Internet gambling: Threat or opportunity?

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The likelihood Internet poker will soon be legal in the United States is igniting a fear among some tribal leaders that online gambling will impact revenue from tribal government casinos. Internet gambling proponents contend the fears are unwarranted as online gamblers represent a segment of the public that is not patronizing casinos.

The controversy is greatest in California, where the Morongo Band of Mission Indians is proposing an intrastate Internet poker Web site in partnership with Los Angeles area card clubs. California tribes generate $7.3 billion a year in casino revenue, the largest share of the $26.8 billion won in 2008 by 442 government casinos operated by 237 American Indian tribes and Alaska Native villages in 28 states.

Morongo’s proposal comes as Rep. Barney Frank, D-Mass., is advocating federal legislation legalizing, regulating and taxing Internet poker. Frank’s bill is one of three pieces of legislation in Congress that would legalize online gambling, including the Bipartisan Tax Fairness and Simplification Act sponsored by Sens. Ron Wyden, D-Ore., and Judd Gregg, R-N.H.

“Card game gambling on the Internet would take business away from brick-and-mortar casinos,” Robert Smith, chairman of the Pala Band of Mission Indians and a director of the California Tribal Business Alliance, wrote in a letter to state legislators. He called the Morongo proposal “a Trojan horse for the wholesale expansion of non-Indian, off-reservation gambling.”

Chairman Daniel Tucker of the Sycuan Band of the Kumeyaay Nation in December successfully ran for chairman of the California Nations Indian Gaming Association, a coalition of 25 tribes, to “lead the fight” against Frank’s “outrageous and unjust” federal legislation.

“The recent drive by members of Congress to legalize Internet casino gambling nationwide represents the greatest threat to Indian gaming in the last 20 years,” Tucker said.

The Tribal Alliance of Sovereign Indian Nations, a group of 14 of southern California’s most successful gaming tribes, is also opposed to the federal legislation.

It does not appear the sentiment of California tribes is shared by indigenous nations across the United States. Tribal Chief Miko Beasley Denson of the Mississippi Band of Choctaw Indians and the United South and Eastern Tribes, a coalition of 25 indigenous nations, has asked Congress to study the issue.

If Frank’s legislation does not impact tribal-state gambling agreements or amend the Indian Gaming Regulatory Act of 1988, “it has the potential to create economic development opportunities for Indian country,” Denson and Chairwoman Lynn Malerba of the Mohegan Tribe said in letter to USET President Brian Patterson.

Existing federal law does not prohibit intrastate online gambling. But states like California have a significant advantage over other states in creating interstate, online player-banked poker Web sites. States with smaller populations could not generate a significant betting pool.

“States like Connecticut and Mississippi. … are unable to support an intrastate Internet gaming system,” Denson and Malerba said in their letter. Frank’s bill could level the playing field, enabling tribes to form coalitions to pursue online poker and other player-banked games.

The National Indian Gaming Association stands mute, pledging to take a stand on the matter at its April membership meeting in San Diego. The American Gaming Association, the lobby for the commercial casino industry, is neutral on Internet wagering. Harrah’s Entertainment, the country’s largest casino company, has spent more than $3 million promoting Internet gambling, hoping to capture some of the $5.9 billion wagered each year on illegal Web sites by online poker players and sports bettors.

Proponents of Internet wagering believe tribal concerns about cannibalization are unwarranted because online gamblers are primarily poker players and sports bettors who do not patronize casinos.

On average, 80 percent of casino revenue comes from slot machines with another 15 percent generated by table games such as blackjack and mini-baccarat. Poker, a player-banked game, normally generates less than 5 percent of a casino’s revenue.

Slot customers are termed “risk” gamblers while players at poker, other table games and horse and sports bettors are “skill” gamblers who are students of the odds. Most commercial casinos place race and sports books adjacent to the poker room

“The profile of the U.S. online player is a skilled poker player,” said Lewis and Roca attorney Anthony Cabot, an authority and author on Internet gambling. “He doesn’t go to casinos.”

“The person on the Internet is certainly a different profile of gambler than the individual going to the casino,” said Las Vegas attorney Toni Cowan, who previously worked for the National Indian Gaming Commission, the federal regulatory agency for tribal government casinos.

“The whole cannibalization argument is really suspect,” said Sue Schneider, a consultant with eGamingBrokerage.com.

Experts contend whatever negative impact online poker would have on brick-and-mortar casinos will likely be far offset by the Internet marketing advantages.

Playing with figures

There are numerous studies on the size and potential impact of Internet wagering. International online poker and sports wagering, according to the most prominent survey is a $21 billion industry, about $5.9 billion of which comes from U.S. gamblers.

PricewaterhouseCoopers estimates online wagering nationwide would generate $10.1 billion to $41.85 billion in federal taxes and fees over a 10-year period. BolaVerde Media Group, an Internet gambling consultant which analyzed PWC figures for Congress, said the lower figure is more realistic.

Another study shows California poker players bet $300 million a year on the approximately 2,355 wagering Web sites, many of which are in the Caribbean and Central America. Sacramento gambling attorney Martin Owens believes 1.4 billion Californians are wagering on the Internet.

Weaving through all the studies, it is difficult to grasp what impact legal online wagering will have on tribal and commercial casinos. But there are informed opinions.

“Until it happens, it’s hard to tell,” Cabot said. “My personal feeling is from an economic standpoint Internet gambling does not have a negative impact on land-based casinos. In fact, it’s the opposite. Once land-based casinos – tribal or commercial – embrace Internet gambling they will find it’s going to be a valuable tool to bring traffic to their facility.”

If the most often quoted figure of $5.9 billion a year in U.S. Internet wagers is accurate, the online industry will likely have a minimal impact on casino revenues, positive or negative.

Americans in 2007 lost $92.3 billion gambling at tribal and commercial casinos, racetracks, card clubs and lotteries, according to Christiansen Capital Advisors Gross Annual Wager. Of that amount, $60.4 billion was won by tribal and commercial casinos.

Promoters of online wagering contend legalization will result in double-digit growth of the online poker industry, igniting what has been a dormant era for tribal and commercial casino gambling.

After a decade of robust growth, casinos operated by Indian tribes and Alaska Native villages won $26.8 billion in 2008, a meager 1.5 percent jump over 2007, according to the National Indian Gaming Commission and Alan Meister’s 2009 – 2010 Indian Gaming Industry Report. Revenues for 2009 are expected to drop for the first time since passage of the Indian Gaming Regulatory Act of 1988.

California has in a decade evolved into a maturing market showing early signs of saturation. Revenues in 2008 fell 6 percent, from $7.8 million to $7.3 million. With the slowing market demand a handful of tribes that negotiated the right to increase their complement of machines from 2,000 to 5,000 have yet to install the devices.

Morongo Chairman Robert Martin and other supporters say tribes and the state are missing out on millions in online poker proceeds.

“We want to be out in front on this. It’s gaming, and we feel we have expertise in gaming. We’re not going to sit back and let all those dollars leave the state.”

Chairman Richard Milanovich of the Agua Caliente Band of Cahuilla Indians in Palm Springs, Calif., is neutral on the Morongo proposal but “intrigued with the notion of intrastate Internet poker.”

But other California tribes believe intrastate poker would violate the tribal exclusivity on casino gambling written into tribal-state agreements, or compacts. Those agreements guarantee the state a “revenue share” of casino profits amounting to $365 million a year, far more than the $30 million to $50 million a year that the most optimistic supporters contend will be generated with online poker.

Much ado about nothing?

Four states – California, Iowa, Florida and New Jersey – are proposing some form of intrastate Internet poker. Pundits, however, do not believe the state measures or congressional proposals stand any chance of passage in the current 111th Congress.

That has not prevented many tribes in California and elsewhere from going into apoplexy over the perceived threat of online wagering, urged on, no doubt, by lawyers, lobbyists and consultants some believe have limited knowledge of the casino industry or Internet gambling.

“A lot of lobbyists don’t mind making fires so they can put the kibosh on them,” said a prominent Washington, D.C., tribal political consultant who requested anonymity. “California is the tail wagging the dog because of the state issues. On the federal level, there’s no real chance of passage.”

Nevertheless, gambling observers believe Internet wagering will become a reality. The trends are clear. Forty years ago the only legal gambling in the United States were casinos in Las Vegas and a few racetracks. Casinos opened on the Atlantic City Boardwalk in 1978 and today there are commercial casinos in 12 states, tribal government casinos in 28 states, racetracks in 29 states, lotteries in 43 states and racetrack slots or “racinos” in 12 states.

“Federal legislation on Internet wagering is inevitable,” Cabot said. “But unless a bill gets attached to something that has a likelihood of getting through the House and Senate it has very little chance of success this session.

“Legalization on a national level will come about as states embrace intrastate Internet gambling and start to break down the barriers. Then something will come up on a federal level and it will have less resistance.”

Helping remote tribes

Sovereignty is a major issue with online wagering.

“There has always been a feeling that if we’re not going to stop Internet wagering we want to be on an equal footing with the states in terms of regulatory authority,” said a tribal lobbyist who requested anonymity.

Online wagering is also viewed by many as a means by which remote tribal casinos in the Great Plains and Southwest can reach out to customers. Seventy of 405 tribal casinos audited by the NIGC in 2008 – mostly small tribes near urban areas – generated 70.9 percent of the revenue. Most tribal casinos are marginal operations.

“Some Indian casinos have been wildly successful, but it’s a small portion of the total number of tribes,” Cowan said. “The big handicap for many tribes is they are out in the middle of nowhere. They don’t have the people Connecticut has, or New York state, or California. Without the Internet how are they going to reap the benefit of the Indian Gaming Regulatory Act?”

Urban tribal casinos would likely use the Internet as a marketing tool. “The rural situation is different,” Cabot said. “The Internet gives remote operations an opportunity to generate incremental revenue they otherwise would not have gotten. It becomes a separate sort of industry as opposed to a complimentary sort of industry.”

Such is the case with the Mohawk Council of Kahnawá:ke near Montreal, Canada, which operates Mohawk Internet Technologies, a lucrative tribal government enterprise and Internet service provider for e-businesses, including online poker.

That doesn’t mean, of course, that impoverished tribal nations will reap riches with the Internet.

“I have never been convinced that a Lakota Internet casino based on Pine Ridge is going to do that much business,” said a tribal Capitol Hill consultant.

A tribal policy for the future

Cyberspace is regarded as the inevitable wave of the future, which many believe should be embraced by tribal governments. Retail conglomerates such as Wal-Mart, Williams Sonoma, JCPenney and others have utilized the Internet to expand their markets. Should tribal casinos do the same?

“That’s the intelligent way to look at it,” Cowan said. “You’re not going to be able to keep this horse in the barn.”

“Internet gambling is inevitable and the sooner tribes get entrepreneurial about it and not be afraid of it the better off they will be,” Schneider said. “Some tribes are there with it. Others are not, and should be.”


Dave Palermo is an award-winning writer, editor and media consultant. He can be reached at dgpalermo@aol.com.