not enough fish in the sea
Poker industry watchers and some poker players say that the advent of Nevada, New Jersey, and Delaware's legal online sites is interesting but not yet big enough to attract high-profile, high-stakes players. Those state setups simply aren't lucrative at the moment. More specifically from a player's perspective, there aren't enough "fish"—or bad poker players—to go around."These are all small states and there are no cross-border alliances formed [yet] between the states," Phil Gordon, the CEO of Jawfish Games, told Ars. "One of the important things for online poker is critical mass. You really have to have enough players online to have a game of a particular stake and variety so that anybody that walks in has a place to play—without that critical mass the site dies."
California's top gambling official, Richard Schuetz, recognizes this sentiment. He told the assembled industry members at the San Francisco conference that when the Golden State authorizes online gambling, it will be a game changer.
"We have 38 million in this state—once we turn that on, everyone in the world would want to be on that site," he said. "If you're a poker player you're going to want to be on the biggest site in the US. We have more college students than people in Iowa or Nevada. We are the big dog on the block and if we go legal, you're going to want to play on our sites."
But there's more to consider than mass. From a state perspective, it takes a lot of resources to set up the structure for online gambling to exist, run smoothly, and then thrive in state. Gordon feels the real answer here is not state regulators, but preferably federal ones undertaking "a tremendous amount of work that needs to be done [to make online gambling] viable at a national level." Gordon sees this as a few years away but notes that bigger states could speed up the process. "When California gets serious, that will be interesting." So it becomes a chicken and egg scenario: players won't come unless big states are on board, but big states don't want to participate if there isn't an audience to profit from and justify all the effort.
There's no perfect answer. But David Schwartz, director of the Center for Gaming Research at the University of Nevada Las Vegas, believes that some states may find the best solution by using existing regulators as partners rather than undertaking their own regulatory infrastructure.
"The model I've been talking about is that they should model it on [simulcasted horse races]," he said. "Let's say you're at a racetrack in New York and you want to bet on a race in Florida, so they simulcast the signal. The bet at the New York track is split with Florida. To me that makes so much sense that we have somebody in New Jersey betting with an online casino in Nevada; the states will find a way to divvy up the tax money. It's not that complicated. I would expect something like that to happen. It's the difference between getting 50 percent of a big number versus 100 percent of a small number. Let's say I'm California and I want that money from online gaming but I don't want to pay for a regulatory apparatus. I strike a deal with Nevada and you license people and I will let our citizens gamble there. They'll have some kind of oversight but it saves them from having to create a whole regulatory approach."
The bottom line is that despite three states starting the push, the path to growth is a complicated one. So high volume gamblers like Stout, the 28-year-old professional poker player who moved to the Netherlands, are likely to keep playing abroad for now. Stout said that even with more legal US sites undoubtedly on the way, it will take more to entice him to return back to the United States.
"It's definitely interesting to see the roots of [legal online poker] forming," he said. "I'm glad, even if it came at the expense of the beautiful situation we used to have where we were free to play online poker in the 'Land of the Free.' It'll take a pretty big alliance to create enough action to appease high stakes players."
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