Information, Insight and analysis for the business of interactive gaming IN NORTH AMERICA
iGaming Business
north america issue 01 MAY 2012
iGaming Business north america | issue 01 | MAY 2012
Shuffling the Deck
Shuffle Master CEO Gavin Isaacs on the iGaming opportunity
Plus: Michael Jones takes Illinois Lottery Online Senator Lesniak on Saving Atlantic City State-by-State iGaming Update Mark Lipparelli and Nevada’s 2012 iGaming Vision
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Contents Editor’s Letter Welcome to the first edition of iGaming Business North America. Being from Connecticut, but having published iGaming Business magazine from our London office for the last decade, I am personally delighted to launch a new title designed for my home country, and I’m excited to do so at the beginning of what is surely going to develop into a major segment of the larger gaming industry in the United States and Canada. I would like to thank all of our section editors for their support in producing this magazine and in providing many of the ideas and inspirations that have ultimately resulted in the magazine you are now holding. I hope you enjoy this first issue of iGaming Business North America, and I wish you success in whatever part you have chosen to play in the birth of the regulated North American iGaming industry. Michael Caselli, Editor in Chief
04 08 10 12 14 18 20 22 24 26 28 32 34 36 38 39 40 42 44 46 48 54 58 62 64 66 70 72 78 80 82
Editor Profiles Events Calendar US News International News The State of the Union – State Updates on iGaming Progress Professor Nelson Rose on the Third Wave of Legal Gambling iGaming and the Iowa Legislature 2012 California: The Golden State of Affairs Senator Raymond Lesniak on iGaming in New Jersey Regulating Online and Offline Gaming GLI-19: the Global Online Gaming Technical Standard Taxation: Turnover or Gross Profits? Building iGaming Technology Interview: Travis Foley on Nevada’s Technical Standards Ipsos Survey into the Consumer Appetite for iGaming Operations and Marketing New Frontiers, New Opportunities Full Tilt Poker: Bringing Down the House Brokering Deals with European iGaming Entities Building Liquidity in a Limited Pool Shuffling the Deck: Shuffle Master CEO, Gavin Isaacs Interview: Michael Jones, Superintendant of the Illinois Lottery Bridging the Great Divide: John Connelly, Bally Technologies Indian Gaming and the Digital World Internet Protocol: Anshu Kalhan, Foxwoods Development Company The DoJ Opinion and the Indian Gaming Opportunity Interview: Mark Lipparelli, Chairman, Nevada Gaming Control Board Business and Finance: the iGaming Index The Progress of US iGaming Regulation Key Performance Indicators and Industry Reporting iGB Data Center
Managing Editor: Michael Caselli, michaelc@igamingbusiness.com
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iGamingBusiness North America | Issue 01 | May 2012 | 3
Editor Profiles
Editor in Chief: Michael Caselli
Management and Marketing: David Briggs
Michael Caselli is considered one of the world’s leading experts
David Briggs is an experienced figure in the iGaming industry,
on online gaming. During his 16-year career in the iGaming industry, he has
having joined Ladbrokes in 1999 to head its fledgling online division and going
founded and served as the editor of seven iGaming publications, chaired dozens
on to become Managing Director of Ladbrokes eGaming where he ran its online
of international iGaming conferences and regularly appears on international news
Sportsbook, Casino, Poker, Bingo, Financial Fixed Odds and Games businesses
programs including CNBC, MSNBC and the BBC as an expert in the field.
worldwide; covering Internet, mobile, and cable, satellite and WebTV interactive
Editor: James McKeown
platforms. In 2007, David formed his own consultancy company, OrchidSports, to assist established and start-up betting and gaming businesses leverage the
James McKeown is Editor of iGaming Business and its sister
opportunities that the Internet brings. David has over 13 years of board level
journal, iGB Affiliate. Since 2006, James has overseen the
experience in the regulated gaming sector and has worked at the highest levels in
development of iGaming Business into an award winning publication and was
the UK, Europe, Asia and North America. David is also Chairman for GeoComply,
responsible for the launch of the company’s annual European Legal Gaming
the Geopositioning solutions provider for the Internet gaming industry.
Outlook. He was formerly Editor of consumer title Gambling.com and prior
Business and Finance: Melissa Blau
to entering the iGaming industry worked in Financial Services Corporate Communications with MBNA credit card bank.
Law and Legislation: Professor I Nelson Rose Professor Rose is recognized as one of the world’s leading
Melissa Blau has been in the Media, Technology and Finance sectors for 20 years. She is currently an advisor for the online gaming industry bridging US and European interests as well as a financial advisor working in conjunction with Akur partners providing M&A advisory
experts on gambling law, and is a consultant and expert witness for governments
for online gaming companies. In addition, she is currently the Business
and industry. His latest books, Internet Gaming Law (1st and 2nd editions),
and Finance Editor and regular columnist for iGaming Business Magazine.
Blackjack and the Law and Gaming Law: Cases and Materials, are available
Historically, her roles in online gaming included CFO of St Minver (acquired
through his website, www.GamblingAndTheLaw.com. Gambling
by GTECH), Online Advisor for Global Leisure Partners, CEO Europa
and the Law® is a registered trademark of Professor I. Nelson Rose.
Point Group (BetUK, Betrepublic, Betasia) and Director of CasinoTV.
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EVENTS CALENDAR Canadian Gaming Summit 2012 Niagra Falls, Ontario
MediaEDGE www.canadiangamingsummit.com/2012 June 11 – 13 Chris Torry christ@mediaedge.ca
Gaming Technology Summit Las Vegas, Nevada
BNP Media www.gametechsummit.com June 11 – 13 John Guzzarde guzzardej@bnpmedia.com
8 | iGamingBusiness North America | Issue 01 | May 2012
iGaming Super Show Dublin, Ireland
World Gaming Executive Summit
iGaming Business www.igamingsupershow.com May 22 – 25 Alex Pratt alex@igamingbusiness.com
Barcelona, Spain
North American Gaming Regulators Association Annual Conference
SAGSE Gaming Panama
Austin, Texas NAGRA www.nagra.org June 25 – 29
Terrapin hwww.terrapinn.com/2012/wges/ July 10 – 12 Jonathan Whelan jonathan.whelan@terrapinn.com
Panama City, Panama Monografie www.sagsepanama.com/ June 27 – 28 Alan Burak info@monografie.com
News
NFL Opens to Gambling Adverts The National Football League (NFL) is hoping to get a share of the nation’s $35 billion-a-year commercial casino industry by changing the rules governing the types of advertisements that can be broadcast and displayed. According to various reports, the owners of the NFL’s 32 teams passed a resolution that will permit them to display billboards for gambling venues inside their stadiums from the fall, alongside such advertisements in programs and on radio broadcasts. Teams in the NFL have been able to display advertisements for dog and horseracing tracks since 1993 alongside those for municipal lotteries and off-track betting organizations provided that these do not offer wagers based on actual sporting events. These rules were modified three years ago
AGA Marks “Black Friday” Anniversary The American Gaming Association (AGA) has marked the one-year anniversary of “Black Friday” by calling on Congress to pass legislation to eliminate illegal online gambling. The AGA has called for Congress to set up a wide-reaching federal framework for the regulation and taxation of online gaming and has sustained this appeal in reaction to December’s clarification from the Department of Justice that the Wire Act of 1961 only applies to sportsbetting. “On Friday, April 15, 2011, the FBI shut down the websites of Full Tilt Poker, PokerStars and Absolute Poker charging the companies and several of their executives with money laundering and bank fraud,” read the statement authored by Frank Fahrenkopf, President and Chief Executive Officer for the AGA. “Yet, in spite of Department of Justice action against several other illegal Internet
gambling companies in the year since Black Friday, hundreds of illegal offshore Internet sites are still operating. “As long as these sites are operating outside the reach of US law enforcement and with little to no regulation, the millions of Americans who continue to patronize them will be at risk of being defrauded. After a year of Congressional inaction, the fact remains; until the US changes existing laws to ensure that only licensed, taxed and highly regulated companies can operate in the US, it is certain that illegal activities will go largely unchecked. “In order to correct this situation, Congress needs to adopt changes that modernize and strengthen the Wire Act of 1961 with conforming amendments to the Unlawful Internet Gambling Enforcement Act (UIGEA) that would unambiguously eliminate illegal Internet gambling.”
allowing franchises to partner with state-run scratch card lotteries while clubs have been permitted to accept advertising for the city of Las Vegas since 2010 provided that the adverts
New York Judge Accepts John Campos Plea
do not refer to or depict gambling or casinos. However, advertisements for particular games such as slots or blackjack alongside promotions for individual tournaments are still to be forbidden. In addition, casinos may not use team logos in their advertisements and are prohibited from sponsoring individual teams, stadiums or seating sections while those venues offering a sportsbook have been completely excluded from advertising.
10 | iGamingBusiness North America | Issue 01 | May 2012
The misdemeanor guilty plea finalized in late March by “Black Friday”defendant, John Campos, has been accepted by Judge Lewis Kaplan of the United States District Court for the Southern District of New York (SDNY) following advice from federal prosecutors. According to Utah television station KCSG, Campos originally agreed to the plea on March 27 but this was immediately questioned by Kaplan because the former Vice-Chairman for SunFirst Bank had originally been charged with five felonies relating to his alleged involvement in illegal payment processing activities. However, prosecuting US Attorneys Preet Bharara, Arlo Devlin-Brown and Andrew Goldstein subsequently wrote a letter to Kaplan asking the Judge to accept Campos’ plea as his involvement had
been “relatively minor” compared to the other suspects charged in the Black Friday indictments. The trio also revealed that the sentencing and punishment guidelines for the single misdemeanor charge are similar to those for the felony charges. Campos was charged in SDNY’s 51-page and nine-count federal indictment unsealed in April of last year after he allegedly agreed to process gambling transactions tied to online gambling in return for co-defendant Chad Elie and an associate agreeing to invest ten million dollars and obtain a 30 percent stake in his SunFirst Bank. As part of the deal, Campos has agreed to a lifetime ban from the banking industry and could now receive a sentence of up to six months in prison when he next goes before Kaplan on June 27.
News
Jeff Burge Joins Cantor Gaming Management Team Cantor Gaming has appointed Jeff Burge to serve as its new Chief Financial Officer and Chief Operating Officer. Burge has joined Cantor Gaming from The Cosmopolitan of Las Vegas resort casino and hotel where he has worked as Chief Financial Officer since 2009 and replaces Coreen Sawdon, who resigned in order to “pursue other interests”. Las Vegas-based Cantor Gaming stated that Burge served as Finance Vice-President for Las Vegas Sands
Corporation’s Palazzo and Venetian properties from 2007 to 2009 and will now be responsible for the strategic management of its accounting and finance operations. “We are pleased to welcome Jeff to our management team,” said Lee Amaitis, President and Chief Executive Officer for Cantor Gaming. “We are confident that his extensive financial knowledge and deep industry expertise will be beneficial to our business as we seek continued opportunities for growth.”
Federal Bill Seeks to Overturn Ban on Sportsbetting Two Congressmen from New Jersey have penned a letter asking for the support of their fellow representatives on measures that could see sportsbetting expand across the nation. Democrat Frank Pallone and Republican Frank LoBiondo are both long-serving members of the United States House of Representatives and declared that they are working together in a bipartisan effort designed to gather support for separately proposed legislation for the expansion of sportsbetting. LoBiondo represents New Jersey’s Second Congressional District, which includes the resort of Atlantic City, and his House Resolution 3797 would allow states to decide
GTECH G2 Expands Canadian Online Poker Presence
on an individual basis whether to legalize sportsbetting. Pallone is the representative for New Jersey’s Sixth Congressional District
GTECH G2 has announced it will be supporting the British Columbia Lottery Corporation (BCLC) in its recently announced online gambling partnership with the Manitoba Lotteries Corporation. The minister responsible for lotteries in Manitoba, Steve Ashton, announced plans in April that will see the Manitoba Lotteries Corporation partner with the BCLC to bring regulated online gaming to the western Canadian province in the hope of earning up to $17 million a year by 2018. The arrangement could see the Manitoba Lotteries Corporation premiere an online casino and poker offering regulated by the Manitoba Gaming Control Commission as early as next year and the new enterprise is now set to join the Canadian Poker Network from GTECH G2 via its arrangement with the BCLC. “Manitoba Lotteries Corporation joining the Canadian Poker Network through its partnership with the British Columbia Lottery Corporation is a very exciting development for GTECH G2,” said William
Scott, Vice-President for GTECH G2. “We have seen the Canadian Poker Network increase in scale since launching in December of 2010 and its continued growth will help generate greater player numbers and larger tournaments.” GTECH G2 is the interactive subsidiary of American gaming technology and services firm GTECH Corporation and stated that it already provides its poker solution to the BCLC and fellow operator Loto-Quebec, with the pair offering Canadian players over 40,000 legalized regulated online poker tournaments last year alone. “GTECH G2 provides a world-class poker solution and has a strong reputation in regulated markets,” said Rhonda Garvey, iGaming Vice-President for the British Columbia Lottery Corporation. “The experience of GTECH G2 in both Canada and around the world in running successful poker networks has been fundamental to our success and continued growth.”
and his House Resolution 3081 would exempt New Jersey from the current Professional and Amateur Sports Protection Act (PASPA) prohibition of 1992 and permit it to offer online sportsbetting within its borders. “New Jersey has been clear about its intent to host sportsbetting,” said LoBiondo. “Legalizing sportsbetting would strengthen Atlantic City in the face of stiff competition, giving it an additional edge to attract visitors and critical tourism dollars. I appreciate Congressman Pallone’s partnership in gathering support for our effort to bring sportsbetting to our state.” The pair pointed to November’s state-wide ballot referendum on allowing sportsbetting at casinos and racetracks, which was supported by a margin of two-to-one, and stated that both bills could see New Jersey benefit to the tune of “billions” of dollars. “Sportsbetting is widely supported in the state of New Jersey but Federal law stands in the way of considerable revenues that will undoubtedly benefit the state,” said Pallone.
iGamingBusiness North America | Issue 01 | May 2012 | 11
International News
EUROPEAN GAMING UPDATE Stephen Ketteley, a leading UK iGaming attorney, highlights key European regulatory developments, which may serve as lessons for US legislators. EUROPE: harmonization to come? Following on from the European Commission’s (the “Commission”) publication of its report last year – which sought the industry’s views on how gaming regulation should evolve to meet the needs of the consumer within the European market – the Commission has confirmed it will issue an “action plan” this summer which, we are informed, will lead to draft legislation shortly thereafter, all to introduce an element of iGaming standardization across the EU. The Commission recognizes that harmonization, is needed in areas such as consumer protection, anti-money laundering/fraud protection, integrity in sport and multi-jurisdictional enforcement. However, the Commission also recognizes the on-going debate around the compatibility of certain Member States’ laws with European Union freedom of movement principles and acknowledges that, in order to proceed with any pan-European enforcement cooperation against the “black market”, Member States must operate regimes that are compliant with their wider EU obligations.
12 | iGamingBusiness North America | Issue 01 | May 2012
UK: all change, please A few years ago, the UK was considered to be a progressive jurisdiction for regulating online gambling. Yet, it chose to do so in a such a way that it would not necessarily require operators who transact with UK citizens to pay any form of tax in the UK (unless they located certain equipment here which would, itself, create a licensing obligation). While many European markets have sought to enact legislation which taxes on a “point of consumption” basis, such that the taxes are payable where the player is actually located. The UK has now chosen to change its position and will tax at the point of consumption like its European neighbour. The wheels have definitely began turning on this with a consultation document published by the Treasury on April 5, which seeks the industry’s views on the way such an additional tax burden should operate. Such taxes will become payable as of December 2014 and this will have a major impact on a number of operators and suppliers who, hitherto, have taken significant business from UK players from the shelter of either tax-free jurisdictions. The government’s intentions are clear and the additional tax burden is now inevitable, but the industry is encouraged to engage in the consultation process in a coordinated way to ensure that the government is aware of the consequences of the changes and how they will impact business.
SPAIN: almost there… As another of the major European markets to recently introduce online gambling regulation, Spain has been the focus of attention for many operators and their suppliers as they prepared themselves for implementation. As applicants beavered away in the fall to ensure that they hit the December deadline for the lodging of applications, it became clear that the regulatory body simply did not have enough time and manpower to process applications in the prescribed period and, as such, the opening of the market was postponed. “.com” operators have been granted an amnesty until June 30 allowing them to continue to trade and advertise in the Spanish market and it had been envisaged that by the end of March, licenses would be granted and the regime considered open. However, continued delays including the resignation of a key individual at the regulatory body in late March, has delayed things further. It is envisaged that May will be the go-live date. Any operators who did not hit the original deadline of December 14 for lodging of applications will have to wait for a new round of applications. Once the system does go live, Spain will become a fundamental regulated market for a number of operators and their suppliers.
International News
GERMANY: the uncertainty continues As the largest European market yet to regulate online gambling, Germany has been the focus of the industry for some time, not least due to its significant contribution to the financial performance of many of the largest operations and their suppliers. Various rounds of discussions between Germany and the European Commission have resulted in the Commission sending a letter, dated March 21, in which it expressed reservations about Germany’s proposed regulations. The draft law limits the number of sportsbetting licenses (to 20) in an apparently arbitrary way, which is then coupled with a tax rate deemed so high as to act as an economic barrier to entry for some operators. The blanket exclusion of online casino and poker also raises related issues. In effect, the Commission has warned Germany that the passage of the legislation, as currently drafted, could lead to eventual infringement proceedings being bought against Germany. At the time of writing, clear statements have been made that the law will be passed and come into effect on July 1, 2012. However, in the interim, the implementation of a regional law, in Schleswig-Holstein (a northern region of Germany), will test the ability for the holder of a regional license to supply throughout Germany. The uncertainty in the Germany market, therefore, continues and the risk-aware online gambling operators will continue to exploit such uncertainty.
ITALY: continuing to adapt Probably the most developed of all “onshore” iGaming regulatory environments, the Italian market has rapidly developed to encompass almost all product types historically made available by operators on their “.com” sites and has, by all accounts, been very successful over a number of years. Economic pressures have led to difficulties in the Italian market, as in all markets, which has led the government to re-assess some of the restrictions placed upon bookmakers. Whilst players are able to wager on a whole host of events and markets on offshore gambling sites, Italy had been relatively restrictive on the events and markets that bookmakers can make available to their players. This is set to change with the recent notification by the Italian government to the European Commission of their proposal to significantly extend the event portfolio. The Commission now has to consider the draft regulations and respond.
iGamingBusiness North America | Issue 01 | May 2012 | 13
Law and Legislation
State of the Union Since the US Department of Justice defined its position on the scope of the 1961 Wire Act, conceding that it only reserved jurisdiction over sportsbetting, there has been a hive of state activity with regards to the adoption of online lotteries and iGaming models, with Illinois, Nevada and New Jersey arguably leading the way in 2012. Here, we provide a snapshot of current activity within a selection of states that have been visible in their attempts to expand, or restrict iGaming. A re-emerging market? It is perhaps inaccurate to refer to the United States as a “re-emerging” market. The one thing that the various state regulatory frameworks currently being assembled will not permit is a return to the days when America was the most lucrative but greyest market in the world. Regulation and legalization will not play catalyst to the re-emergence of anything; this is very much the emergence of a new marketplace. The signs would suggest that the landscape in the US will emerge much like it has in Europe, with states engaging their own formulas in the legalization of state-wide Internet gaming, be it poker, lottery or other. In time, we may see some forms of inter-state alliances, where neighboring states partner up to pool liquidity on networked customers; with some states already factoring such potential into provisional legislation. But for now, the states of America will be united in their attempts to set-up iGaming systems on an intra-state basis and to this end, we’ve provided a graphical breakdown of current state-level progress in the “New West”. Additional information courtesy of Frank Catania (Catania Gaming Consultants, New Jersey), Matt Eide (Eide & Heisinger, Iowa), Rachel Hirsch (Ifrah PLLC, Washington DC), Karl Rutledge (Lewis and Roca LLP, Nevada), Marc Dunbar (Pennington, Moore, Wilkinson, Bell and Dunbar Attorneys at Law, Florida) and Martin Owens (Trade Attorney, California).
California A new bill, co-authored by Senator Roderick Wright and Senator Darrell Steinberg, has come into play. Much is being made of the influence of Senator Steinberg, with some citing that his involvement will ensure the bill is given a fair hearing. However, doubters will point to the 2012 elections as a likely stumbling block for any further progress. Active poker bill SB1463: Poker Only “Authorizes the operation of legal and regulated play (wagering) of Intrastate Internet Poker (I-poker), a Class II non-banked game, within the physical boundaries of the State of California that is consistent and compliant with federal Internet gambling laws. “For the purpose of getting this process “off the ground”, initially, the law will authorize “poker-only” and all derivations thereof (including tournaments) as the games legally allowed to be played via the Internet in California.” Likelihood of progress for intra-state iGaming in 2012: The best it’s looked in years. Especially hopeful is the addition of the hugely influential California Sen. Darrell Steinberg, president pro tem and co-author with Sen. Rod Wright. Governor’s stance on iGaming: Gov. Brown is officially neutral. Political supporters: The biggest single bloc in favor of Internet gambling are the 91 licensed card rooms located in California towns and cities. Lottery’s stance on iGaming: The California state lottery has been effectively excluded from participation. Status and influence of Tribal Gaming: Initially against Internet gambling, in the belief that it would poach their existing customer base, Today most Californian Tribes have been won over to the view that Internet and interactive gambling is the future, and they cannot afford to ignore it. Number of iGaming bills that died in past sessions: One per year since 2008.
14 | iGamingBusiness North America | Issue 01 | May 2012
Law and Legislation
Iowa Iowa has been ‘to-ing and fro-ing’ over the passage of iGaming legislature in recent sessions but underwent significant progress in March, when its Senate approved a bill, via a bipartisan 29-20 vote, that would permit online poker. There is also a bill active in the House but it is thought unlikely that there will be any movement in progressing this further.
Political supporters: House bill is supported by the IGA, the association for Iowa’s 18 land-based casinos. Prairie Meadows has also registered ‘for’ the bill. The Senate bill is being supported US Digital Gaming, Caesars, Prairie Meadows, and two other Iowa casinos.
ikelihood of progress for intra-state iGaming in 2012: Unlikely. L Elections will play a role in whether iGaming advances during the 2013 legislative session. The Democrats currently hold the Senate 26-24. The Republicans control the House 60-40. Should the Republicans gain control of the Senate in November, the likelihood of iGaming legislation advancing will decrease.
Status and Influence of Tribal Gaming: Tribes have been involved in Senate process. Have not indicated opposition.
overnor’s stance on iGaming: Neutral. Staff has said he will G keep an open mind and review the bill when it reaches his desk.
Lottery’s stance on iGaming: Will remain neutral and will not be involved in managing any iGaming program.
umber of iGaming bills currently active: One in House; N one in Senate. umber of iGaming Bills that died in past sessions: N Bill authorizing an iGaming study passed in 2011.
District of Columbia If ever there was an example of politics’ influence on the progress of iGaming in the US, then it came via the District of Columbia Council’s decision to overturn a law that would have seen the DC Lottery offer iGaming services to district residents. The 10-2 vote has halted progress on what would have been the US’ pioneering regulatory program, and has dampened any possible progress for the remainder of the year. Likelihood of progress for intra-state iGaming in 2012: Certainly possible Governor’s stance on iGaming: The Mayor was initially in favor of iGaming, but decided the bill as it stood was not
Florida Often seen as one of the likeliest states to build regulation for online gaming, Florida has now taken a back seat on the matter having seen various attempts, more recently by Rep Joe Abruzzo, fail to garner sufficient support and die in session. There remains political support, from Abruzzo and from Senator Miguel Diaz de la Portilla, but with the Governor generally uncomfortable with increasing the state’s reliance on gaming revenues in the budget and the lottery opposed to iGaming, there is no room for maneuver in 2012.
workable. A spokesperson has said he “is not necessarily opposed” to new legislation Political supporters: City Council Member Michael Brown is the strongest supporter. Support has been shown by other members of the City Council and the Mayor has said that he is not necessarily opposed to new legislation authorizing Internet gaming. Lottery’s stance on iGaming: The DC Lottery was going to run the city’s online poker program Number of iGaming bills currently active: 0 Number of iGaming bills that died in past sessions: 1, repealed in February
increasing the state’s reliance on gaming revenues in the state budget Political supporters: Rep. Joe Abruzzo, Sen. Miguel Diaz de la Portilla Lottery’s stance on iGaming: Opposed
Likelihood of progress for intra-state iGaming in 2012: Nil
Status andinfluence of Tribal Gaming: Seminole Tribe of Florida gaming compact contains a contingency in the event that Internet gaming is authorized. The contingency potentially reduces payments to the State of Florida depending on the impact of legalized Internet gaming on the gross gaming revenues of the tribe. Number of iGaming bills currently active: 0
Governor’s stance on iGaming: No position, but generally opposes
Number of iGaming Bills that died in past sessions: 2 iGamingBusiness North America | Issue 01 | May 2012 | 15
Law and Legislation
state of the union Illinois Illinois has become the first state in the US to sell lottery tickets online. The Governor, Pat Quinn, has been relatively tight lipped on the matter of expansion but hasn’t ruled it out.
Nevada According to Nevada Gaming Control Board Chairman, Mark Lipparelli, licensees in Nevada could be online by the fall. The legislation covers intra-state online poker only, but is also built to regulate inter-state gaming should federal law permit it. This is the state with the most advanced regulatory platform having already passed legislation in the last session, and has witnessed a raft of joint ventures and partnerships between land-based assets and online (MGM, Boyd and bwin.party, for example). Mark Lipparelli, Chairman of the Nevada Gaming Control Commission, told iGaming Business North America: “The process from here will be that license applications will start appearing on our public agendas in May or June. For the successful applicants, when those licenses are issued, the last step in the process will be the technical evaluation of the systems, which we can expect to take place in late spring/early summer. If someone (an applicant) was thoughtful about their approach and had their systems reviewed by test labs in the past it’s plausible, even likely, that you’ll see the first set of systems approved for operation by the fall. So there are Nevada licensees that would be potentially in operation by late fall and certainly by the late winter of 2012 or early part of 2013.”
Utah In a complete break from the growing trend across America, Utah’s regulatory progress has come in the form of House Bill 108, which seeks to ban state residents from all forms of online gambling. Governor Gary Herbert signed the bill into law in March, which could see it stand alone as the sole US state prohibiting any forms of gambling (Hawaii, the only other state currently without any form of gaming, is considering iGaming legalization).
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Mississippi House Bill 1373 (Mississippi Lawful Internet Gaming Act of 2012), introduced by Rep Bobby Moak, would have legalized and regulated online gaming within the state, but died in session in March. It is unclear whether Moak will re-gather a revised version of the bill in the future.
Law and Legislation
Connecticut According to reports, the state has no plans to introduce intra-state legislation in the foreseeable future after meetings between State Representative, Steve Dargan and Governor Dannel Malloy. However, local tribal gaming interests are keen to embrace online gaming on either an intra or inter-state basis.
In his own words... Iowa Senator, Jeff Danielson “Theoretically, it would be best for everybody if there was a federal law. That way, there would be
New Jersey
a clear standard and the states could then
Having been just a Governor’s signature away from being the “Silicon Valley” of US iGaming, New Jersey is again pressing to get back in the race it once spearheaded. A revised version of the bill co-authored by Senator Ray Lesniak and vetoed by Governor Chris Christie has found approval with the state Senate committee and will now (at the time of press) progress to a full Senate and Assembly vote. Despite having vetoed the original bill, Governor Christie has emphasized his support for New Jersey to be an ‘epicenter’ of online gaming, his concerns lying with ‘how’ any legislation is brought to fruition. New Jersey’s iGaming bill would allow all forms of gaming available in casinos to be offered online.
So, theoretically, I would support a federal
Number of iGaming bills currently active: Senator Lesniak’s legislation is the only serious contender
“Certainly, (federal regulation) would be
Governor’s stance on iGaming: In favor, however, he may require voter approval in the form of a referendum
But, absent of that, at the state level, we’re
Political supporters: Senator Ray Lesniak plus a number of legislators from both side of the aisle Lottery’s stance on iGaming: None
begin to implement whatever that would be. law relative to online gaming. However, I don’t think we’re going to get one. At present, Congress is in gridlock – they are unable to do some of the most basic functions, such as focusing on their budget. “I believe the states have the right to regulate gaming and I believe the history of gaming in the United States bears that out – virtually no bill has originated in Congress related to gaming. It has always started at the state level and grown across the country. So, I’m not holding my breath waiting for Congress to act on this and I don’t think anybody else should either.
more efficient from a business perspective and also from a regulatory perspective. willing to boldly experiment as James Madison gave us permission to do when the country was founded. States will look at areas where their own gaming policies might fit with an online environment, but I think you’ll see standards become
Delaware
more similar over time.
Delaware Governor, Jack Markell, has unveiled an “Expansion Plan” that calls for the state to follow Illinois’ lead and sell lottery tickets over the Internet and also to consider allowing the state’s three racetrack casinos to offer online casino games such as poker, blackjack and slots.
“Eventually you may see something from Congress that consolidates all of the lessons learnt. But, for those in the states currently dealing with the millions of dollars leaving our own borders, we believe that’s enough of a problem that we’d like to act now and not wait for Congress.”
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Law and Legislation
The Third Wave of Legal Gambling The United States is about to join Canada and Europe on the greatest expansion of legal gambling since New Hampshire rediscovered the state lottery. But this time, it is going to be online, says iGaming Business North America’s Legal Editor, Professor I Nelson Rose. We are in the middle of what I call the Third Wave of legal gambling. This is the third time that legal gaming has swept across both Canada and the US. The First Wave started before either country existed. Lotteries in England helped finance the first settlements. In the colonies, government approved and private lotteries were actively encouraged. But great scandals – mostly privately run lotteries where the operators absconded with the loot – led to lotteries being banned by most state and provincial constitutions. The Second Wave began with the opening of the Western frontier, where gambling was tolerated, and often expressly authorized. The Civil War devastated the South, and legal gambling is seen as a painless tax. But by the 1890s, scandals and a reawakened morality once again led to a crackdown. The Louisiana Lottery, ‘The Serpent’, led to the first strong US federal anti-lottery laws. By the turn of the 20th Century, all state lotteries had been shut down. Casinos and racetracks soon followed. Even Nevada outlawed casino gambling in 1909. The Third Wave started with the Depression. In 1931, Nevada re-legalized casinos. Every year since, there has been an expansion of legal gambling. Racetracks reopened in the 1930s; low-stakes charity bingo spread in the 1940s; social games in the 1950s. Then, in 1963, New Hampshire
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Legislature authorized the first state lottery of the century, labeled a ‘Sweepstakes’ and tied to horse races to avoid 70 year-old federal anti-lottery statutes.
Federal laws US federal laws are designed to help the states enforce their public policies toward gambling. The federal anti-lottery laws were enacted in the 1890s to help states like New York keep out The Serpent. But the prohibitions were so great that states had to ask for exemptions once they started running their own state lotteries. In 1961, Congress enacted the Wire Act, designed to cut “The Wire”; the telegraph that illegal bookies used to get the results of horse races before their patrons. Betting on horse races is obviously legal in many states, so, like the federal anti-lottery statutes, the Wire Act applied to state-legal gambling that crossed state lines. As with state lotteries, when states started authorizing remote wagering on horse races, the federal laws had to be changed. Congress first enacted an Inter-state Horseracing Act. In December 2000, it amended that Act to expressly allow states to decide for themselves whether they would let their residents bet on races by phone and computer. There is only one other federal statute that could apply to state-legal gambling. When
the State Lotteries of Delaware and Oregon began taking bets on National Football League (NFL) games, Congress passed the Professional and Amateur Sports Protection Act (PASPA), preventing new stateauthorized sportsbetting. The history of the Unlawful Internet Gambling Enforcement Act (UIGEA) is well known: a failing politician, Bill Frist (R.-TN), used his position as Majority Leader of the US Senate to ram through a bill that he hoped would boost his chances to become President. This was in October 2006. The largest publicly traded company taking online bets from the US, PartyGaming, home of PartyPoker, believed that the UIGEA made its activities illegal. The announcement that it was cutting off its major customer base resulted in a 60 percent drop in the price of the company’s stock. Other publicly traded online gaming operators were hit just as hard: the UIGEA was like a terrorist attack, instantly wiping out more than $7 billion on the London Stock Exchange. The UIGEA did not actually change any substantive state or federal antigambling laws. It did create a new federal crime, but only for operators who were already violating American anti-gambling laws. And it called for new regulations on payment processors. Those regulations actually turned out to be quite useful for legal businesses, such as skill games, fantasy sports, free alternative means of entry poker and pure intra-state gaming. The latter turned out to be the most important.
Law and Legislation
The DoJ Vs iGaming The federal Department of Justice (DoJ) has been waging a war of intimidation against all Internet gambling, but especially Internet poker. But the DoJ is missing the two essentials for a successful prosecution: a statute that clearly makes the activity illegal and a defendant who can be brought to trial in the US. For a statute, the DoJ has been relying upon the Wire Act. Using a law designed for telegraph wires on horse races against Internet poker is like using stone tools to perform brain surgery: it might work, but it is awfully messy. The DoJ took the position that the Wire Act covered all forms of gambling, even state-legal gaming, so long
processors. The UIGEA would allow that, since the customer and operator were in the same state. But the DoJ’s interpretation of the Wire Act would not. In early 2011, state-legal Internet gambling looked like it was going to explode, despite the DoJ and the Wire Act. Caesars Entertainment received permission from Nevada gaming regulators to team up with 888, which had taken poker bets from the US. The District of Columbia legalized Internet poker and other games. So, Harry Reid (D.-NV), the majority leader of the US Senate, and Jon Kyl (R.-AZ) the minority whip, wrote to the DoJ, asking it to reaffirm its position that the Wire Act made everything illegal.
“ The UIGEA was like a terrorist attack, instantly wiping out more than $7 billion on the London Stock Exchange.” as a wire crosses even temporarily into another state. But courts, including a federal Court of Appeal hearing consolidated class actions brought by losing players against MasterCard, ruled that the Wire Act applies only to sports events. And now a new federal statute, the UIGEA, expressly stated that intra-state online gambling is legal under that statute, even if wires cross temporarily into other states. After the MasterCard decision, Nevada and the American Virgin Islands passed legislation to allow Internet casinos. Nevada regulators went so far as to begin holding hearings. But the DoJ wrote them letters, threatening to arrest any licensee who took a bet online. At least six states began taking orders for subscription tickets for their state lotteries online. Illinois and New York asked the DoJ whether they could use out of state payment
Two days before Christmas, the DoJ issued a formal announcement that it was reversing its position on the Wire Act. To reconcile the apparent conflict with the UIGEA, prosecutors would, from now on, limit the Wire Act to sports bets. It would, therefore, not be a problem for state lotteries to use out-of-state payment processors. The DoJ had to also know that this reversal meant Reid and Kyl got their answer: there is no federal law preventing any state from authorizing almost any form of intrastate gambling. PASPA still prevents new sportsbetting, but that is being challenged in the courts by New Jersey. The gambling must be legal under state law. On April 15, 2011 (the so-called Black Friday), the DoJ announced the indictment of the principals of the five largest poker sites then taking real money bets from America. But the Wire Act was never mentioned.
Instead, the UIGEA and federal organized crime charges were based on violations of New York state anti-gambling laws. Once a state decides to legalize Internet gambling, there is almost no limit to what it can do. Small states should be able to compact together to create player pools in the millions. Even without a compact, a state could authorize its licensees to accept bets from foreign nations where the betting is legal, such as England. In March, the Illinois Lottery starting selling individual tickets online: more than $1.14 million the first week. Every lottery is now looking to see whether it can join the three Canadian Lotteries that are already operating Internet poker games. More than half the states allow at-home betting on races. Nevada has two online sports operators, one accepting credit cards, and will start issuing its first Internet poker licenses this summer. Land-based operators are paying outrageous amounts for Internet expertise, while social gaming companies, like Zynga, are openly saying they want to join. The question is no longer whether Internet gambling will be made legal, or even when. The question is, ‘who is going to ride the Third Wave?’
© 2012, I Nelson Rose. Professor Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry. His latest books, INTERNET GAMING LAW (1st and 2nd editions), BLACKJACK AND THE LAW and GAMING LAW: CASES AND MATERIALS, are available through his website, www.GAMBLINGANDTHELAW. com. © Copyright 2012, I Nelson Rose, Encino, California. All rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, www.GAMBLINGANDTHELAW.com.
iGamingBusiness North America | Issue 01 | May 2012 | 19
Law and Legislation
iGaming and the Iowa Legislature 2012 There have been two bills under consideration by the Iowa Legislature in 2012, with the likeliest candidate, Senate bill SF 2275 (introduced by Senator Jeff Danielson [D-Cedar Falls]), having passed trough the Iowa Senate in March. The Democrat-controlled Iowa Senate passed a significant iGaming bill with bipartisan support on March 13, 2012. The final vote was 29-20. The Republican-controlled Iowa House did not take up the Senate bill nor did it move a separate House iGaming bill that was introduced by a Republican committee chair. Governor Branstad (R) remained neutral on both bills. Our focus will be on the Senate bill, SF 2275.
The Senate bill SF 2275 authorized current Iowa gaming licensees to apply for an Internet wagering license. Internet wagering was defined as a method of wagering that allows a person to establish an account, deposit money in the account, and use the balance for online wagering. The bill’s sponsor (Senator Danielson) said that he envisioned people needing to initially sign-up and make a deposit “in-person” at an Iowa casino that was offering Internet wagering. Future transactions could then be done over the Internet. The bill limited online gaming to Internet poker only. This was defined to include all types of poker, including “…Texas Hold’em, Omaha Hold’em, draw poker, and stud poker.”
Who was supporting Iowa’s iGaming effort? In support were Caesars, US Digital Gaming, Isle of Capri, Prairie Meadows, Iowa Poker Network, Wild Rose Casino, Peninsula Gaming, Great River Entertainment, Grand
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Falls Casino and Riverside Casino. Scientific Games was registered as “undecided”. The bill opened up poker, in a limited manner, to non-Iowa residents. The bill states, “[a]n internet wager may be placed from any location within this state or from any other location where authorized by law, subject to any requirements adopted by the commission.” Much of the lobbying was undertaken by service providers. The bill provides a great deal of discretion regarding the licensing of service providers to Iowa’s gaming regulatory body, the Iowa Racing and Gaming Commission (IRGC). The bill does not limit the number of service providers who can be licensed. The bill states that potential licensees will apply for a license with a service provider. In other words, there must be an agreement between the Iowa casino wishing to offer Internet poker and the service provider prior to making application to the IRGC. “…the commission shall issue an internet wagering license to the licensee, following a review of the applicant and internet wagering service provider in the manner provided in this section…” The IRGC estimated adjusted gross receipts from Internet poker of between $13 million and $60 million annually. Like other forms of gaming in the state, this bill requires three percent of the adjusted gross receipts from Internet wagering to be distributed for educational, civic, public, charitable, patriotic or religious purposes.
The outlook Elections will play a role in whether iGaming advances during the 2013 legislative session. The Democrats currently hold the Senate 26 to 24. The Republicans control the House 60 to 40. Should the Republicans gain control of the Senate in November, the likelihood of iGaming legislation advancing will decrease. Based on this year’s Senate vote, I believe the regulation of Internet poker in Iowa has enough votes to pass both chambers regardless of which party is in control. However, I don’t see the issue being a priority issue for the Republicans. While there certainly is Republican support for this issue, making iGaming a “must do” bill for a possible Republican-controlled Legislature in 2013 is unlikely. The good news for iGaming advocates is that Iowa has a Governor with a history of supporting gaming legislation. Five-term Governor Branstad has consistently said he would review iGaming legislation once it passed both chambers. Branstad has a long history of supporting a variety of gaming bills. During previous terms, he signed into law legislation legalizing pari-mutuel wagering on horse and greyhound racing (1983), legislation creating a state lottery (1985), and, perhaps, most notably, legislation allowing gambling games on riverboats (1989). In 2011, Branstad signed into a law an omnibus horseracing bill that codified many priority issues for Iowa’s horseracing industry.
Matt Eide has been a lobbyist in Des Moines, Iowa, for nearly 20 years. He represents some of America’s best known companies including UPS, HP, Tyson, Alcoa, Lennox, and others. He has worked with the Iowa Racing and Gaming Commission on a variety of issues over the last 12 years. www.ialobbying.com.
Law and Legislation
california: The Golden State of Affairs While the prospects for legalization of Internet Poker in California remain uncertain, the terms for potential legislation are coming into sharper focus. Aside from Nevada and New Jersey who are authorizing intra-state iGaming, of the other states now considering Internet gambling regulation in some form, California may be the pick of the litter. Not only does California offer tremendous market potential, but also the realistic prospect of legalization. The market data is relatively straightforward. As a separate jurisdiction, California ranks as the eighth largest economy in the world. Its population is younger, more affluent and more connected than in other states. Poker is also an indigenous game with more licensed land-based poker tables than any other gaming market, 91 card rooms and over 60 tribal casinos.
Where once there were two, now there is one Last year, two bills were introduced in the California Senate to legalize Internet poker. Neither bill passed committee. The bill drafted by the Government Organization’s Committee Chair, Rod Wright, provided for a process of auctioning a limited number of licenses to operate poker “hubs”. The other bill was introduced by Senator Lou Correa, sponsored by the California Online Poker Association (COPA), an association of card rooms and tribes, principally made up of four Los Angeles card rooms and the Morongo Band of Mission Indians. In an article written for iGaming Business last year, I suggested: “Neither bill will
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make it to the Governor intact. There will be significant amendments, or a substitute. What is material is that there is now a negotiation going on in the capital over a few key questions.” Those questions are: (1) what games will be offered; (2) how many licenses will there be; (3) who can apply for them and under what terms, and (4) how out of state operators can participate. Over the last two years, Senator Wright and his committee staff invested a great deal of time learning about Internet poker business and regulation, met with interest groups, and promised to incorporate a number of changes into their next version of the bill. What has emerged this year is a single bill co-authored by Senator Wright and Senator President Pro Tem, Darrell Steinberg, the leader of the Senate. The bill reflects the changes Senator Wright discussed last year, and answers the four questions in the following way. The bill initially authorizes poker and poker tournaments. But after two years, the Attorney General could permit other non-banked games now allowed for land-based non-tribal gaming operators under the California laws, unless the Legislature, within 90 days, rejects any expansion of those type of games. The bill provides for the issuance of ten-year licenses to the entities now authorized to operate gambling in California; Card Clubs, Tribes with compacts, Horse Racing Associations, and Advance Deposit
Wagering (ADW) providers. These operators can partner together and apply for a license jointly should they desire. Those licensees may contract with other firms, for example for marketing, financing, and technology purposes; but no licensee may work with or use resources from any entity that accepted or offered Internet wagering to Californians after December 31, 2006, when UIGEA went into effect. Other key provisions include: • There is an up-front fee of between $1 million and $5 million for background and suitability reviews. • Licensees will pay monthly fees to the state equal to ten percent of gross revenue. There is a $30 million advance nonrefundable payment to the state applied to the first three years of license fees. • After three years, changes can be made in fees and other license terms. • Regulators can outsource software testing and certification. They can also make provisional findings of suitability based on other jurisdictions’ findings. • There is a uniform starting date of January 1, 2014. Interestingly, Senator Wright introduced a second bill to allow land-based entities to offer in-person sports wagering if not in conflict with federal law, but the federal questions have yet to be answered.
Politics While a couple of tribal groups initially fired warning shots across the bow that
Law and Legislation
they opposed the bill, it was greeted with restrained public silence from most interested parties as they digested its provisions. Discussions about how to amend the bill are proceeding quietly, but the coauthored version more than likely contains the framework of the final legislation with a few caveats. That is a good thing. By and large, the bill makes sound policy decisions. The bill provides for: • Substantial revenue to the state. • Healthy market competition. • Detailed background checks of owners and related persons to assure the integrity of gaming. • Consumer protection: fair and honest games, age and residency verification, identification of and monitoring of players to assist law enforcement, player funds segregated and kept in California, privacy and data protection. • Effective responsible gambling protections to educate patrons and provide problem gamblers with easy access to information and resources. • The bill does not impose artificial constraints on business operations or financing. That said, the chief roadblock remains that most California operators will oppose a bill unless it is solely for poker, with only the legislature having the power by affirmative vote to expand the games. There are many reasons for this but regardless, the political problems in trying to legalize games other than poker are substantial.
Beyond that, some operators are still trying to exclude other categories of operators, in particular racetracks and ADWs, but so far without success. COPA persists in seeking (indirectly) limits on the number of licenses by imposing business constraints, but has been unsuccessful. Indeed, the new bill declares that operators and suppliers are free to structure their own relationships.
in proportion as we know how they are made.” But that comparison might be unfair to the sausage. Sausage making involves accessibility, coherence, regularity, efficiency, comprehensibility and product. 1 More broadly, so long as some interested parties continue to try to use amendments to the bill to get a leg up on their competition or exclude competition entirely, they are likely to succeed only in damaging the prospects for
“ So long as some interested parties continue to try to use amendments to the bill to exclude competition, they are likely to succeed only in damaging the prospects for legalization as opposed to having it on their terms.” More likely, the changes to the bill will be instrumental: changes in licensing procedures, clarification of suitability requirements, amendments to implementation provisions, revision of the renegotiation of the license after three years, and changes on how fees are applied. In the end, these changes may make the bill better for everyone. We should start to see those bill amendments in May, with a legislative hearing shortly after. More likely than not, there will be more than one set of amendments.
Conclusion The American poet, John Godfrey Saxe, said: “Laws, like sausages, cease to inspire respect
1 Rosenthal, State Legislatures, September 2001, pages 12-15. Copyright 2001, National Conference of State Legislatures. The sausage quote is sometimes attributed to Otto Von Bismarck, but the honor belongs to Saxe.
legalization as opposed to having it on their terms. Maybe that is what they want. Regardless, as Saxe’s famous poem the “Blind men and the Elephant” teaches, even the wisest among us sometimes does not yet know what we are looking at. So while the legislative process and politics are fascinating, we all look forward to one day dining on the meal.
David Fried is a California based gambling lawyer, who represents land-based gambling operators and gambling suppliers. He has processed gaming license applications and/or software approvals in 15 states in the US, the United Kingdom and Canada
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Law and Legislation
For the Good of the State Senator Raymond Lesniak has been here before. In fact, we’ve had this very conversation before… the economic benefits, the jobs, the revenue. What separates the 2012 iteration of his New Jersey iGaming bill with the last is that this time, the land-based casinos that once successfully lobbied for its removal are now largely behind it. When the New Jersey Senate returns on May 31, the Senator’s Internet gaming bill will be presented for a Full Senate vote and by the end of June, we are likely to once again have a bill on the Governor’s (Chris Christie) desk. Speaking to iGaming Business North America, Senator Lesniak is in optimistic mood. What has changed from the perspective of the land-based casinos that they now support the bill having lobbied to ensure it was vetoed just a year ago? I think two things have changed. Firstly, and particularly in Borgata’s case, although I can’t speak for them, they realized that federal legislation just isn’t going to happen and getting started in New Jersey will be helpful to their New Jersey-based casino.
Is there a different momentum for your bill in 2012? The distinction between now and when the Governor vetoed the previous bill is that this time, the casino industry is strongly behind it. Last time around, both Borgata and Harrah’s asked the Governor to veto the bill because they were relying on federal legislation to be passed. Borgata now supports the bill and Harrah’s is agnostic on the subject.
“ I’m hoping that by the end of the year that we’ll have intra-state Internet gaming in New Jersey.” Additionally, one of the concerns the Governor raised in vetoing the bill was whether we had to amend our constitution, as a new form of gaming requires a constitutional amendment. We had two legal opinions from Temple and Seton Hall Schools of Law that supplemented my opinion that it’s not a new form of gaming; it’s a new way of placing a bet that was not in existence when the constitution amendment limiting casino games for Atlantic City was passed by the voters.
The other reason is that New Jersey’s leadership on this has prompted more attention to the issue of iGaming; whether that prompts federal legislation, which I do not believe will ever occur, or whether it prompts other states to get involved, on
their own or through compacts. It’s not the ideal situation – I don’t even believe it’s the ideal situation. I believe the ideal situation is one regulator rather than multiple states, but we’re not going to get that because the mood in Washington is not to expand federal government, but to contract it. Internet gaming being regulated out of Washington would be seen as a huge expansion of federal government. And that’s on top of the morality objections about the expansion of gaming. So I think there’s been a recognition that the only way this is going to happen is through the states. In saying that federal legislation is never going to happen, do you think that there would become a point where at least a federal set of guidelines could be implemented to form an overarching blueprint for gaming? Certainly not until multiple states start their own systems. I don’t believe it will happen. We have many compacts between states for energy, clean air, disposable radioactive waste… states have a lot of experience in forming compacts where one set of regulations can apply to an entire region. So it’s more likely to come through state compacts rather than through federal government. I’ve been in politics for 36 years and early on, I remember quite vividly the push for a national regulation of insurance… that
“ Without Internet gaming, we will see more of our casinos close. They’ve been hurting badly for such a long period of time in terms of declining revenues that this is a real lifeline for them.”
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Law and Legislation
hasn’t happened, and I don’t think anybody wants to wait 36 years for the regulation of Internet gaming. Returning to the aspect of leadership, New Jersey has been visible in its desire to be the “Silicon Valley” of Internet gaming in the US. Considering that Nevada is leading the race to go online, is first-moveradvantage still important to New Jersey’s aspirations or is it a case of getting online as early as possible? I don’t think that being there first is as important as being there early. If Nevada gets going then I’m not concerned about that as long as we’re ready shortly thereafter. We have a lot of advantages over Nevada; not only is our population much bigger and wealthier, but I believe we have a better regulatory system – a licensing system that investors can rely on more than other any in the world. Setting up these systems takes some capital investment, and being in close proximity to New York, Wall Street and the financial centers helps us as well. Whether we’re first or second… it don’t think it matters just as long as there’s not a large gap between the two. You also have the potential inter-state dynamic in the future – how will that develop? Actually, I started thinking about this recently as (regulation) moves closer to reality. I think that it will be an interesting dynamic because there will have to be negotiations between the host state and the compact state in terms of sharing revenues, the sharing of sites, etc. I do believe that there are few states that will have the ability to make the investment and the licensing procedure to have inter-state Internet gaming. At the moment, it looks
like it is just Nevada and New Jersey. I can’t speak for the appetite of other states to enter into compacts because they’re all waiting to see how this works, so I would assume that would take at least a year or two to develop. Having touched on the position of the state’s casino industry, how will iGaming actually affect New Jersey’s land-based sector? I firmly believe that without Internet gaming, we will see one, two, or even more of our casinos close. They’ve been hurting so badly for such a long period of time in terms of declining revenues that this is a real lifeline for them. This will be the margin that will enable them to continue to remain profitable.
“ The ideal situation is one regulator rather than multiple states, but we’re not going to get that because the mood in Washington is not to expand federal government, but to contract it.” What about the position of some of the other gaming interests, such as the racetracks? The racetracks are against it. I have been a huge proponent of the racing industry as I believe that they need a lifeline as well. In fact, in the sportsbetting referendum that I sponsored and that was approved by the voters in November, I included the racetracks along with the
casinos. It was also the first time the casino industry had supported a sportsbetting referendum – it was the first time they’ve supported any expansion of gaming or gambling outside of Atlantic City. So that’s how important sportsbetting, when it comes to pass, will be for our entire economy. Again, our racetracks are hurting as badly as our casinos, maybe more so. They need a lifeline as well. In terms of sportsbetting, I’m waiting for the Governor’s administration to get going. The Governor is dragging his feet. If it were up to me, we would have been in court already. We have already passed legislation and the Governor has already signed it and what they have to do is start the regulatory process and just wait for the Justice Department or the NFL to try to stop us. Moving on to the broader impact of iGaming in New Jersey, you’ve identified the state’s economy as a significant benefactor of the expansion of your gaming program. To what degree will this bill improve the economy? First of all, the high tech and customer services jobs that will be necessary just to get these Internet sites operational will exceed 1,000 jobs. Then there will be the jobs that we’ll save by keeping the casinos open and the fact that we’re keeping Atlantic City alive through this is a big boost to the industry, and will help our tourism industry as well. It will also allow casinos to market the other attractions in Atlantic City. Finally, are you hopeful that New Jersey will be online in 2012? Yes, I’m hoping that by the end of the year that we’ll have intra-state Internet gaming in New Jersey.
iGamingBusiness North America | Issue 01 | May 2012 | 25
Compliance and Technology
Regulating Online and Offline Gaming: Is there a Difference? In the early days of regulating online gaming, Alderney was often criticized for being too onerous, by applying an “offline approach” towards regulating the online industry. Andre Wilsenach, Executive Director of the Alderney Gambling Control Commission, argues that although there are unique differences between the offline and online gambling industries, the basic principles and objectives for their regulation are essentially the same. The criticism leveled against Alderney in the early days was, by and large, related to Alderney Gambling Control Commission’s (AGCC) strict requirements in respect of the testing and certification of gaming equipment (i.e. the gaming platform, the network, the random number generator and, most importantly, the games). AGCC’s approach has always been that a gambling game should not be released to the public for play before it has been thoroughly tested and certified according to AGCC’s technical standards, so as to ensure it behaves in practice as promised in theory. It was evident early on that the already well regulated offline industry was looking for an online regulatory regime with similarly high standards to what it was used to in terrestrial jurisdictions. It was also hard to see why the principles which have been developed over many years in regulating the offline industry should not apply online, obviously, appreciating that the online sector is technologically much more dynamic than its land-based component. Today, it is well known that regulators around the world, whether from offline
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or online jurisdictions, share the same objectives; namely, to keep crime out of the industry (i.e. to ensure that the funding, management and operation of the business remains free from criminal influence), that the games offered to the public are honest, fair, secure and auditable, and that the interests of the public, specifically, the young and vulnerable, are protected.
The first objective Keeping crime out of the industry is always the first step on any regulator’s list of statutory obligations and, from a reputational point of view, probably the most important. This can only be achieved by embarking on thorough due diligence of the funding, management, ownership, beneficiaries and business associates. There are still regulators who argue that due diligence has little to no value in an environment where only so-called “blue chip” companies are licensed. This approach is tantamount to self-regulation with concomitant high risks for the reputation of the jurisdiction and the industry as a whole. It is like arguing that the big, well known banks should not be monitored.
The second objective Ensuring that the day-to-day operation of the business is honest is of vital importance to both online and land-based industries. Here, there are normally two basic questions that any responsible regulator would seek to answer. Firstly, does the operator have a sufficiently thorough understanding of the risks associated with his operation and, therefore, does he have the necessary internal controls and operating procedures in place to mitigate those risks? These controls normally consist of a combination of financial, technical and administrative processes and procedures which depend largely on the nature of the risk but may differ depending on the nature of the product (i.e. casino games, poker, bingo, sportsbetting). Secondly, are the games which the operator will be making available to the public fair, secure and auditable? This normally requires, in the first instance, the regulator to set standards against which gaming equipment can be tested and approved. Although the testing might be conducted by a third-party testing house, the responsibility to approve the system and games before their release is essentially that of the regulator.
The third objective Protecting the interests of the young and vulnerable is equally important to both industries and impacts the day-to-day running of the business; in this case, in accordance with normally well prescribed
Compliance and Technology
legal and technical requirements produced by the regulator either in the form of regulations and/or guidelines. A point worth making in respect of both the second and third objectives is that, irrespective of it being online or offline, the regulatory responsibility does not end with the granting of the approvals allowing the licensee to commence operations. There remains a need to monitor the operations on an on-going basis to ensure compliance with the requirements in law and the agreed internal controls. Most importantly, the regulator should at all times be aware of significant changes. Therefore, change
the use of payment intermediaries; the prevalence of player accounts where the player’s funds are held by the operator on his behalf, are commonplace in the online industry and introduce various risks and issues that are not prevalent offline. In another area, namely, game play, there are some differences requiring different regulatory approaches. Collusion and cheating during game play can potentially occur in both industries, but manifests itself in different ways. For example, in the online poker industry, a player could make use of so-called “bots” to play the game on his behalf, which is unlikely to occur in the
“ Although both industries have their peculiarities posing unique regulatory challenges, from my own experience, the online industry is generally easier to regulate.” control reports of a financial, technical and administrative nature are essential, and although the methods of gathering such information may differ from regulator to regulator, this should be a universal requirement.
Specific demands Although the regulatory objectives in both industries are very similar, there are certain specific differences that require a unique regulatory approach and requirements. The most important of these relates to the socalled “faceless” nature of the online industry compared to the face-to-face offline sector. This faceless concept introduces some interesting challenges as well as benefits to regulators depending on which industry they regulate. For example, the electronic verification of the player; electronic fund transfers between the player and operator;
offline industry. This requires a different focus for online regulatory regimes. In the offline industry, it is possible for players to collude with the croupier, which is impossible in the electronic online world. Similarly, there are unique differences in the area of player protection. For example, the risks associated with underage gambling are higher in the online industry due to its non-face-to-face nature and require specific technological safeguards that aren’t used in the offline world. On the other hand, the detection of problem gambling online is easier due to the availability of the player’s transaction history. Also, iGaming lends itself far better to providing problem gamblers with easily accessible preventative tools such as self-exclusion and self-limitation options. Although both industries have their peculiarities posing unique regulatory challenges, from my own experience, the
online industry is generally easier to regulate, especially as all transactions – from where the player is registered, right through to depositing his funds and playing up to the point of withdrawal – are electronically recorded and, therefore, easily monitored. When a regulator in the online industry reviews a player complaint, he is not only able to rely on the record of transactions but also on the written communication (chat) between the player and operator. The opening up of the online industry in traditionally offline jurisdictions, such as the USA and Canada, is bound to introduce significant challenges for existing online operators. Those operators who have in the past preferred to establish themselves in jurisdictions which have not set high standards in respect of due diligence, operational controls, testing and certification of games and player protection measures, will find it difficult and costly to enter those jurisdictions. It is well known that traditionally offline regulators in the USA regard affiliates in a similar light as their terrestrial junket operators and will want to satisfy themselves that the reputation of those such associates does not impact negatively on the suitability of their licensed operator. In many online jurisdictions today, affiliates are not regulated. The AGCC’s regulatory framework is by no means perfect. It is a work in progress and I can’t imagine that in a dynamic industry such as this we will ever be able to say “this is our final set of regulations”. What is of critical importance for any regulator of the online industry is to have in place robust processes, systems and structures that enable him to achieve the aforementioned objectives. AGCC is keen to work with other jurisdictions in sharing and developing such systems.
iGamingBusiness North America | Issue 01 | May 2012 | 27
Compliance and Technology
A Starting Point for Global Online Gaming Technical Standards Kevin Mullally of Gaming Laboratories International explains the process and philosophy of the industry’s first global technical standard. Since the global expansion of gaming began in the early 1990s, the industry has increasingly called for greater harmonization among global regulatory requirements. While the industry is not satisfied with the progress on these initiatives, as evidenced by the American Gaming Association’s recent campaign for regulatory reform, some headway has been achieved. Some of the most notable progress towards regulatory harmonization is reflected in gaming industry technical standards. Because of the fractured and incremental process of implementing iGaming throughout the world, many industry participants and observers believe this sector of the gaming industry is in particular need of emphasized harmonization efforts. Fortunately, the industry is still in relatively early stages of development, creating a good opportunity to work towards better global efficiency in online gaming regulation. On June 23, 2011, Gaming Laboratories International, LLC (GLI) published the first global technical standard for online interactive gaming. To understand the significance of this standard, it is important to first review the process GLI uses for creating its Technical Standards Series. Based largely on government practices for
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the formulation of administrative rules, GLI consults with regulators and industry experts globally in the creation of its standards.
The process for creating a global technical standard First, GLI’s technical compliance team reviews its extensive database of the world’s regulatory policies for the subject matter of the standard. It then isolates the most common practices and themes among jurisdictions worldwide while also identifying outlier policies. It then studies the basis for the creation of the common policies as well as the rationale for the outlier policies and consults with regulators and industry end-users to identify those that appear to be the most effective, efficient or have support from both the regulatory community and the industry. Based on this research, the technical compliance team assembles a first draft of the standard. It is then circulated internally to GLI’s legal, engineering, quality assurance, audit and development team members for review and comment. This allows for input from a diverse group of professionals who interact daily with a broad array of experts within the regulatory community and gaming industry, thus providing valuable perspective to the final draft. Subsequently, the final GLI draft is circulated for comment to gaming regulators, operators, suppliers, attorneys, accountants, auditors and related vendors worldwide. GLI evaluates the comments and, considering its
Gaming Standards – the Burning Issues
Insights from industry leaders Framing the iGaming Debate “One of the fascinating ways to frame the debates on Internet gaming in the US comes from the founding figure in the academic study of gambling, Bill Eadington. Dr Eadington suggests an analogy with the film industry here, in that this was a product that was once consumed in massive cathedrals of movie consumption (think Mann’s theater or the Pantages in Hollywood). Today, of course, we consume them in home theaters – or on our Smartphones, even. This leads us to wonder whether gambling might follow a similar path, whereby consumption of the gambling act shifts from massive cathedrals to the home, and to the super-connected supercomputer on one’s person that is the Smartphone. Indeed, the future of Las Vegas’ modern-day cathedrals hangs in this balance and this shift.” Dr. Bo Bernard, PhD, Executive Director of the International Gaming Institute at the University of Nevada-Las Vegas
previously conducted research and analysis, amends the document based on a consensus of the comments or trends within the industry. Those who commented on the first draft of the document then form an informal working group to consider the revised draft,
Compliance and Technology
Gaming Standards – the Burning Issues
Insights from industry leaders Developing a State Regulatory Structure for iGaming “Nevada is the first state to complete the process of creating required laws, regulations and policies for interactive gaming in the US. This process took two years and we will likely have additional matters to consider after interactions with our first round of applicants. In the event that federal legislation fails to materialize, and, as other states move forward, it is critical that iGaming policy be shaped in a manner allowing us to work together efficiently. This will be a challenge given our established bricks-and-mortar regulatory model. A patchwork of varied models within ring fenced markets in the US would be a substantial missed opportunity for all involved for the sake of short term goals.” Mark Lipparelli, Chairman, Nevada Gaming Control Board
Standards Covered by GLI-19
which is circulated to them for final review. This process is more interactive and results in a final draft that is released as a GLI Standard. On a periodic basis, depending on activity in the particular subject area or the amount of feedback from regulators and the industry, GLI will revisit each standard to consider revisions. A similar review process is conducted for each new revised standard. It is important to note that each entry of GLI’s Standards Series is simply a template for regulators to consider when formulating technical standards. It is commonly understood that each jurisdiction has its own nuances that include local political, legal and cultural considerations. However, a global standard provides a starting place to assist in helping avoid the phenomenon of a ‘one-off’ jurisdiction that can result in decreased consumer choices, economic activity and gaming-based revenue.
Philosophy of the GLI-19 Online Gaming Standard GLI’s Online Gaming Standard is the first GLI Standard that has been separated into two distinct practice areas. At the suggestion of regulators, software developers, hardware providers and operators, GLI separated the requirements for suppliers and operators. This makes the standard easier to understand and avoids confusion and contention regarding specific areas of responsibility. As a former regulator, I am a firm believer in “clearly communicated expectations and responsibilities” where the industry was directly involved in the formulation of the rules and they were presented and explained in a clear and unambiguous manner. This concept is reflected in GLI-19. Kevin P Mullally serves as the General Counsel and Senior Director of Government Relations and Development for Gaming Laboratories International LLC. Mr Mullally has over 28 years of experience in public policy development, law and gaming regulation.
Game Requirement
Note: GLI-19 standards cover both
Player Account Management Requirements
operators and suppliers. Standards specific
• Player Registration
to suppliers are stipulated “(Suppliers)”.
• Peer to Peer (P2P) Games
• Player Accounts
• Game Play
Gaming Platform Requirements • Game Outcome (Suppliers) • Gaming Platform • Gambling Information to be maintained by the Gaming Platform
• Player Game Session • Player Loyalty Programs • Responsible Gaming
RNG Requirements (Suppliers) • Scaling
• Game Design • Game Artwork
Information Systems Security (ISS) Requirements • Information Security Policy • Physical and Environmental Controls
Jackpot (Progressive) Requirements
• Choice of Algorithm • Hardware RNG
• Administrative Controls
• Jackpot Design and operation
• Software-based RNG
• Technical Controls
The full GLI-19 standard covering Interactive Gaming Systems for both operators and suppliers can be found online at www.gaminglabs.com.
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TAILORED MODULAR OPEN GAMING PLATFORM
Compliance and Technology
Taxation: Turnover or Gross Profits? With legislators coast to coast considering legislation permitting online gambling, Sue Rossiter of the Remote Gambling Association sets out the argument for a gross profits tax. The taxation of remote gambling can provide an important source of revenue for governments if it is properly designed. The remote gambling sector is highly competitive. Consumers are sensitive to price differences and can easily switch to other operators, sometimes in different jurisdictions. It is therefore important that when jurisdictions are considering their tax regimes for remote gambling that they devise systems which consider this sector of the gambling industry in its own right rather than seeking to employ whatever measures already apply to the landbased gambling industry.
Turnover tax It is easy to think that turnover tax (a tax on customer stakes), with its deceptive simplicity, will result in optimum income. However, the high volume, low margin nature of online
would penalize consumers on each hand and would be unworkable because a significant number of small pots do not generate fees for the operator but would still be taxed. As the tax burden is shifted to the consumer, demand for the product will be reduced (which obviously will impact adversely on the taxable returns to the government).
The failure of turnover tax Imposing turnover tax would run counter to the current trend in Europe, where the UK, Denmark, Spain, Greece and Italy (for some products) have opted for a gross profits tax. Since France imposed a turnover tax in June 2010, the regime has seen its locally regulated market become restricted due to the inability of the limited number of locally regulated operators to compete with operators who are licensed in
“ It is important that when jurisdictions are considering their tax regimes for remote gambling they devise systems which consider this sector of the gambling industry in its own right rather than seeking to employ whatever measures already apply to the land-based gambling industry.” gambling results in the strong probability that customers will seek better prices from overseas operators with a resultant loss of tax and a reduced level of consumer protection. In online poker, for example, a turnover tax
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other jurisdictions. This has led to ARJEL, the French regulator, concluding that “a taxation model where a percentage of stakes is levied does not work”. We fully agree with the regulator on that point.
Gross profit tax Gross profit tax (GPT) is defined as “stakes less winnings” for betting and casino games and “charges made to customers” for poker. GPT enables operators to adjust to changes in the competitiveness of the market, thereby enabling them to adjust prices in response to both competitors in the locally regulated market and, more importantly in the context of our analysis, the offshore market. This means a GPT is able to accommodate all business models including that based on low margins and high turnover. Under a GPT, the operator will be seeking to increase its gross profit which, in turn, increases the tax take for the government. A GPT is a predictable tax that can be easily and transparently calculated by the operator. A GPT system is also administratively simpler, resulting in lower costs for the regulators and lower compliance costs for the operators. A significant advantage of the GPT is that it reduces consumer motivation to gamble illegally. This is because turnover taxes tend to be passed on to the customer. When consumers are confronted with a visible tax of this kind, they may seek out lower-cost alternatives, such as gambling in a tax-free market where operators may not be subject to the same standards of regulation that might be expected in the US or in European jurisdictions. A GPT, set at a reasonable rate, is likely to be absorbed by the operator in a competitive market
Compliance and Technology
and, thus, consumers are able, from their perspective, to gamble tax-free. Apart from the potential revenue leakage, there is also the associated social cost of stimulating what, in some parts of the world, might be a criminal environment. An analysis by the UK Revenue and Customs department found that the switch to GPT significantly decreased the risk of illegal betting and, thus, protected government revenues and social protections. For all of these reasons, a GPT set at a reasonable effective rate is the right choice for the remote gambling sector. In combination with a workable effective rate, the choice of an efficiently structured tax can have benefits for consumers, operators and governments. GPT is levied directly on the operator’s revenues. It creates a level playing field between operators, permitting the freedom to provide consumers with greater choice and value without concern
for the margin of specific offerings. The GPT is the best option for the remote gambling sector because it has the highest potential to provide better value, entertainment and choice for the consumer. This, in turn, creates
“ GPT is the best option for the remote gambling sector because it has the highest potential to provide better value, entertainment and choice for the consumer.� additional demand for the product and taxable revenues for the government. In conclusion, when calculating the total tax burden, all of the costs must be
taken into account, including all associated business taxes, license fees, administrative and compliance costs, as well as the actual tax rate. The sum of these expenses in addition to the costs of market entry, such as advertising, can be considerable. Consequently, if the tax regime is not viable, it will prevent operators from taking up licenses.
Sue Rossiter is the Director of Projects and Policy at the Remote Gambling Association, the largest online gambling trade association in the world representing over 30 of the largest licensed and stock market-listed remote gambling operators and software providers. Sue has a wide ranging background in the gambling industry including being Principal Officer for Gambling Therapy which provides online support for problem gamblers and she was Head of Policy at the UK Gambling Commission.
iGamingBusiness North America | Issue 01 | May 2012 | 33
Management & Marketing
Building your iGaming Technology Brian Hooper, CTO of land-based and online gaming systems and services provider, Jade Gaming, shares his experience to set the scene for CTOs approaching the iGaming industry for the first time. Prioritizing your iGaming roadmap
Strategic IT Decisions
If you are an existing land-based operator, it’s likely you already have an active customer base that you would like to convert to your online products. This is a challenge in itself as most online gaming platforms are not designed for this type of scenario. Having in place a flexible middleware that allows you to integrate the old platform (loyalty systems, casino and poker floor gaming system accounts) with your new online offering can prove to be a huge advantage. Before moving ahead with your online venture, it’s good to get the right advice and ensure you have experienced resources available to you. Having partners/advisors that have online experience will help you make the right choices and avoid many of the mistakes made by operators in the current regulated markets. When you start to define your IT/product roadmap, firstly create a timeframe to bring the product to market and work with partners and suppliers who can commit and work within your constraints. And, as with all roadmaps, define the business goals clearly.
Do you buy, build or license your iGaming tools, systems and platforms? Buying or licensing will be the sensible option for most companies and will depend on budgets, existing skill sets, and the like. Building your own platform and tools requires extensive knowledge of iGaming, a very fat wallet and lots of time. • Renting: cheaper alternative, can also allow you to use independent middleware as many suppliers can offer this type of model. Normally involves some sharing of revenue, quite possibly with minimum guarantees. • Building: when time is critical, you need to be online before your competition. Building your own software is not normally an option unless you have a very strong in-house development team available to you. Even then, success is not guaranteed. Land-based and iGaming is infinitely different, so an open learning approach is highly advised before investing in your own software. Another important decision you will make is whether to buy independent
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middleware or use the middleware that comes with the first gaming product on your roadmap to serve as the basis for all future product and payment method integrations. Gaming software providers do what they do best; make excellent games used by your customers. They are not always good at integrating with their competitors. Although they regularly do, it’s sometimes a lengthy and difficult process for the iGaming business. The frustrations of waiting for these third-parties to find time to integrate crucial products and services into their platform was, to use us as an example for a moment, the catalyst for us to build Maelstrom – our own central platform with middleware.It took us three years but now the benefits of independence, speed and flexibility are paying off. “But why would you want to integrate all products?” you may ask. Simply put, customers do not want to have to manage multiple usernames/passwords for each product you offer, and you don’t want to have to manage this situation. User experience is vital to gain market share and keep an edge over the competition – single accounts, single passwords, transparently moving between products and moving money between products is now the norm.
Management & Marketing
iGaming information gathering If you were approaching this as a complete start-up or with only land-based personnel, I am not sure you would be able to get by without any iGaming industry knowledge – you would certainly be making life very hard for yourself as land-based and online have so many points of difference. iGaming relies heavily on three business units: customer service, marketing and IT. Speaking from an IT perspective, the demands are high as the speed of development and innovation is just so fast. As a result of that, the high volumes 24/7, the need for constant security vigilance and the obligation to deliver the products and services across multiple platforms (Mac, PC, iPad, iPhone, Android, multi-browser, etc), the technology needs to be cutting edge – and so do your employees’ skill sets and dedication to tasks. Working in the early days of iGaming in Europe, 18 to 20 hour working shifts were accepted as the norm. Even in a more stable market the demands from the business on IT still frequently become intense. The learning curve is naturally faster for people coming into iGaming with an offline gaming background, but nothing
“ If you were approaching this as a complete startup or with only land-based personnel, I am not sure you would be able to get by without any iGaming industry knowledge – you would certainly be making life very hard for yourself.” beats direct experience of the online side. As with any industry, having made mistakes and knowing what NOT to do are very useful skills to have on your team. Having been in a position where I have had to hire IT staff without previous iGaming experience, I can honestly say that this has a huge impact on their immediate effectiveness. An average systems engineer or software developer takes three to six months to get to grips with the specifics and requires a lot of investment in terms of knowledge transfer. In this competitive industry, doing things better and faster really gives you the edge. My advice is to make the effort to bring in staff with iGaming experience in as many of the key IT management roles as possible.
You can certainly blend-in land-based or non-gaming professionals around them; however, a critical mass of iGaming experience in the key areas will make all the difference between meeting your target launch dates/standards, and not. Regardless, if you plan to choose a gaming product they have not worked with before, similarities exist across all products and it’s likely an experienced professional can give valuable input.
Evaluating the available options Another key area is evaluating what to look for in a new platform. Simply, you need to identify platforms that have a proven track record and that are truly flexible and allow the operator to be in control of their destiny. It is also important to look for platforms which come bundled with additional systems which are not core to the gaming product, but core to the actual business operations such as affiliate and bonus systems.
Common regrets Often, the biggest regret and frustration is when a CTO finds they are locked into a platform which is slow to integrate new products/payment methods and has limited bespoke tools. Everyone does business differently, and they will need to in order to create USPs with their customers. Brian Hooper is Chief Technical Officer at Jade Gaming, a land-based and online gaming systems and services provider. Brian has over a decade’s experience working with and building some of the world’s largest and most successful iGaming systems, across Europe and Asia.
iGamingBusiness North America | Issue 01 | May 2012 | 35
Management & Marketing
Nevada: the Technical Standard Bearer Travis Foley joined the Nevada Gaming Commission as a Test Engineer in 1998 and rose through the ranks, spending his last five years there as Chief of the Technology Division including overseeing the testing of the first interactive devices licensed in Nevada. In his current role as VP Operations for BMM, the leading gaming certification lab, Travis speaks to iGaming Business North America about technical standards in the new Nevada regulations. How different will European operators and vendors find the Nevada iGaming technical standards compared to what they have known in other jurisdictions? While there are significant differences between Nevada’s land-based gaming regulations and those of Europe’s iGaming jurisdictions, I think what Nevada has done is to try and accommodate the needs of the digital industry in the drafting of the interactive version of its technical standards. What aspects of Nevada’s approach to technical standards stand out to you as distinct from what is common in Europe? Obviously, it is only natural to build on what you know works, so the starting point for iGaming would be the proven practices from the land-based environment. An example of this is how important accountability and reporting is in Nevada and the detail that Nevada expects is something that just isn’t common in iGaming elsewhere. Typically, European vendors and operators seem to think that the integrity of the RNG is of
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paramount importance while in Nevada there are so many other areas that need to be tested, audited and reported on. Do you think existing Nevada land-based operators and vendors will have an advantage as they are going to be more comfortable with this approach than European pure-play online providers? I don’t think so. My belief is that everybody will get the same treatment, large or small, local or foreign. Nevada has always strived to treat all licensees equally. Also, I think it is worth stressing that a lot of work has been done in Nevada to take in what has happened in the iGaming regulations space in Europe and to learn from it. The current published documents on interactive gaming technical standards in Nevada reflect that desire to move regulations here to the digital environment. Yes, there are sure to be obstacles, however, Nevada has always been prepared to make adjustments, as necessary, as they learn. I think we have already seen that readiness in the work done to license the mobile iGaming devices that are now operating in Nevada.
So European operators shouldn’t feel Nevada’s standards are going to be unworkable? Exactly. When you look at the draft standards, it is important not to panic; instead work out what the intent of the regulations are before you react. The Governor’s convening of the Gaming Policy Committee to review and advise on iGaming regulation is an example of how problem areas in the standards can be raised and put forward for amendment as required. If you had one piece of advice for a would-be European iGaming company thinking of coming to Nevada and present their technology for approval, what would it be? The most important thing is to start your dialogue early. The recent changes to the Technology Division of the Gaming Control Board will allow greater opportunity for providers and operators to discuss the regulations and standards. The sooner you understand which components of your proposition may need to be adapted in order to be compliant, the better. Also bring an open mind. If you come over thinking “I have been in the iGaming industry for 15 years and I know everything about it, and you know nothing”, then you are going to have problems. The regulators in Nevada are willing to listen and learn as well as provide direction and support for all licensees.
Management & Marketing
National Statistics Paul Lauzon, Senior Vice President and Managing Director of the Lottery and Gaming Group at Ipsos Reid, details the findings from a national survey conducted to ascertain the consumer appetite for Internet Gambling. In a study conducted in November 2011, a full month before the DoJ reversal of policy, Ipsos found very strong public support (70%) of the legalization of Internet gambling in the United States. Not surprisingly, males were slightly more supportive (75%), and in particularly those from a younger demographic (82%). Nonetheless, strong majorities of those in the 35 to 54 (71%) and 55-plus (58%) age brackets also felt it should be legal. The support for Internet gambling was also strong across all income categories (65% to 70%) as well as the four broad regions of the US – Northeast, Midwest, South and West. These results suggest ample opportunities for those entities and operators thinking about adding Internet gambling to their portfolios. Although this level of public support is considered strong, it doesn’t necessarily translate that everyone who supports legalized Internet gambling would subsequently participate. In fact, when asked, just over one in ten (12%) said they would definitely or probably spend money on some type of Internet gambling activity (such as Internet poker, various Internet casino games, Internet sportsbetting, Internet bingo, Internet horseracing betting) during the next 12 months, and another one in five (22%) were sitting on the fence. Given that traditional bricks-and-mortar gambling penetration in any given year is somewhere between 30% and 40%, and that Internet gambling penetration has typically been in the single digits, this is good news for gaming operators. As with traditional Internet gambling behavior, Ipsos found that anticipated wagering
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online in the next 12 months would continue to skew males (17%) and those from the younger 18-34 cohort (17%). Females were less likely to play (7%) during the same timeframe as were those aged 55-plus (7%). One interesting statistic that caught Ipsos researchers’ attention was that respondents from households with children (14%) and those employed full-time (15%) were more likely to say they would play in the next 12 months. If given the choice, a slightly larger proportion of potential players would prefer to wager with their state lottery (20%) as opposed to their favorite land-based casino (15%). These findings are more or less as expected given the long history of state lotteries and the fact market penetration for state lotteries ranges from 50% to 75% depending on the jurisdiction. Lotteries are well known and are a trusted brand. Unfortunately, in this survey we did not ask about specific casino brands, but we expect that had branding been part of the equation, anticipated wagering with specific online casinos sporting a bricks-and-mortar brand presence would have been higher. In fact, we get a hint of this when we examine the data among respondents who had been landbased casino patrons in the last year. Among this group, they would equally spend money online if it was offered by the state lottery (22%) or their favorite casino (23%). Among those who said they would or might spend money wagering online within the next year, the top two activities stated were purchasing lottery tickets (35%) and online casino slot games (18%), followed by poker (10%), sportsbetting (10%), bingo (9%), blackjack (9%), wagering on horse races (5%), table games like roulette or craps (3%) and other card games such as Baccarat or Pai Gow (2%). When examining results by gender, we see some interesting differences. Females were more likely to buy lottery tickets (42%), wager on online slots (22%), and play bingo
online (12%) than males (30%, 15%, and 6% respectively). On the other hand, males would dominate other game categories such as poker (14%), sportsbetting sites (14%), and blackjack (11%), whereas female participation would be lower (6%, 4%, and 6% respectively). Some differences also emerge by age group, with a higher percentage of people over 55 more willing to buy lottery tickets online (40%) versus a slightly smaller 31% of 18 to 24 year olds. Playing poker online would only be the choice for 12% of the 18 to 24 demographic, with the same percentage for bingo, whereas online poker found popularity with just 8% of over 55s with bingo faring worse still at 6%.
Methodology These are the findings of an Ipsos poll conducted between November 7 and 19, 2011. A national sample of 2,013 adults from Ipsos’ US online panel was interviewed online. Weighting was then employed to balance demographics and ensure that the sample’s composition reflects that of the adult population according to Census data and to provide results intended to approximate the sample universe. A survey with an un-weighted probability sample of this size and a 100% response rate would have an estimated margin of error of +/-2.19 percentage points 19 times out of 20 of what the results would have been had the entire population of adults in the United States been polled. All sample surveys and polls may be subject to other sources of error, including, but not limited to coverage error, and measurement error.
Paul Lauzon is Senior Vice President and Managing Director of the Lottery and Gaming Group at Ipsos Reid. (403) 294-7386 paul.lauzon@ipsos.com.
Management & Marketing
iGaming Start-up 101: Operations and Marketing If you are a land-based operator who is considering offering online free play as a precursor to full cash online wagering, then you may well be currently coming to terms with the following challenges: • How to offer your customers an integrated experience between both the new digital channels (Internet and mobile) and your existing product portfolio • How to establish a back office capable of supporting both land-based and digital As with all technology, the integration of these channels will create operational challenges as well as commercial opportunities. The ability to deliver the same product and consistent communications/rewards across multiple channels will also create new opportunities, particularly in relation to promotions, market research, customer education and product testing. Ahead of real money wagering, these could include: • The testing and promoting of new slot games prior to introducing them to the gaming floor • Developing an on online dialogue with existing customers • Providing existing customers with the ability to access their loyalty scheme online • Current level, current reward opportunities, requirement for next level • Utilizing online recruitment to build a database of online gamers in preparation for online wagering and a funnel for landbased recruitment • Offering free-to-enter online tournaments (poker/slots) with prizes that generate footfall • Educating players on table games ahead of their arrivals
A shopping list of the technology required to embrace the potential of the digital channels will almost certainly include some or all of the following: • Product: online games, mobile games, social games, live dealer streamed games • Operation: integrated back office with unified bonus tools across all products, accurate geo-location tool, identity verification, payment processing, online customer support, customer portals • Marketing: multi-channel customer relationship management tools, digital content management system, digital campaign creation, affiliate management, online evaluation
However, issues can develop over time when/ if the platform cannot support the operator’s needs for exclusive and/or faster, more specialised features and functionality. The best option is to focus on a solution that gives you flexibility and control over your product, service and development destiny. Each provider is likely to offer a basket of online and mobile games which comprises digital versions of their slot products, generic table games and liquidity games (poker, bingo). Remember, what works so successfully now on the gaming floor is being able to pick and choose from competing vendors – this will be the same in the interactive space so make sure your platform and providers will allow you to do this.
ESB Central Back Office Back Office
Slot Screens Keno
Online Customer Service
Bingo
Offline Products and Comms
Social Games Affiliate Management
Loyalty Scheme
Products
Slots
Geolocation
Online
Sportsbook
Direct Marketing
Mobile
Table Games Customer Portal
Payment Processors Live Dealer
Campaign Management
Customer Database
Poker Scratchers Data Analysis
So where to start? If you listen to many vendors, the process is relatively simple: license their platform with its suite of games, have customers register via their back office, using their pre-developed tools and away you go. Opting for one single platform provider with their own core-base of games and a great deal of experience does offer a lot of advantages and may seem very convenient.
Play History CRM Tools
Nigel Blower has over 20 years’ experience in the design, development and implementation of marketing systems and services. His passion for poker led him into the iGaming industry over ten years ago where he has fulfilled a number of roles, including Head of Poker Operations for Ladbrokes. After that, Nigel went on to set up his own iGaming consulting business, helping US gaming and lottery companies establish themselves in the interactive sector.
iGamingBusiness North America | Issue 01 | May 2012 | 39
Management & Marketing
New Frontiers, New Opportunities Things to consider when moving your business online, by Nicky Senyard, CEO, Income Access. A regulated online gaming market gives North American bricks-andmortar operators, suppliers and games manufacturers the opportunity to expand their reach, tap into new demographics, and increase their return on investment (ROI). As we have seen from previous marketing openings, venturing into iGaming provides the potential for increased profits. The decision to go online presents opportunities for increasing brand exposure and revenue. Similar to the fundamentals of offline gaming, it’s important to scope out your environment and competition so that you have a firm understanding of the landscape before entering. This analysis will help you to identify who you are competing with, and their individual strengths and weaknesses. This information can help you further shape your own platform and offerings and define your unique selling point (USP). Additionally, building a plan that includes clear goals and targets will become your reference point, helping you to measure the impact and success of your offerings, partnerships and marketing activities. Targets and goals are also part of your overall business plan, which become even more important should you decide to partner with advertisers and media partners, and introduce program terms and conditions that govern your relationship. The key here is ensuring that your business plan and terms and conditions (T&Cs) are congruent, insofar as evaluating the costs associated with your revenue streams and planning your commission model. This is a step worth spending some time on, as your T&Cs are most successful when they are long-term, transparent and sustainable.
40 | iGamingBusiness North America | Issue 01 | May 2012
More channels, more players, more business If you run a bricks-and-mortar operation, launching an online site can expand your marketing reach by allowing you to target a (typically) younger audience located within your regulatory guidelines rather than just people capable of physically visiting your business. You can engage with your audience through offline, online or performance marketing channels. Offline engagement may include traditional advertising such as television, radio, and print, as well as the use of hotspots or agents, which include stores, hotels, cafes and sporting venues. Your online channel can be defined as anything you do that generates publicity for your business on the Internet. This may comprise pay-per-click advertising (PPC), media buying, social media, search engine optimization (SEO), and email marketing. Online channels, particularly social media and email marketing, are important because they can help establish a personal rapport that traditional offline measures may not be able to match. Performance marketing is considered to be within the online channel, although it differs enough from the previously mentioned approaches to merit its own category. With performance marketing, you partner with advertisers who promote your site using creative marketing tools and techniques across the Internet in return for a commission or compensation. Advertisers become your marketing arm as well as brand advertisers. The benefit is that all of your partners’ actions can be tracked and recorded, which means that you can set up a compensation system that pays only for your desired results.
Know your channels, grow your returns When dealing with multiple channels, the best way to get the most out of your marketing
efforts is through channel reporting tools which help to identify which of your acquisition channels, offline or online, is performing the best, breaking down your campaigns by medium, landing page, bonus code, etc. Additionally, with analytics, you can plan ahead and set measurable goals for your marketing strategies. Simply put, channel reporting means measurability, and measurability is the major part of profitability.
Business intelligence: your iGaming essential Supplementing a land-based operation with iGaming can be an immensely profitable move, resulting in access to more promotional channels as a means of acquiring more players. Additionally, with channel reporting software tools you can objectively identify which of your marketing works best, and adjust your efforts to capitalize on that knowledge. Business intelligence is key to profitability, and obtaining the intelligence you need to succeed is an iGaming essential. Once you’ve acquired new players, the safest bet is to engage in an effective and personal retention strategy in order to get a steady stream of revenue while still expanding thanks to your multi-channel marketing approaches. All in all, expansion into the iGaming landscape requires effort and research, and brings the opportunity for realizing increased profit and exposure that may be less limited than a bricks-and-mortar operation.
Nicky Senyard is the CEO of Income Access, overseeing their network, software and affiliate management services.
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21
Management & Marketing
Full Tilt Poker: Bringing Down the House It’s the gambling industry story that’s playing out like a soap opera complete with villains, backstabbers, innocent bystanders and what appears to be a last minute gallant rescue. The Full Tilt Poker drama, which has now been rumbling on for over a year, seems to be reaching a surprise ending with the swift breakdown of the Groupe Bernard Tapie (GBT) deal after a seven month negotiation period and the even faster entry of PokerStars into the acquisition picture – PokerStars’ has reportedly been conducting due diligence in Full Tilt’s Dublin offices over the past few days. Both aspects of the Full Tilt news (GBT and PokerStars) initially broke in a flurry of activity on Twitter on April 24 and were subsequently widely reported in the industry media including iGaming Business and the Wall Street Journal.
PokerStars At the time of going to print, PokerStars had neither confirmed nor denied its role in the saga. A statement from Eric Hollreiser, Head of Corporate Communications for PokerStars read: “We’ve had a lot of enquiries and there’s lots of speculation on the forums, so I wanted to address the PokerStars chatter. As you know PokerStars is in settlement discussions with the US Department of Justice. As such settlement discussions are always confidential, we are unable to comment on rumors. As soon as we have information to share publicly we will do so.” The fact that PokerStars did not deny the rumors and confirmed that talks were still ongoing with the DoJ has been interpreted as a sign that the rumors are true, although the reality is that nobody is any the wiser about whether a $750 million deal is in the offing or not. If the deal does take place it’s likely to be part of the broader settlement between PokerStars and the DoJ.
42 | iGamingBusiness North America | Issue 01 | May 2012
Groupe Bernard Tapie The GBT deal fell through primarily over the failure to agree the terms for paying back the thousands of poker players who are collectively owed in excess of $300 million. The proposal that GBT had submitted to the DoJ was to reinstate all Rest of World (ROW) player balances immediately with a right to withdraw those funds over time, based on the size of the player balance and the extent of a player’s playing activity. GBT attorney Behnam Dayanim spoke to PokerNews on Tuesday April 24, and said that the proposed plan would enable the overwhelming majority of players to be paid back within a year, and a substantial majority of them immediately. According to the GBT statement, 94.9 percent (those players with less than $100 in their accounts) would have had unrestricted access to play or withdraw their funds. However, what it did not state was that these player balances are purported to amount to approximately $16 million and the remaining 5.1 percent of players had an aggregate balance of $168 million. The GBT proposals to the DoJ were many and varied and at times included very stringent play-through requirements (which might have involved fresh deposits from a large number of players in order to meet the game play and rake contributions required to release further funds from their old account), inactivity fees and player applications to the DoJ. Multiple timelines had been proposed, which went as high as five years but, ultimately, this was deemed unsatisfactory to the DoJ who demanded full repayment within 90 days. This was the point at which the deal collapsed and GBT withdrew.
The Dean Report The Alderney Gambling Control Commission (AGCC) commissioned Peter Dean, the former Chairman of the Gaming Board for Great Britain and subsequently the Gambling Commission from 1998 to 2007, to review and report on the actions taken, so that the AGCC could “reassure ourselves, and those who take an interest in our activities, that should mistakes have been made then we would recognize them, and if lessons could be learned that we would learn them.” In the report, published on the AGCC website on March 26, 2012, Peter Dean called the entire episode “deplorable,” however, the investigation reached the conclusion that the “AGCC fulfilled its statutory obligations in relation to FTP and that its actions were appropriate, timely and fair.” Full Tilt Poker held four Alderney licenses and the investigation reviewed each of them from the very beginning of their application. At the outset, Full Tilt was operated by Kolyma Corporation, which was incorporated in Aruba and licensed in Kahnawake. The software and marketing services were supplied by Tiltware (a Californian company). In 2006, Pocket Kings was incorporated in Ireland and took over the functions of Tiltware. Filco was licensed in Alderney in December 2007. The sole proprietor and CEO was Ray Bittar. However, when making the application, the beneficial owners of Kolyma and Pocket Kings refused to be subjected to scrutiny by the AGCC and, ultimately, the Commission accepted from Full Tilt’s external lawyers a form of certificate on each of the owners who had more than a three percent interest. The certificates were in anonymous form, but satisfied the AGCC license application probity checks.
Management & Marketing
Oxalic and Vantage were both licensed in July 2009 with intentions to target Germanspeaking countries and the US market respectively and, at the same time, Full Tilt intended to transfer its entire operations (excluding Italy) to Alderney and close down its Kahnawake set-up. The indirect vetting of key personnel anonymously via Full Tilt’s external lawyers was replicated in these license applications. Orinic was licensed in January 2011, and was set-up to target Swiss players. The same pattern of external screening was followed in this situation. Immediately after April 15, 2011 (Black Friday), the AGCC launched a special investigation into Full Tilt, and discovered very quickly that that the poker operator was in dire financial straits and on June 29, the Full Tilt licenses were suspended and a public hearing was planned in London for July 26. Ultimately, the hearing was not public, but instead held in camera (in private) and was adjourned on the grounds that Full Tilt was in “advanced commercial negotiations likely to lead to a beneficial outcome for players”. The adjourned hearing was held between September 19 and 27 and the licenses were fully revoked on September 29 on the grounds of: • Insolvency of Filco, Vantage, Oxalic and the licensee’s associate Kolyma • Failure to report serious incidents affecting the operation of the licenses • Failure to pay the players when requested • Failure to operate within the approved regulations • Offering credit to customers • Submission to the AGCC of inaccurate reports on its financial position The Orinic license was not revoked, but maintained its suspended position and could only start trading based on a series of stringent conditions. Its application to reactivate the license was due to be reviewed on May 3, 2012, but the application was
withdrawn on April 25 after the GBT negotiations broke down. The Dean Report found Alderney’s licensing process to be “fit and proper” despite the unusual vetting procedure and the reliance of the Commission on Full Tilt’s external lawyers as a communication middle-man instead of having a direct relationship with the company. He also found to be “reasonable” the way that the AGCC handled a regulatory hearing with Full Tilt in 2010 once it had discovered that the operations move from Kahnawake (at the time of the Oxalic and Vantage license applications), was undertaken some time before the AGCC had approved the adequacy of the arrangements. The AGCC issued written cautions on June 24, 2010, and prompted Full Tilt to put in place revised compliance arrangements. Between 2008 and 2011, the AGCC carried out annual and supplementary on-site inspections covering both technical and financial aspects of Full Tilt’s business. The inspections revealed a number of shortcomings: • Safeguards against underage gambling and anonymous funding of accounts • Lack of compliance resources • Inadequate information about payment processors Dean found that Full Tilt was “slow to get to grips with some of the issues” but not fundamentally unwilling to do so, nor obstructive, hence, AGCC’s actions were “appropriate, timely and fair”. The report also addressed the fact that the AGCC was permitting Full Tilt to accept “unlawful” business from US players. Despite the majority of operators in the industry withdrawing from the market and some other jurisdictions (excluding the Isle of Man which continued operations with PokerStars) prohibiting their licensees from operating in that market, Alderney knowingly permitted Full Tilt (under its Vantage license) to
continue with business as usual. Its response to the investigation was threefold: 1. There was no definition of what constituted an “unlawful transaction” 2. There were numerous legal opinions that poker was not unlawful under federal or state law 3. The AGCC cannot be responsible for interpreting or enforcing laws of other jurisdictions, but instead it places the onus on the licensed operators to conduct their operations in compliance of local laws The Report notes the DoJ announcement of December 23, 2011, which confirmed that the scope of Wire Act was for sportsbetting only, and outlined that the AGCC has never licensed a US-facing sportsbook. However, the reality is that despite the opaque nature of the legislation, the intention of the Unlawful Internet Gambling Enforcement Act (UIGEA) was clear, and this was understood by every single operator that withdrew from the market. On several occasions, the Dean Report outlined that Alderney is “comparable” to other jurisdictions and actually states that the procedure followed by the AGCC in this entire process is an example of “regulation working as it should”. Yet, Full Tilt’s shortcomings surely suggest that those procedures and processes are perhaps not stringent enough. For all of Full Tilt’s “deplorable” practices and for all of the AGCC’s “fit and proper” processes, as deemed by the Dean Report, the fact of the matter is that this situation should never have been allowed to happen. The fact that it has means that justifiable questions will persist as to “why?”
Aideen Shortt is an experienced consultant, author and researcher in the gambling industry with 12 years of work across all sectors and verticals. aideen.shortt@gmail.com.
iGamingBusiness North America | Issue 01 | May 2012 | 43
Management & Marketing
Dealing with Europe David Zeffman, Head of the Gambling Group at international law firm Olswang LLP, provides an insight into the fundamentals behind entering into deals with European iGaming companies. Since the DoJ’s change of heart just before Christmas, 2011, the consensus view is that it’s now only a matter of time before online poker is legalized in the US, or at least in certain states. Likewise, the general view is that the most likely first licensees will be the incumbent land-based casino groups, who will look to harness their brands and knowhow to the tried and trusted technology
and marketing experience of the European iGaming operators. So, further transatlantic deals are likely to take place which may go further than the previous strategic partnerships and contractual joint ventures (Caesars/888; MGM/bwin.party) and result in M&A activity. What, then, are the key issues for US companies to consider in any of these deals?
Key Components Behind Brokering Deals with European iGaming Companies Marketing • What is the European operator’s track record in acquiring and retaining customers and what kind of return do they get on their marketing investment? • How transferable is their European experience to the US market? • Are the companies intending to share liquidity (if permitted by regulators)?
Regulatory history • Did the European operator take wagers from US residents before (or even after) the introduction of the UIGEA (in October 2006)? • In general terms, is the operator likely to meet US state (or federal) regulatory standards?
Technology • How good is the company’s technology? • Will any acquisition timetable permit the acquirer’s technology experts to carry out (or engage a third-party consultant to carry out) sufficient due diligence on the technology platform to verify its quality and robustness and to assess the ease with which it can be deployed?
44 | iGamingBusiness North America | Issue 01 | May 2012
• Is it scalable and can it be easily adapted to comply with different technical/regulatory standards and potentially different player requirements? • Does the company own all rights to its technology? Should some of the payment terms be contingent on the technology actually working as promised?
People and culture • Is there a good fit between the organizations seeking to work together? • Are any of the key personnel likely to be unacceptable to US regulators? • How reliant is the target company on key individuals to operate, maintain and develop its technology and how can they be retained?
Management & Marketing
“ Further transatlantic deals are likely to take place which may go further than the previous strategic partnerships and contractual joint ventures and result in M&A activity.”
UK public company acquisitions • Where the target company is listed on a UK stock exchange, recent changes in the key governing legislation for acquiring such companies (the City Code on Takeovers and Mergers) has strengthened the position of the shareholders of target companies which can mean less deal protection for acquirers (e.g. break fees are no longer permissible) and there is a greater onus on the acquirer to carry out all its due diligence, arrange its financing and commit to the acquisition earlier in the process than was previously the case.
Other territories • What scope is there for the US and European companies combining resources to target other territories, for example in Asia (where some US casino groups have significant operations)?
Merger control • Does the US company currently have operations in Europe or generate turnover through sales to European customers? If so, an acquisition may trigger a filing requirement under the European Commission’s merger control rules or under the merger control rules of individual European Union Member States.
Due diligence
Regulatory licenses • Is the European operator licensed in a jurisdiction that US regulators deem reputable? • What is the process required if the US company wants to take
an equity stake and appoint directors to the board of the European company? • What regulatory approvals are required in the US and Europe?
• In an M&A situation, is there a change of control clause in key contracts? • Does the company being acquired have any existing partnerships with competitors of the acquirer?
iGamingBusiness North America | Issue 01 | May 2012 | 45
Management & Marketing
How do you Build Liquidity in a Limited Pool? On the desk of a Nevada Gaming Commission officer are the files of 15 separate companies, each one applying for a license to operate a real money poker site in the Silver State. Will Griffiths, founder of The Level Media, is willing to wager that all 15 of these companies think that being first-to-market will make them the go-to poker site for online poker players who want to play at a regulated site. And he’s willing to go all-in on the fact that most of these companies subscribe to the “If you build it, they will come” notion. Unfortunately, thinking that a poker site will automatically have a giant field of players flocking their way – and staying put – just because they’re first-to-market is nothing but a giant field of dreams. In Nevada, there’s a pool of approximately 55,000 possible poker players. I can spend the rest of the article crunching the numbers but no matter how you slice it, the truth is that there aren’t enough poker players in Nevada to provide the type of action at every rake and stake level that poker players demand. That’s true whether all 15 applicants land a site. And it’s likely true even if only one site reigns supreme. At the end of the day, though, it doesn’t matter; Nevada will likely end up being the test case that will provide the future roadmap that other states follow to offer licenses. California’s poker playing population is as large as the UK’s, so there’s definitely a market to go after. While the market will vary from state to state, the single critical factor an online poker site will face while trying to gain traction will be the same from coast to coast. And that’s liquidity.
“ It’s important to note that there is clearly far more to running an online poker business than throwing money at the wall and hoping for the best.”
46 | iGamingBusiness North America | Issue 01 | May 2012
Liquidity essentially means critical mass – the number of players an online poker site needs in order to provide: • enough action at every stake level in ring game play; • enough sit and go action that provides enough players to get games started quickly; • and enough players to provide a compelling tournament schedule that doesn’t bleed a site dry because it’s forced to pay for guaranteed tournaments that overlay.
So how does a new online poker site become a leader with the type of liquidity that will make them attractive and successful? For the post-Black Friday answer, we need to take a trip back to the world of online poker before April 15, 2011. Here’s a quick run down of some of the tactics and strategies the former biggest US-facing poker sites used to build and retain their player liquidity.
Full Tilt Poker – build a brand In 2005, Full Tilt Poker presented a huge marketing campaign using the top pros at the time. Its angle was that you could learn, chat, and play with the pros, no matter where in the world you resided. The product was both solid and feature-rich, and liquidity was built using incredible promotions, fantastic branding, and a hugely appealing user interface. The company bought all the TV time through sponsored deals that saw pros wearing patches. It bombarded the airwaves with TV advertisements on all types of programming and, eventually, it even produced its own high stakes TV programs.
PokerStars – spend big money PokerStars also bought its way into the market with a marketing spend that would outstrip most Hollywood movie budgets. The company also spent much of this marketing budget on TV adverts, sponsorship of televised tournaments, and paying poker
Management & Marketing
players to wear its logo in televised events. It also invested in marquee events such as the PokerStars Caribbean Adventure (PCA). One of the major factors that helped build liquidity was its tournament schedule, which consisted of huge guaranteed weekly tournaments that attracted both casual and serious online tournament players. PokerStars became synonymous with the Sunday Million tournament, where $1 million was up for grabs every week.
UltimateBet – offer what players want The smallest of the big three with less than a sixth of the player base of PokerStars, UltimateBet became hugely attractive because of its fast software and a tournament schedule that provided real value. It also sponsored some of the top pros, including leading poker pro Phil Hellmuth, and spent millions of dollars on TV advertising and programming.
So, we have a theme here; product, pros, an attractive tournament schedule, a TV presence, a big brand – mix them together and you’ve got a winner. However, it’s important to note that there is clearly far more to running an online poker business than throwing money at the wall and hoping for the best. Other factors that made these few companies succeed above the rest include a slightly unfair differentiator known as the 2006 UIGEA bill. Its passing led to many sites exiting the US market, including PartyPoker, which had the biggest market share at the time. Party’s exit left a huge player base to be picked up by those operators who elected to continue to operate in the US. Why is this relevant? Well, this factor won’t exist in the same way if the US market slowly opens its doors to licensed operators. But one thing is clear; these sites will have to generate liquidity from scratch. And a smart marketing strategy is key.
Some of the former US operators relied heavily on affiliates to help build liquidity. In some models, they represented upwards of 35 percent of revenue. I do believe affiliates have an important role to play in the future, but I think the commercial model on offer will be less generous. Online poker operators had up to 4,000 affiliates that sent players to their site but in reality, only a small number of affiliates had the ability to send the majority of players. It was a 90/10 model, meaning only ten percent sent the majority of players. Equally important (if not more so) to marketing in building liquidity is quality of product. No matter how slick the marketing is and no matter how fantastic the tournament schedule might be, a sub-par poker product will force a site to fold. For the last decade, poker players have enjoyed fast, feature-rich software that offered an enjoyable experience. If a site’s software was mediocre, poker players didn’t stand for it. Today’s savvy poker player will still demand the best, and those companies that stand by the first-to-market mentality will quickly realize that poker players demand and expect nothing short of excellence. So what happened to all those companies who couldn’t buy liquidity? Rather than cashing in their chips, they joined a poker network where their user base would join a larger pool of players made up of players from other network sites. Companies like Microgaming, Cake Poker Network, and Ongame are examples of poker networks. This model provides instant liquidity, but also has a number of negative business issues. In our post-Black Friday world, a number of US operators are still attracting US players. And the global market remains open to PokerStars – the only site still standing after Black Friday. You can view their player liquidity by visiting www.pokerscout.com. It’s something I hope those 15 applicants did before banking on regulated poker in the US making them rich.
iGamingBusiness North America | Issue 01 | May 2012 | 47
Feature
Shuffling the Deck Shuffle Master’s acquisition of Ongame Network from bwin.party is a signal of real intent from the global gaming supplier that it sees the iGaming space as an opportunity for significant strategic growth in global regulated markets. Both parties talk of a “perfect fit,” a marriage of land-based and online expertise that can be mutually beneficial to their aspirations. Shuffle Master CEO, Gavin Isaacs, speaks of Ongame as a “Jewel in the Dust” that through his management and investment, he hopes to return to former glories.
“Ongame was a half a billion-dollar company – it was like a jewel in the dust in many respects. We figured that, with our management style and with our investment, we could really restore some of its glory.”
48 | iGamingBusiness North America | Issue 01 | May 2012
Feature
Can you describe the acquisition process that you go through to identify the right target to complement your business model in the iGaming space. When I started the company, one of the things we were lacking was a strategic plan. So we sat down and looked at our strengths and where we wanted to grow. We decided that iGaming was an opportunity to grow and, with our core strength being in proprietary table games, we identified it as a poker opportunity. We looked at our strategies and decided that a logical extension of what we’re doing would be to buy or partner with a B2B poker operator. When it came to partnering we decided, rightly or wrongly, that most of the people out there won’t get through licensure and if they do it will take them a long time, meaning they would miss the boat. So we decided to buy. I went to a conference in Scottsdale and spoke to Jim Ryan (co-CEO of bwin.party) and he told me that he had this company that he was looking to sell that would fit with our strategies. So we had a look at it and we went from there. Of course, one of the difficulties was that being part of the bwin empire, Ongame had no identity of itself, including in its accounts. So we spent three months recreating the accounts and another two months verifying and auditing them. We found out that it was a good little business; obviously, it needed some investment and as part of the negotiations Jim and Norbert (Teufelberger, co-CEO of bwin.party) agreed to allow that investment to start. So that’s all in process now and we hope to close on June 1. Our number one strategy is to invest in the company and get the business healthy and profitable in the UK and Europe, and then to get the first-mover opportunity in the US when that occurs. What were the defining characteristics of Ongame as an acquisition target? Why is it a good fit for Shuffle Master for the iGaming market?
I think there are three things that stood out in the acquisition process and one that emerged afterwards. The first thing was that Ongame is a B2B business. That was a focus for us as we don’t want to compete with our customers. The second thing we looked at was technology across the board. We looked at all the different poker platforms out there and Ongame’s new P5 platform is outstanding, one of the better ones out there. We figured it would take us 18 months minimum to build it ourselves at the cost of many millions of dollars and we wouldn’t have the benefit of the expertise of the team at Ongame. At one stage, Ongame was a half a billion-dollar company – it was like a jewel in the dust in many respects. We figured that, with our management style and with our investment, we could really restore some of its glory. When we met Peter (Bertilsson, MD of Ongame) and his senior management team, we were really impressed with their desire to succeed and remove themselves from the anxiety and the issues they’ve been dealing with as a company that had been up for sale for two years. So, we felt that it was an extremely good fit for us.
The other side of the coin...
Peter Bertilsson, MD, Ongame Network The Deal “For Ongame, it’s the perfect deal. The size of Shuffle Master means that it is large enough to be present in multiple markets around the world (which Ongame can now access without the hassle of multiple licensing), and it is small enough that we are still important. “The management team at Shuffle Master is down to earth, results oriented
How have the two teams bonded so far? Are the early signs promising that this will be a potentially fruitful collaboration for both entities? Absolutely, yes. We haven’t closed yet, but we’ve met with Peter and the management team and with the whole staff in Sweden recently, and Jim Ryan and Norbert have been wonderful in allowing access to all of that. We’re building relationships and already performing product and business development reviews. There seems to be a very good culture there and we have a very positive culture at Shuffle Master. As Ongame has learnt more and more about our culture and met our people, I think it has resonated that this could be fun for Ongame as well. It’s a good place to be.
and hard working, and these are traits that we connect with. “Perhaps the best thing about this deal is that the products are a great match for each other. We are a pokeronly company but we also need to get into the casino space, and Shuffle Master has both the knowledge and the games. “Another complimentary part of the deal involves Shuffle Master’s social platform. This benefits Ongame because we have no social offer and we now have no requirement to go into that space because Shuffle Master is already there.”
iGamingBusiness North America | Issue 01 | May 2012 | 49
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www.igamingbusinessnorthamerica.com *Orders must be placed by the 31st May 2012
Feature
The company was looking for some direction and that’s what we were looking for a while back. I think Ongame has seen the positive impact we’re having at Shuffle Master and the great atmosphere we’ve got going here and I hope that it is excited about it. In your releases, you mention the value that the potential acquisition could afford you in the online space. How specifically do you think the combination of the two companies, and your expertise, will benefit you when approaching potential customers in regulated markets? Ongame is a specialist in online poker for regulated markets, but there were a couple of things that it needed to be a much better offering, namely the gaming platform and the side games. We’re investing in the company now and the summer releases should be good. We have just under 300 licenses around the world so we really understand how regulations work and how to work within regulation. So the combination should work out very well. That’s the whole strategy, that’s the value. Many companies have ambitions of coming to America, getting licensed and being competitive. We operate in many jurisdictions around the world and have licenses in most of those jurisdictions so by virtue of a clean acquisition, Ongame becomes a Shuffle Master product through its license. Those who want to come to America either have to be acquired (and we didn’t see much else out there to acquire in that space) or alternatively, they have to go through that licensing process which we’ve all been through. It’s not easy, and it takes a long time. Is the marriage of land-based experience with online expertise something that will stand out to your potential customers of the future? I think it’s an absolute. One of the things we looked at when we built our strategic plan was the customer and the end customer.
The end customer in North American casinos is ageing and the offering hasn’t really kept up with what that player wants. I come from a slot and systems background at Bally and Aristocrat and now, with the table knowledge that I’m learning, we can see that table players are genuinely younger and that iGaming players are genuinely younger. There is an opportunity for iGaming businesses to attract older players and for casinos to attract younger players. Put the two of them together and you can combine the offering – you can expand your customer’s business. I genuinely believe in that being a great extension so, strategically, I think it makes a lot of sense and I do believe that it’s a way of expanding the scope for your customers and for improving the offering to others.
The other side of the coin... Peter Bertilsson, MD, Ongame Network The Process “There are complexities for a US company to enter into any deal with an online operator. It’s been a time consuming process and the compliance aspect – the process to ensure we were a fit company for a land-based casino supplier to own – has been extremely difficult. “We’re also only half a year old,
So there’s an opportunity for landbased communities to bring that population back into the casinos through their iGaming offering? Absolutely, although you’ve got to be a little bit careful as I don’t think the cross-sell is as big as some might think on day one. The land-based casino’s database isn’t necessarily a great cross-sell but there will be a part of it that is. It will be an evolution. You’ve got to start somewhere and once you get them together you’ll attract more people.
with a small amount of historical data, so it’s a challenge for anyone to acquire a company of such youth. We are old operationally, but we are young financially.”
Strong Proposition “What we will now have on the Ongame Poker Network are the first branded poker games in the industry. We will be offering peer-topeer versions of Shuffle Master’s house games that nobody else in the online space will have.
Coming back to the deal itself, does this act as a barometer for your overall acquisition strategy? Are we likely to see more acquisitions of this type in the future? Probably. We’ve made it very clear that we’d much prefer to put our money to work to grow the business. If we can find the right acquisition, which strategically makes sense and is at the right price, then we’ll do it. I have three golden rules when it comes to an acquisition. The first one is strategic; it must be a strategic fit for our business. I’m not going out there to buy an auto parts company. You can see where we are focused
“This is a strong proposition because everyone in the online industry knows how well brands sell into the casino world, and now you have something that you can brand in the poker space – something you can offer your customers that nobody else has.”
The Right Fit “The connection between the two companies is “hand in glove.” They are in the US, we are in Europe, they are land-based; we are online; they are casino, we are poker.”
iGamingBusiness North America | Issue 01 | May 2012 | 51
Feature
The other side of the coin... Peter Bertilsson, MD, Ongame Network Market Entry “Until our discussions with Shuffle Master, we hadn’t identified how to enter the US market in terms of licensing, as it is a nightmare for anyone not inside the US. But since Shuffle Master has all of these licenses, we together have the best of both worlds – Shuffle Master has the licensing capabilities and Ongame has a modern poker platform that can now be used in the US, once the market has opened up. “Shuffle Master isn’t acquiring Ongame for the US. It is acquiring Ongame because it is a good company that has a presence in Europe, and Shuffle Master actively wants to pursue the European market. If the US opens up, that will be a fantastic opportunity when it comes. “What Ongame gets now is a fantastic B2B-based owner that will help the company to expand into customer markets that we have struggled to access.”
and where I believe the extension of the world’s gaming industry is going, so to take our strengths and add companies and skills to that makes a lot of sense to me. Secondly, even before I get the financials done, it’s got to be a good cultural fit. I’ve been in and seen too many companies where the culture kills a lot of these deals and can kill the business’ momentum. We have good momentum in our business so culturally we can’t bring in poison. It’s got to be the right “mojo.” Thirdly, it has to make financial sense. We have a great little team here and we sit down and talk pretty openly about the things we want to do and conversely those that we don’t. We’re open (to further acquisitions) and we’re looking. The deal positions you well, not just for the US but for all regulated markets. What specific advantage do you think this will provide for you in regulated American markets? I believe the regulated American markets, when they do go towards iGaming, have made it fairly clear across the board that poker will be the preference. If you look at what poker companies will be looking for in a supplier, they’ll need someone who is licensed across multiple jurisdictions. We have that. Some casinos won’t want to give their players to competitors so the online companies that have already aligned with major competitors may not be attractive to some of the other casinos. Obviously, you’ve got competition in companies like IGT and
Entraction, so the question will be whether we can give a better service and have a better product than them. Then, of course, you’ve got the other people who want to come in who aren’t yet licensed and who still have to go through that process. They think they’re going to get it done in six weeks and be ready to go when the market is open. We are well positioned and I think we’ll find some good partners to work with. The other thing that doesn’t hurt is that poker is a table game and we are a table game leader. What are your thoughts on the appetite for intra-state gaming in the US? We’re seeing progress in Nevada and New Jersey to a degree but fluctuating progress elsewhere. How do you think the landscape will look in the next 12-24 months? Everyone thinks it’s better for the country if iGaming is federally regulated. The way it seems to be shaping up in election year is that if the federal government doesn’t move on the subject, then it will open up state-by-state. That’s my gut feeling. I’m still hoping for a federal solution. However, it really doesn’t matter to us. Even if it is federal there are going to be state nuances. One of the great advantages we identified in the Ongame platform was its multi-jurisdictional capabilities that really accommodate the needs of the different jurisdictions. It really doesn’t matter either way; you’ve got to have a plan for both.
Structure of the deal “As consideration for the purchase of the shares of Ongame, Shuffle Master will pay bwin.party Services (Austria) GmbH €19.5 million in cash, subject to certain adjustments at closing, and may pay up to €10 million in cash within five years of closing, contingent upon the commencement of legalized, real-money online poker in the US within such period. The €10 million contingent payment decreases through the five-year period. Shuffle Master expects to fund the transaction with cash on hand or availability on its existing senior secured revolving credit facility.” Excerpt from the official press release.
52 | iGamingBusiness North America | Issue 01 | May 2012
Scott Butera
Kevin DeSanctis
Mitchell Etess
Robert Griffin
Gary Loveman
Virginia McDowell Timothy J. Wilmott
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Lotteries
Illinois: Piloting the Internet Program The Department of Justice’s reclassification of the Wire Act has proven to be the catalyst for US state lotteries to reconsider their approach to the Internet, with Illinois leading the way in allowing state residents to purchase tickets online. Illinois Lottery Superintendant, Michael Jones, has been researching the lottery’s online potential long before the DoJ made public its opinion and here, he tells iGaming Business North America about the process that brought his state lottery into the digital age. The process to bring the Illinois Lottery online has been ongoing for a number of years – can you outline the background of the program that has seen you pioneer the Internet lottery movement in the US? I had run the lottery in the early 1980s with some degree of success, building up around a billion dollars in four years, and I had a couple of companies that were peripherally involved in the lottery business. Approximately seven or eight years ago, I was approached by a group of prominent Chicagoans who came to me and asked “why can’t you buy a lottery ticket over the Internet?” So, at that point, we began trying to find out why we couldn’t. That led to the legislature actually passing a law that specifically directed the Department of the Lottery, which was part of the Department of Revenues at that time (roughly four years ago), to carry out an Internet test. The legislation specifically directed the Lottery to test the sale of Lotto and MegaMillions, and the ways it could control the geography and make sure that people under the age of 18 couldn’t play. Also, given the firm direction in which we were going in using this new retail channel (new for the Lottery at
54 | iGamingBusiness North America | Issue 01 | May 2012
least) we wanted to test how we could broaden the lottery’s player base. Finally, it was included in the same legislation that created a private manager for Illinois and was passed two years ago. It was the opinion of the legislative legal counsel as well as that of the Governor, that to sell Lotto and MegaMillions over the Internet was legal; that it did not violate federal law. The Department of the Lottery was also in contact with the federal Department of Justice over a two year period, advising them of what we were doing and to see if they had any reservations. We didn’t receive any negative reaction and so, when I became Lottery Director in October, I moved aggressively to set up a system by which we could sell tickets to lotto customers online. And, lo and behold, on December 23, the DoJ issued a letter which basically confirmed what our attorneys had always told us was true. It was legal to sell lottery tickets over the Internet. All in all, it took about seven years to come to fruition. That announcement from the DoJ has played catalyst to a number of other states’ intentions regarding the possible expansion of intra-state gaming. Clearly, you were well down
the line with your pilot program but apart from confirming your attorneys’ counsel, did it act as further credence to what you were doing? I was always a true believer. It certainly validated what we were doing, but I also think it took away some uncertainty for the major companies such as GTECH, Scientific Games and Lottomatica (who were, in essence, owners of our private management contract), that we could move forward expeditiously without any fear of transgressing on any federal regulation or law. What were the results of the research you oversaw in terms of the forecasted impact of online lottery sales on both state residents and also potential state revenues? This started around four years ago though my own company (Michael Jones and Company) and Chicago-based company, Leo J Shapiro and Associates, where we carried out extensive research that we shared with the legislature as to what this potential retail channel means in the grand picture of where the lottery should be, who should play it, the official political considerations and the potential impact on the bricks-andmortar industry. The results were logical
Lotteries
but also overwhelming when you think about the size of the potential market especially with a game like MegaMillions, which has a dynamic grand prize which can generate huge prize amounts. So, that research indicated a significant number of what we called ‘Jacks’. The counter to that, ‘Joe Player’, is somebody who plays the lottery once a week. A ‘Jack’ is basically everybody else, but the large percentage of Jacks are people who the
The Impact on the Lottery’s Retail Partners Internet MM/PB play is likely to expand the number of retail lottery players; retail revenue impact may be neutral. The Internet Pilot Program will not remove any products from the at Recent Large Jackpots retailer network. Lottery retailers remain the primary sales channel where players will have access to the full portfolio of Lottery products. Retail is and will continue to be the key channel in the Lottery’s growth strategy. Adding new channels such as the Internet will strengthen the overall sales platform. Research conducted in February 2012 found that the Internet Pilot Program will increase sales at retail locations throughout the state by +2% ($275 million to $282 million) and players at retail locations are forecasted to increase from 5.25 million to 5.70 million or 9%. These increases in sales will allow for even greater contribution to profit in the range of $22.5 million to $40 million including only Mega Millions. Adding Powerball, the additional profit will increase an estimated $13.5 million.
lottery is invisible to; it’s not relevant to them. They’re philosophically in favor of lottery but they very rarely play. If they do, they only play when the prize for a game like MegaMillions or Powerball is above $100 million. So, if you took a look at those people and ask them what their behavior might be, it’s fairly compelling that prize levels of $100 million or more would attract between 600,000 and a million players, and those
people tend to be younger, more affluent and boast a higher percentage of women. Two years ago, we carried out more research as part of our potential bid for the private managers contract – we had to come up with a “dollar figure” as to what we would potentially be bidding, and how much profit it could generate for the state – and the research basically duplicated what we’d found two years previous.
“ It emerged that the retailers had misinterpreted the law – misread the lottery’s strategy. They thought that we were taking Lotto, MegaMillions and PowerBall away from them. When they realized this was not the case, they were fully supportive.” Number of Retail Players | 5.25M 5.70M (+9%)
New retail only players +0.27M
Current retail players
Will play internet only -0.33M
5.2 million Continuing Continuing retail retail and only internet 3.69M 1.23M
New retail and internet players +0.51M
Retail Revenue | $275M $282M (+2%)*
New retail only players +$9M
Current retail revenue
275 million
$
Continuing Continuing retail retail and only internet $201M $151M
*If ‘Retail and internet’ Players do 40% of their spending at retail and 60% on the internet.
Will play internet only -$11M
New retail and internet players +$28M Source: Illinois Lottery
iGamingBusiness North America | Issue 01 | May 2012 | 55
Lotteries
Cross-Channel Lottery Purchasing in Illinois 3 in 4 potential Internet lottery players say they would buy tickets at retailers as well as on the Internet. Internet Only or Internet & Retail? In addition, Internet-based sales and marketing of Lottery games will draw new consumers and grow sales at retail by creating
a new understanding of and new demand for Lottery products. To further the Internet-retail connection, the Illinois Lottery will co-promote across the channels, offering a variety of integrated promotions that engage social media and web technology to drive consumers into retail locations.
Reasons for Not Purchasing at Recent Large Jackpots
Will play on Internet only
26%
Will play at retail and on Internet
74%
Question: Why didn’t you buy any Powerball tickets for the $170M/$200M/$250M/$325M drawing?
70%
Meant to play but forgot
60%
Not convenient to buy a ticket
50%
Didn’t have the money
40%
I was out of state Didn’t know the jackpot was that high
30%
Ticket price went up
20%
I only play at higher jackpots
10%
Decided to play a different lottery game
0
I limit how open I play
$170M
$200M
Then I became Lottery Director, or Superintendant. When the DoJ letter was released, the bricks-and-mortar retailer trade groups immediately came out against it. I reached out to them to say that “I understand their plight, but that I come from a business background and I think this is going to be a significant boon to you”. For the first time in a long time, we would be able to increase the
56 | iGamingBusiness North America | Issue 01 | May 2012
$250M
$325M
total number of people who play the lottery, and the statistics suggested that it’s good for the retail stores. However, they still objected. Then in an amazing turn of events, following a Senate executive committee meeting, it emerged that the retailers had misinterpreted the law – misread the lottery’s strategy. They thought that we were taking Lotto, MegaMillions and PowerBall away
Source: Illinois Lottery
from them. When they realized this was not the case, they were fully supportive. So rather than fearing the cannibalization of their retail business, their assumption was that it was actually taking away from it? As you say, a misunderstanding that this
Lotteries
“ The expansion of the lottery is a legislative question and I think that the DoJ letter created a great deal of momentum for the gaming community at large, far beyond lotteries.” collaboration was merely moving the product online rather than removing it from the retail premises. That’s exactly it; the concern was not cannibalization, the concern was removal. These guys are good businessmen and they understand numbers and how beneficial this would be to them. Once they grasped the true nature of the idea, using the National Lottery (UK) and Finnish Lottery as examples, then
they were much more open to the scope of the project. I have a number of ideas on how to use both of these channels to compliment each other and certainly to take advantage of the interest generated by large grant prizes, play over the Internet and then converting that to playing at retail premises. Moving on to expansion, is there any potential scope for expanding the lottery’s offering to include further iGaming products should legislation allow? We are very early in the test, but I do think we need to have something approved in terms of being able to prohibit underage and outof-state play and also have some controls, as there are in the UK, over how much people play. For the first time, we have a responsible gambling program that actually works. But, the expansion of the lottery is a legislative question and I think that the DoJ letter which, in essence, only prohibits
New Mega Millions/ Powerball Players Expected
Current MM/PB players Potential players with MM and PB on internet
Do you think that further US states will follow in your lead in embracing the Internet and do you see yourselves as pioneers in this regard? I certainly think most lotteries quite logically will try to broaden their player base by creating or emulating the e-commerce channel that’s used by millions of people who are philosophically in favor of the lottery, but who we are currently irrelevant to. As far as us being pioneers, I don’t think we set out to be pioneers, we just set out to competently execute the intent of the legislation passed two years ago. This is certainly a work in progress and I don’t think we’re there yet; but we will be there soon.
730,000 more weekly MM/PB players
600,000 players new to lottery and MM/PB plus 450,000 lottery players new to MM/PB 2.83
2.78
2.23
2.22
1.78
1.76
1.76
1.62 1.39 Millions of Illinois Adults
Illinois-specific research (617 interviews completed across Illinois among adults 18 or older; sample was weighted to be representative of age and geographic distribution) suggests that 20% of those who will purchase online have never before played the Illinois Lottery, and 53% will be light or lapsed players.
sportsbetting, created a great deal of momentum for the gaming community at large, far beyond lotteries. At present, we have no plans to do anything other than add PowerBall just because it’s a logical extension of these block lotto games.
1.03
Once a week or more
1-3 times a month
Less than once a month
Frequency of playing Mega Millions and Powerball
Never play MM but play lottery
Never play lottery Source: Illinois Lottery
iGamingBusiness North America | Issue 01 | May 2012 | 57
Feature
Bridging the Great Divide In building a new B2B division focusing on the interactive gaming market, Bally Technologies has positioned itself as one of the leading suppliers that can lean on dual online and land-based expertise. John Connelly, Bally Tech’s Vice President of Business Development, talks to iGaming Business North America about the company’s venture into the world of iGaming.
It’s been a busy time for Bally Technologies, particularly with your business in the interactive space. There must be quite a buzz in the office with regards to iGaming at the moment? There certainly is, and I think that buzz comes primarily because the customers are beginning to understand our approach and their feedback has been creating tremendous amounts of excitement. Our approach is somewhat unique and we took a lot of time trying to architect the right method for our company and for our customers in the interactive world. We’ve been greatly surprised, in a positive way, with the reaction we have been receiving from both existing and potential customers in the US. So, I think that’s driving a lot of the excitement.
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I would assume this might come as some solace for a lot of your existing customers, that should they want to move online they have a partner with them that knows all about the crossover between land-based and online. That’s very true, and I think there are a few key points that we’ve been slowly educating the market on with regards to our approach. First and foremost is that we are a B2B company. The material we’ve been circulating recently has really emphasized that as I strongly believe that our customers are becoming more educated on the interactive market, the suppliers within that market and their existing business models and are concerned that, perhaps, they have a supplier who is not just a supplier but an operator as well. We’ve assured our customers that it is in no way our intention (to become an operator), and the model we’ve constructed validates that to them. A second key point is that the architecture of our model allows our customers to maintain and control the data on their platform. Traditional casino operators are accustomed to having the player database – the information that they derive from the casino floor – hosted within their location, or under their control, and legally it’s their content. There is concern that some of the
proprietary architectures of other platforms do not necessarily allow the customers to control the data in the fashion they’re accustomed to and, therefore, it creates some risk and exposure to them in the future if they decide to change suppliers or have to evolve with market technology. Finally, there has been this premise that suggests that only 15 percent of online players have ever been to a casino (or are traditional casino players), while 85 percent are solely online players and a completely different demographic. Now, I don’t know if it was a sales pitch on the online companies’ part, but when I initially had discussions with people up to twelve months ago, they were saying that the online companies and their CRM tools are better suited for the online world, and that the traditional operators don’t really understand how to operate outside of a bricks-and-mortar casino. The attitude of the online companies was, “let us do it for you – we will provide a turnkey solution with poker, casino, bingo and sportsbook all from one platform/company”. This is very irregular from both a global commercial and technology perspective today. It is the more open, best-in-class case studies that we see evolving and succeeding. When we started diving into the numbers more carefully, it appeared that the majority
Feature
“ We’re a company with an 80-year track record of evolving and adapting within a changing gaming environment. We’ve gone from a pinball company to a leading supplier of today’s gaming technology.” of the profit coming from online sites in Europe was from the casino applications. And then, when we looked into the casino applications we started to see that the content was very similar if not identical to that being provided in a traditional casino environment. It made us think that although 85 percent of online players potentially had not been to a traditional casino, it would appear that they are attracted to the same type of content that you would find in a bricks-and-mortar environment. Therefore, pulling those players into the physical casino could actually bring added value to a land-based business, and provide them with a new form of revenue, a new player base and a new demographic. And land-based casinos have many advantages over online suppliers in attracting those players into a traditional casino. For example, they have hotels, restaurants, spas and shows. So, in the online world, many of the incentive schemes offered could be targeted at bringing players back into a traditional casino, by interfacing your traditional casino platform with your online casino platform and cross promoting. In effect, you’re promoting and trying to incentivize players in the online world to come into the physical casino and also ensuring your traditional casino players,
when they do go online, are tied to your players’ club and incentive packages. Some of the concern of the landbased gaming companies you’d be targeting was that migration to the online sector would fill them with trepidation, in some instances for fear of cannibalization. But you are saying that operators can transfer their core expertise into the online space and cross-sell those benefits. Absolutely, and what I’m also championing is that if you’re going to have a partner to help you do that, make sure it’s a B2B partner that can distribute the content on your floor throughout the digital spectrum. There are incumbent suppliers in the online space who have feet in both land-based and digital camps. I would imagine that mixture of heritage and expertise will give you a key advantage in the online space particularly with your existing customers but also for those that you would seek to acquire. Exactly. Our offering, as it evolves here quite rapidly, is allowing us to show our customers that we’re able to provide a secure B2B
platform from a regulated company that has the ability to integrate online hand-held distribution networks along with social offerings into their traditional core business. By having that integrated approach, it gives them the necessary flexibility to choose best-in-class content and evolve as the market and technology continue to advance. It also allows them to do so in a fashion that protects their core business and eliminates the possibility of potential suppliers one day waking up and deciding they want to become B2C and compete against them. Not only do they understand this, but they’re now demanding it of many of their suppliers as they move forward. I think it’s a decision every company, certainly in the supply sector, is going to have to make and as Bally, we’ve made that decision, and it’s B2B. As a supplier, what are the key challenges and associated risks in effectively straddling the online/ offline divide? One of the most important objectives for every employee in Bally is to ensure that we maintain shareholder value. In doing so, whenever you expand your organization into new areas (the new interactive division as an example) you want to ensure that you do so in a fashion that does not negatively impact your core business. The executive committee here at Bally has taken considerable strides to ensure that as we carry out these acquisitions and as we evolve our interactive division, that it is not in any way at the expense of our core business.
iGamingBusiness North America | Issue 01 | May 2012 | 59
Feature
We’ve taken calculated steps with our investment strategy in such a fashion that the technology we are acquiring is very much in-line with the foundation and history of our company. What I mean by that is that the architecture and the platforms are open in nature. They come from companies that we are able to integrate and place within our organization as B2B – and in no way B2C. These acquisitions provide us with the knowledge base that allows us to form a separate infrastructure and focus on the interactive division without necessarily affecting the core business. However, with that said, we have, in parallel, identified key areas within the organization for integration between the core business and the interactive division where it is necessary and where it is to the advantage of our customers and our business model. One of those examples would be the integration between both our mobile and online platforms into our core
50 casinos today using cloud technology through our concierge applications, play-forfree and marketing solutions. It’s something that we continue to invest in and we have, I believe, the largest concentration of casino customers in the United States using our cloud-operated mobile offerings. So, Bally is very familiar with this technology and will continue to integrate it into our online and traditional businesses in the future. Moving on to the US landscape, Nevada is leading the race to operate intra-state online poker regulations. What is the scope of opportunity for a company such as Bally Tech in an intra-state US market? Bally was one of first to apply for a license here in Nevada. We feel confident we’ll be one of the first to be approved. We’re already in the process of installing our iGaming platform in the state and making
“ Bally was one of first to apply for a license here in Nevada. We feel confident we’ll be one of the first to be approved.” system so we are able to offer our customers a unique approach from a promotions, player tracking, management tools, tournaments and accounting perspective, to provide that single view of the player that they’ve been looking for. Within those acquisitions, how important was the “cloud computing” component? Obviously, there has been a lot of discussion in the industry about “cloud computing” and some companies have, I believe, attempted to paint a picture that they are on the cuttingedge of this technology. I would say that cloud technology has not only been available for quite some time, but that many companies are utilizing it today. For example, we are utilizing cloud computing for our mobile division for all of our customers. We are operating over
60 | iGamingBusiness North America | Issue 01 | May 2012
any necessary changes as per the rules and regulations that have been published. We have a contract through our acquisition of Chiligaming with Golden Nugget, and intend to launch a play-for-free poker application within the next two months with the ability to transform this to a wager-based application when ready. In addition to this, we’re in negotiations for several additional contracts in states that have proposed or approved legislation for online wagering. So you can expect there to be some announcements forthcoming. In being a regulatory-approved company in more 300 jurisdictions, there is a significant opportunity to use these licenses to extend our offerings to our customers from the traditional gaming floor to online, mobile and social gaming channels.
As the company celebrates its 80th anniversary, is the move into the digital gaming environment a poignant milestone in the company’s growing history? Absolutely. We’re a company with an 80year track record of evolving and adapting within a changing gaming environment and have demonstrated our ability to do this throughout our history. We’ve gone from a pinball company to a leading supplier of today’s gaming technology – evolving around, and with, the gaming industry. This is a natural progression for us and is closely aligned to our core competencies. Our flexible iGaming platform enables casino operators to leverage their land-based gaming operations with a unified view of players’ trends and behaviors and gives them the ability to perform multichannel promotions, bonusing, and playertracking across our mobile, online and traditional platforms. Finally, what does the future hold for Bally Interactive – what is the long-term strategy? The long-term strategy is as a B2B supplier within the traditional and online gaming sector. We aim to provide operators with the ability to have a single-view of the player whether they are wagering online, via handheld device, within a traditional casino environment, or other forms of social gaming.
“ Whenever you expand your organization into new areas, you want to ensure that you do so in a fashion that does not negatively impact your core business.”
Tribal Gaming
Where Does Indian Gaming Fit in the Digital World? For many Native American nations gaming is a key factor allowing tribes to fight poverty on their lands with self-sustaining revenue and to create stronger tribal governments. The Indian Gaming Regulatory Act (IGRA) of 1988 was essential to this process. As online gaming becomes a very real prospect in the political framework of the United States, tribes must once again fight for their seat at that table. When “Black Friday” effectively sent the international Internet gambling business running from the US market, lobbying organizations took to Congress with a renewed and near-frantic effort to pass federal legislation to regulate the industry for Americans. At the same time, states like Nevada, New Jersey and California amped their own efforts to pass intra-state gaming legislation within their borders. Indian tribes knew, beyond any doubt, that it was time to increase their own grasp of the issue and become a strong voice in the discussions. Tribes have strength in numbers, as the National Indian Gaming Commission (NIGC) reports there are approximately 442 Indian gaming establishments in the United States operated by 237 federally recognized tribes in 28 states. They generate more than $26.5 billion annually, according to the National Indian Gaming Association
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(NIGA). And of the 565 federally recognized tribes in the United States, more of them are likely to indicate interest in gaming revenue going forward. Any type of Internet gaming, whether on the federal or state level, cannot ignore Native American interests as protected by IGRA and subsequent state compacts. Moreover, any gaming entities will want to partner or work in conjunction with Indian gaming interests in order to maximize their customer base and profit expectations.
Gorilla in the room Tribal leaders began to realize the potential effects of online gaming on their land-based casino operations in recent years, as their revenue and the consequential livelihood of their communities were at risk of suffering losses should major companies step in with popular Internet casino games. They realized that federal bills were being introduced to Congress with little to no input from tribes, meaning issues like sovereignty and taxation were in question. As Jerome Encinas, lobbyist for the California National Indian Gaming Association (CNIGA) and the Rincon Band of Luiseño Indians, noted at the 17th Annual
Western Indian Gaming Conference, “It is the 700 pound gorilla in the room, and it’s time to look at it closely.” An organized effort to oppose federal legislation amassed a groundswell of support from tribal leaders and organizations in 2011 and began to take hold in 2012. A February hearing in the Senate Committee on Indian Affairs was a prime example. The Honorable Robert Odawi Porter,
“ Any gaming entities will want to work in conjunction with Indian gaming interests in order to maximize their customer base and profit expectations.” President of the Seneca Nation of Indians in New York, put it bluntly in his testimony: “We will not tolerate any legal authority that shoves aside tribal gaming operations from the table. We already own the table.” This sentiment was reiterated by an opinion piece published in a February issue of ‘The Hill’ by Senator Daniel Akaka (DHI) and Representative Mary Bono Mack
Tribal Gaming
within the state and extend to a fuller list of gaming options after two years. Discussions included tribes months before the release of the bill, but according to Encinas, speaking for CNIGA, concerns remain, specifically regarding the expansion from poker to casino games. “Games other than poker might not be in compliance with IGRA and might violate the tribal exclusivity written in their compacts,” he stated, also noting that CNIGA, Rincon, and others are committed to being part of the solution. Indian tribes in other states have similar concerns, and continued talks of federal legislation like HR 2366, the Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening Act of 2011 (Congressman Joe Barton, R-TX), have prompted tribal lobbying groups to increase their efforts to be included in negotiations on every level. Proponents of Internet gaming have also realized that no bill of any nature will move forward without the approval of Indian tribes. States like Nevada are exempt from those concerns and are currently moving forward with online poker regulations unopposed, but any future efforts to partner with California or other states will require consent from tribal interests. True partnerships with Native Americans are essential to making widespread US Internet gaming a reality.
(R-CA), which stated, “Out of fundamental fairness, we must make sure that the unique circumstances surrounding tribal gaming and tribal sovereignty are ultimately respected in any future legislation.”
State progress While federal legislation remains stagnant, states are moving forward with their own legalization efforts. Tribes are more ensured of inclusion in most states, especially those like California in which Indian gaming is such an integral part of their economic
and social makeup, but another assortment of concerns arise for Native Americans. Online gaming, as compared to online poker alone, has the potential to quickly erode land-based casino revenue, while the expenses of producing an online gaming platform can be exorbitant. Tribes also fear that name recognition of companies like Caesars Entertainment will make it tougher for tribal gaming to compete in a fair virtual environment. California, as the aforementioned example, is examining SB 1463, a bill to legalize online poker
Jennifer Newell is an experienced writer, editor and reporter in the poker industry. After leaving an accounting position with the World Poker Tour more than six years ago to explore the stories behind the game, she immersed herself in the poker and gaming world. Her columns can be found in numerous poker publications and websites, and she works behind the social media scenes for PokerStars Women. Her writing for Federated Sports and Gaming took her into the world of Indian gaming, where she continues to investigate the industry and analyze the Indian tribes’ place in the burgeoning online gaming marketplace.
iGamingBusiness North America | Issue 01 | May 2012 | 63
Tribal Gaming
Internet Protocol The Mashantucket Pequot Tribal Nation, the owners and operators of Foxwoods Resort Casino, are preparing for the dawn of regulated iGaming in the US, as rumored discussions with Sportingbet would suggest. Anshu Z Kalhan, Executive Director of Business Development at Foxwoods Development Company, discusses the complex connection between Indian gaming and the Internet. Where does Indian gaming fit in the digital world? Indian gaming can and should play a critical role in the digital world. Regulation of Internet gaming in the US appears that it will take shape with existing bricks-andmortar operators being the initial license holders. Tribal gaming in the US is a $26 billion-plus industry and is about two-thirds the size of the commercial gaming industry. Therefore, tribes should be a very big piece of the puzzle when it comes to Internet gaming in the US.
significant unregulated offshore business needs to be corrected, either by regulation, enforcement, or both. Therefore, tribes should be thinking about ways in which they can participate in this potentially lucrative business channel if regulation does occur. Do you believe there is a general appetite among Indian tribes to embrace online gaming, considering the potential longer-term economic benefits? I believe so. The initial gut reaction is that bricks-and-mortar revenues will decline and
“ If a federal bill were passed, tribes would be at a huge disadvantage if we could only offer our services to those customers that are on the reservation, while commercial operators could offer their services throughout the country.” Much has been made of the potential impact that Internet gaming may have on Indian tribes, particularly the tribes’ concern that it will have a negative effect on their land-based gaming businesses. While these concerns are understandable, do you think they mask a timely opportunity to invest in the expansion to the digital space? While many tribes do hold these concerns, I think most agree that some form of regulation of Internet gaming in the US is inevitable. The status quo of continuing to have a
64 | iGamingBusiness North America | Issue 01 | May 2012
jobs will be lost. However, the reality is that Internet gaming in the US exists in a big way, but it is just unregulated. The opportunity for tribes to play a leading role in a regulated market certainly could be a significant long-term economic benefit to tribes with the correct legislation and regulatory structure that protects tribes’ existing sovereign rights. What other prime concerns exist among tribes with regards to the influence of regulated digital gaming in the US? The biggest concern is that many of the bills being floated do not protect tribes. The Indian
Gaming Regulatory Act (IGRA) binds tribes to offering gaming solely on their reservations. If a federal bill were passed, tribes would be at a huge disadvantage if we could only offer our services to those customers that are on the reservation, while commercial operators could offer their services throughout the country. There are several other concerns that the National Indian Gaming Association (NIGA) has done a nice job of outlining in its resolution from last year. Has the Department of Justice’s Wire Act clarification opened any avenues of exploration for the tribes? Absolutely, but not just for tribes. I think everyone now sees that a potentially significant hurdle at the federal level (the Wire Act) is out of the way when it comes to online gaming, excluding sportsbetting. There has been a lot more activity by tribes, lotteries, and states themselves in looking into this space and the opportunities. Could it be the case that the increase in both state lotteries moving online and the various state proposals to regulate forms of iGaming will force tribes to react strategically to the onset of Internet gaming, regardless of their trepidation? Potentially, yes. There are many nuances related to tribes’ compacts, exclusivity, and sovereignty that work to protect tribes, and these vary from state to state and from tribe to tribe. However, the fact that lotteries and states themselves are looking into Internet
Tribal Gaming
gaming is a reason for tribes to be very attuned to the issues and the opportunity. There is a lot at stake, both financially and otherwise for both states and tribes as it relates to the tribal-state compacts and how they may be affected by online gaming. One route to the online space for tribes may come in the form of partnerships, such as your potential alliance with Sportingbet. What are the key benefits for tribes in partnering with companies boasting online heritage and expertise? The reality is that the real expertise in online gaming operations resides overseas and not with existing US bricks-and-mortar operators; despite the fact that both are
‘gaming’, offline and online are very different businesses. However, we also have a real opportunity in the US because of offline/ online convergence. It looks as though bricksand-mortar operators will be the holders of the online gaming licenses, which provides an opportunity for tribal and commercial offline gaming operators to structure partnerships with online gaming companies in order to leverage their online experience and technology to enhance our businesses. I know you’re only at the discussion stage at this point, but what would a partnership with a company like Sportingbet bring to your prospective market? The Mashantucket Pequot Tribal Nation, the owners and operators of Foxwoods Resort Casino, are keenly aware that Internet gaming is likely to be regulated in the US in the future. Therefore, we have actively been preparing ourselves for that by seeking one or more partners that have both the technology and operating experience to help us be successful when the market regulates. We believe that by aligning ourselves with the right partners, we can deliver an enhanced experience to our existing customers while coninuing to attract new customer segments.
In league with some of the concerns mentioned earlier, how does a landbased entity moving into the online arena guard against cannibalization, or at least ensure that their core business is not compromised? The studies certainly suggest that the proper regulation of online gaming will serve to enhance offline revenues rather than cannibalize them. Regardless, it will be important for operators to have the right business plan in order to ensure that overall revenues grow. There is a real opportunity for online gaming to help enhance overall revenues for landbased entities. At the same time, if your competitors are more astute at converging offline and online, you could easily see your bricks-and-mortar revenues decline while losing some of your customer base to competitors. Finally, it’s early days in the regulation of iGaming in the US, but how do you foresee the fortunes of tribal gaming businesses in a future regulated market and in answering that, what should they be doing now to prepare for the digital space? We believe regulation of iGaming in the US is inevitable, but that it will occur slowly and deliberately. I do not see an immediate financial windfall for tribes, but the opportunity certainly exists to provide an additional stream of revenue that enhances their overall revenue base. Every stakeholder, tribes included, should study the market today and make plans for how to participate. A lot of tribal gaming businesses, including ourselves, have spent a lot of time preparing for online gaming, so we would welcome discussing our strategies with other tribes.
iGamingBusiness North America | Issue 01 | May 2012 | 65
Tribal Gaming
DoJ Opinion Letter Creates Opportunity for Indian Gaming Ehren Richardson, Internet Gaming Consultant at Joseph Eve, considers the impact of the expansion of online gaming on Native Indian tribes. The DoJ opinion letter has had a clear effect on the bricks-and-mortar casino industry in the United States, particularly the sovereign tribes of Indian country. There has been great concern expressed by tribes as to the negative impacts Internet gaming may have on their existing land-based gaming businesses, and rightfully so. There are 240 tribes that rely on their gaming facilities to financially support their communities, culture and way of life, but with state lotteries launching Internet lottery ticket sales (eventually online video lottery games) and continued efforts to legislate Internet poker/casino/ sportsbetting in various states, it seems only a matter of time before the tribes will need to react strategically. This was the very subject of discussion at the recent National Indian Gaming Association Annual Tradeshow. What may not seem obvious to many is that the DoJ’s opinion marks a tremendous opportunity for the tribes going forward, because it gives them the motivation to invest in new technology and education in order to migrate from traditional media dependency (print, TV, billboards, direct mail) to a more web/mobile focused marketing organization. This is a much needed change if one considers how connected society has
66 | iGamingBusiness North America | Issue 01 | May 2012
become and how little tribes have invested in web/mobile to reach a younger and more affluent customer. Today, tribal casinos are spending roughly 70 percent of their marketing budgets on direct mail and related “complimentaries”. Other than email broadcasting there are relatively small budgetary efforts to reach customers on the web today. The reasons behind this are not surprising. Many tribal casinos are geographically remote and cater to a largely regional rural market so there is little urgency to change the way business is done. In addition, tribal casinos market to a demographic of retirees and working baby boomers who, for the most part, still read newspapers. However, the writing is on the wall that this target market will not provide their casinos with the long-term economic stability needed in the future. Some tribes today are actually facing an eroding customer base because older customers are passing on, new competing commercial casinos are popping up and the potential customers of Generation X and Y are not converting like their forbearers. So the threat of Internet gaming essentially forces the tribes to reconsider how they are reaching younger customers, something that
is actually needed in order to sustain tribal bricks-and-mortar gaming operations in the long-term and prepare the tribes for the competitive landscape of iGaming.
Progressive strategy The other interesting result of the threat of Internet gaming to Indian Country is that many tribes will adopt a more progressive business posture as opposed to a re-active one. Tribes have a history of being tenacious pioneers in the gaming business having grown a $26.5 billion industry from nothing in a matter of 24 years, but with the threat of Internet gaming looming, tribes must now tap into that pioneering spirit again. Las Vegas commercial gaming companies, on the other hand, are leading the charge in new service offerings, technology and marketing concepts. It is a real possibility that Indian gaming will also be at the forefront of pioneering technologies and business services as we move toward the legalization of various forms of Internet gaming. Foxwoods Resort Casino’s (Mashantucket Pequot tribe) anticipated partnership with Sportingbet Plc is an example of a tribe taking a progressive approach to the threat of Internet gaming. Whether these types of partnerships are successful will depend on many factors but the fact remains that some tribes are already taking the
National Indian Gaming Commission – Gaming Tribe Report (Updated July 6, 2011)
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Tribal Gaming
initiative. What also seems clear is that tribal sovereignty and tribal state compacts alone will not be enough to stop the spread of state operated Internet lottery games and likely not to be enough to stop Internet poker/casino/sportsbetting legislation in several states. To compete in these areas will require tribes to take early adopter positions to gain competitive advantages over their commercial and state lottery rivals, something the majority of tribes have not been accustomed to. For this reason, we can expect to see more unique strategic partnerships and business initiatives from tribal gaming.
The cost of doing business As a part of a transformation to a more web/ mobile focused business organization, the tribes will have to make gradual adjustments in the appropriation of customer acquisition and retention budgets. According to the Indian Gaming Cost of Doing Business2 Report ©, tribes spend 2.47 percent of revenue on marketing, 5.38 percent on promotional expenses and 3.09 percent on complimentaries. While this pales in comparison to the double-digit percentages that Internet gaming companies spend in these areas, it is a significant sum considering the fixed costs associated with bricks-andmortar operations. Tribes can increase their online presence without increasing these budgets but to do so will require portions of these budgets to be invested in Internet and mobile based strategies. Consider the Quapaw tribe of rural Oklahoma who have developed their own mobile application that provides users with information about their Downstream Casino property and real-time promotions. If tribes want to engage a younger demographic of bricks–and-mortar casino customers and prepare their businesses for Internet gaming, they will need to start by assuming their budget allocations will change progressively over time. That said, many tribes are already making investments in the digital world and creating strategies to compete online.
68 | iGamingBusiness North America | Issue 01 | May 2012
Opportunities There has been a lot of focus on Internet poker in the US but poker revenue at Indian casinos accounted for approximately less than one percent of total revenues3 last year. Nevertheless, tribes can view regulated Internet poker as an opportunity to capture business in which they are currently small players. If one assumes that the Internet poker player generates more rake than the average poker player who frequents a physical card room, then this represents an even better opportunity for tribes. What better than to compete for a market that is untapped
moderately successful conversion rates, social games outperform online gambling ‘.net/. com’ conversions by a multiple. As a result, there is a growing number of social casino game developers introducing new forms of social casino games and there will be plenty of opportunities for tribes to capitalize on this phenomenon. Social gaming and social networking opportunities will allow tribes to drive more business to their bricks-andmortar gaming establishments, develop a base of younger customers and establish the competitive advantage they will need to compete in Internet gaming.
“ Together, tribes operate 460 gaming facilities in the US. If they can put aside their differences and form alliances designed specifically to create Internet gaming policy and strategy, their pooled resources could make them the most formidable competitor in Internet gaming.” and can only add to your bottom line as long as the laws do not threaten tribal sovereignty, state compacts or give unfair advantage to commercial gaming interests? Morongo, San Manuel, Barona and other tribes in California recognize this opportunity and have taken the initiative. One could argue, however, that there is an even bigger opportunity to engage, convert and retain casino customers through games, mobile apps and social networks. Some casinos have licensed commercial poker and casino software and have made attempts to attract online users through play-forfun points tournaments, but the results of this strategy have been disappointing. However, these results are no reflection on the phenomenal growth of social games. In 2011, over 41 percent of Internet users (98 million users) played a social game within a three month period compared to 26 percent in 20104. Conversions of social gamers to paying customers varies but even at
Unity Finally, there is a major opportunity if tribes can work together on Internet gaming. Together, tribes operate 460 gaming facilities in the US and although these tribes may not always agree with each other, if they can put aside their differences and form alliances designed specifically to create Internet gaming policy and strategy, their pooled resources could make them the most formidable competitor in Internet gaming. The word “unity” is often used by tribal leaders as the reason they have been able to persevere through hardships over many decades. Hopefully, when tribes are considering the threat of Internet gaming, they will also consider the opportunities it presents and reflect on their sense of pioneering spirit and unity. Ehren Richardson is an Internet Gaming Consultant at Joseph Eve Certified Public Accountants. Ehren.Richardson@Josepheve.com
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Feature
Nevada: Pioneering igaming Regulation Las Vegas is set to become the capital of regulated intra-state poker in the US. In an exclusive interview, Mark Lipparelli, Chairman of the Nevada Gaming Control Board, tells iGaming Business North America of his confidence that his state will be the first to operate real money online poker before the year is out. When do you expect Nevada iGaming operators to go live? The process from here will be that the license applications will start appearing on our public agendas in May or June. For the successful applicants, when those licenses are issued, the last step in the process will be the technical evaluation of the systems, which we can expect to take place in late spring/early summer. If someone (an applicant) was thoughtful about their approach and had their systems reviewed by test labs in the past it’s plausible, even likely, that you’ll see the first set of systems approved for operation by the fall. So there are Nevada licensees that would be potentially in operation by late fall and certainly by the late winter or early part of 2013. Therefore, the approval of the license and approval of the system will result in the ability to operate without any additional legislation? That’s correct. At a state level, that’s down to our own interpretation in terms of intra-state activities which is what we approved in our recent round of regulatory changes. If there was to be an expansion beyond the state of Nevada, depending on how that happens, there would have to be some positions taken to ensure its legality. Is uncertainty causing legislative stagnation throughout the country? Yes, I think that’s correct, and I also thinks it’s unfortunate. What a federal framework does for all the different jurisdictions, regardless of your market placement, is that it gives
70 | iGamingBusiness North America | Issue 01 | May 2012
some degree of organization for everyone to move forward. And then there are those who, for their own business reasons, are arguing for something other than a federal solution. With that scenario, we end up at the same place again; as soon as you get past the first 12 months of operation you’ll want to expand and how you expand is going to be blunted by a complex fabric of state regulations. Is it important for Nevada to be the first mover in state-by-state regulation; does it matter if California, Iowa or New Jersey get there before you? I think the business success will come from those who treat their customers right, who build the right brand and who have the right distribution and product. Our job as regulators is to create a robust framework and I’m not certain that being the first is any representation of who will be the most successful. We have to create a framework that makes sense from a regulatory perspective; from there, the state is either an attractive place to do business, or it isn’t. Likewise for the other states, if they create frameworks that are attractive then the business will go where it believes it can be most successful. Obviously, in an intra-state framework,the states with greater populations will no doubt be the places where people will try to get operational. What is your position on allowing the intra-state operation of poker, casino and sportsbetting rather than the poker-only solution that seems the likely federal route?
Poker-only has the greatest likelihood of moving through federal legislation. At the other end of that spectrum would probably be sports – there is a lot of (at least initial) concern about online sports wagering, so with the Wire Act being structured the way it is, (legalization) is quite unlikely. There’s quite a bit of education and effort that would have to be expended over a period of time to get that changed, if at all. Sports wagering is a major question for legislators at the national level; Nevada is the only (state) that has fullblown sports wagering. So we will continue within the state and we are the only ones that can do that; it’s something that we’ve built a long history in. Poker and sports are at the opposite ends of the political spectrum. Policy objectives such as preventing criminality, protecting the vulnerable and ensuring fair play are generally accepted licencing objectives. What else is included in Nevada’s iGaming policy objectives? Those that you mention are the common concerns that most people affiliated to the industry view as being important. Problem gaming, collusion among players and the appropriate vetting of the licensees
Feature
are all high on the list. We don’t see a difference between an online and offline operator; we hold them to the same regulatory standards. That’s not to say that we’ve been applying our bricks-and-mortar thinking to the online space; in fact, we’ve been quite different in our approach. We’ve tried to strike a balance in developing a framework that will enable a business to succeed and grow and, at the same time, impose the kind of controls that are reasonable for a gaming licensee. We’ve built a robust set of requirements that I think any jurisdiction would be happy to adopt. What have been the operators’ main concerns? They’ve been concerned that the regulations aren’t crafted in a way that are totally geared towards bricks-and-mortar businesses. The online world demands different approaches to regulatory control and we recognize that. In many ways, some of what is provided in the online space is greater than what we get out of a land-based business. In certain respects, the fact that there are books and records and the ability to analyze systems in a manner that isn’t available in the terrestrial space is an advantage to us as regulators. We’ve tried to strike the balance by setting the licensing requirements so that they are on a par with what we require of a landbased business but at the same time, we recognize that there are technological differences that will create both challenges and opportunities for us. Have you been referencing any of the current licensing jurisdictions as examples for what you are doing in Nevada? We’ve visited many of the jurisdictions that already regulate online gaming and we’ve tried to glean as much information as we can, knowing full well that we may do things
differently. We have a great relationship with our colleagues in other markets, but we also respect that we may approach it differently from them primarily because that’s our history; we set a high bar for licensing and we’re not going to change that just because someone’s an online entity. iGaming is probably the single greatest shift in the gaming market in the last 20 years. What are your aspirations for iGaming? My focus has been to set-up a framework that is responsive to the industry but, at the same time, provides a foundation for the business and our colleagues in other
consideration of the federal framework is so important. It can give due respect to the states so that they can choose to be involved or not and on the second level, can give appropriate deference to states to establish requirements that they believe are important. But, at the core, iGaming demands a common set of rules and expectations with respect to how the business functions. However, if it doesn’t go that way, then the bricks-and-mortar regulatory framework will end up creating a world of confusion and complexity that doesn’t take us very far and probably keeps the illegal operators in an attractive position.
“ Serious consideration of the federal framework is so important. It can give due respect to the states so that they can choose to be involved or not and can give them appropriate deference to establish requirements that they believe are important.” jurisdictions. More recently, I have been intensely focused on a framework that makes sense for the long-term. As a regulator group, we have a history that dictates very different requirements from state to state, which has been successful because the gaming activity takes place within that riverboat jurisdiction, or within that Indian tribe, or within that land-based business. So although complex and not elegant, it’s worked because the state applies its tax rate and its rules, and that has been functionally OK; not ideal, but functionally OK. That same mentality can’t exist in the iGaming market if we expect it to be successful. My main focus now is to do everything possible to create a regulatory framework that is “friendly” across the jurisdictions and that’s why I think serious
In relation to the black market operators, by going with a poker-only solution do you leave to door open for black or grey market casino operators supplying into Nevada? That would seem to make sense but, at the same time, a federal law that makes it abundantly clear that operating a website that offers sports wagering or casino is a federal crime, would give greater authority for federal as well as state officials to act against those who operate illegally. Irrespective of whether there is a federal framework, there is a host of state laws being violated today so we, in time, will have to step up our enforcement efforts against those who operate illegally and anything that can assist in that, such as a new federal bill, would be interesting.
iGamingBusiness North America | Issue 01 | May 2012 | 71
Business and Finance
iGaming Index North America iGaming Business North America monitors the top 20 iGaming sites weighted for the percentage of the company’s business derived from iGaming. With the launch of this new North Americafacing publication, the team at iGaming Business has decided to extend a long standing tradition of the magazine, the iGaming Index (which has featured in every issue since 2004), by launching a sister index, iGaming Index North America – which as the name suggests is dedicated to the burgeoning North American iGaming market. Similar to the original Index, we seek to monitor investor sentiment of the iGaming sector by following publicly listed companies.
In creating this dedicated North American Index, we took careful consideration to only select companies who have launched initiatives into the North American market. Given the infancy of the market, selecting the Index components was complicated. In its strictest definition, a North American Index that includes only what is legal today would not leave very many companies – namely those public companies with exposure to Advance Deposit Wagering (ADW),
virtual currency (social gaming) and the legal Canadian market. Therefore, to better reflect the future growth of Internet gambling in North America, we broadened the criteria to also credit the initiatives by both US and European operators and suppliers who continue to develop their product offering in advance of regulation through joint ventures, licensing, application submissions and acquisitions. After careful deliberation, the final selection included a broad mix of companies all with existing operations in the US or who have been actively soliciting business in the US.
The original iGaming Index was launched on the 1st June 2004 with a base value of 1000. The Index aims to be the most comprehensive indicator and benchmark for the performance of the iGaming sector.
Company
Ticker
Exchange
Mkt Cap (in m)
Local
Share Price (Local Currency) Close
04/31/12 Currency 04/31/12 888 Holdings
888
LN
Bally Technologies
BYI
Betfair
BET
Betsson ‘B’ Boyd Gaming
63.50
2-Month Period Change
%
11.00
21.0%
52-Week Hi 63.50
% of
Low
% Wtd of
52 wk Hi
Index
28.50
100.0%
2.75%
$353.69
GBP
NYSE
$2,037.69
USD
46.75
4.53
10.7%
47.18
25.15
99.1%
0.16%
LN
$1,432.40
GBP
869.00
-2.00
-0.2%
901.00
567.00
96.4%
11.14%
BETS’B
SK
$1,074.31
SEK
194.50
20.50
11.8%
198.50
116.75
98.0%
8.36%
BYD
NYSE
$678.86
USD
7.84
-0.93
-10.6%
9.64
4.48
81.3%
0.05%
Bwin.Party
BPTY
LN
$2,040.35
GBP
155.00
-5.40
-3.4%
174.00
100.60
89.1%
15.87%
Ceasars Entertainment
CZR
NASDAQ
$1,846.88
USD
14.74
-0.65
-4.2%
15.39
10.36
95.8%
0.81%
Churchill Downs
CHDN
NASDAQ
$960.42
USD
55.90
-0.05
-0.1%
59.32
37.21
94.2%
2.02%
Global Cash Access
GCA
NYSE
$509.27
USD
7.80
2.50
47.2%
7.80
2.22
100.0%
0.04%
IGT
IGT
NYSE
$4,995.03
USD
16.79
0.92
5.8%
18.73
13.44
89.6%
4.96%
Ladbrokes
LAD
LN
$2,328.27
GBP
160.10
18.40
13.0%
161.80
114.00
98.9%
5.74%
Lottomatica
LTO
MI
$766.31
EUR
14.09
0.94
7.1%
14.50
12.43
97.2%
0.76%
MGM Resorts Intl
MGM
NYSE
$6,658.18
USD
13.62
0.57
4.4%
15.87
8.23
85.8%
0.52%
Optimal Payments
OPAY
LN
$129.48
GBP
64.00
1.00
1.6%
68.50
38.50
93.4%
1.01%
Paddy Power
PLS
DB
$3,072.00
EUR
47.22
4.84
11.4%
48.15
30.35
98.1%
17.72%
Playtech
PTEC
LN
$1,687.40
GBP
364.25
65.00
21.7%
375.00
215.50
97.1%
13.12%
Shufflemaster
SHFL
NASDAQ
$961.33
USD
17.60
4.81
37.6%
18.00
7.51
97.8%
0.37%
Sportingbet
SBT
LN
$403.26
GBP
37.75
-2.00
-5.0%
58.75
27.50
64.3%
3.14%
Sportech
SPO
LN
$159.21
GBP
50.00
2.25
4.7%
51.85
34.50
96.4%
0.07%
William Hill
WMH
LN
$2,940.05
GBP
261.40
36.70
16.3%
261.40
183.30
100.0%
8.69%
WMS
WMS
NYSE
$1,312.60
USD
23.73
1.84
8.4%
30.43
16.53
78.0%
0.10%
Zynga
ZNGA
NYSE
$1,600.42
USD
13.15
2.66
25.4%
14.69
8.00
89.5%
2.61%
100.0% Note: iGaming Business is not licensed to give investment advice. The iGaming Index should not be relied upon as an indicator of the future performance of any company within the index or an indicator of the future performance of the sector. All Share Price data and Market Capitalization reflected in local currency. *Index weighting (1) adjusted to reflect exposure to online operations only and (2) all market capitalizations adjusted into US$ at end of the period.
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The company sectors include: 1. European operators and suppliers who have either announced partnerships/ acquisitions with US operators, made concerted efforts to develop a US-facing business, have existing licensed business in the US or have applied for an online supplier license in Nevada. 2. US software suppliers who have launched online divisions with businesses either in the US, Europe and other regions or who have consumer-facing departments with European licensed operations or the early development of online divisions for supplying into the US. 3. US operators with existing legal operations online in the US (ADW/virtual currency) or in Europe as well as those who have announced domestic joint ventures and partnerships.
The calculation of the Index Currency adjusted: the calculation of the iGaming Index North America has been complex. The Index is based on the market capitalization of each of the Index components and is adjusted only at the end of the month. Given that the Index includes companies listed on various exchanges from around the world, the market capitalizations are currency adjusted into US Dollars at the end of the period. Despite exchange rates continually changing over time, the exchange adjusted value of each market capitalization is locked in at the end of each two-month period. Remote adjusted: an important feature of the original European Index is the dedication to monitor online sentiment only. Thus, the market capitalizations of all of the landbased companies included in the Index are adjusted down to isolate the “remote effect” only. In doing so, each company is adjusted to reflect the portion of the cash flow (EBITDA) that was derived from online or interactive (we call it remote adjusting). In Europe, for example, we adjusted companies such as William Hill, Ladbrokes and Paddy Power
who have exposure to bricks-and-mortar revenue by the portion of their EBITDA that is derived from their online operations. Here in North America, where legalized online gambling legally remains in its infancy, a more creative solution was required in order to keep the Index accurate for measuring investor sentiment to onlineonly yet inclusive to keep the Index relevant. In creating a North American Index, we felt it wouldn’t be accurate to solely focus on European companies seeking to capitalize in North America. Including companies such as Boyd, MGM, Bally and Global Cash Access was important as their share prices are impacted by news regarding online gaming, albeit if only marginally. Moreover, in recent months, we have seen investors begin to take notice of the early initiatives of a number of leading US gaming operators and suppliers with regards to iGaming, and stock prices have been influenced accordingly. In March, investors reacted positively to news that USbased supplier Shuffle Master had acquired Swedish B2B poker provider Ongame from bwin.party for $27.5 million (pre-earn-out). Other US examples include IGT’s purchase of virtual currency casino Facebook app, Double Down Casino for $500 million as well as the acquisition of Swedish poker network Entraction for $108 million and not to forget Caesars’ $90 million acquisition of Playtika, Double Down’s largest competitor. While we felt it was critical to include these companies, the complication is that these companies currently have minimal cash flow attributable to remote gaming (online or interactive) or don’t break down the percentage of EBITDA attributable to their remote businesses. Until such businesses are of significant size or are properly reported, we instituted a two-tiered rule. First, if a land-based company acquired an online business, the remote adjustment percentage attributable to that company was based on the relative valuations of the acquired company. For example, Caesars’ market capitalization at the time of the
Playtika acquisition was $1.6 billion. Given the company paid $90 million in cash, Caesars’ remote exposure would be 6% (note: if the company issues shares for the acquisition, the $90 million would be added to the $1.6 billion but in this case, Caesars used internal cash). For those companies who did not make sizeable acquisitions or any acquisitions at all, a minimum “floor” of 1.0% was instituted as their share prices will be affected, even if only a little, from the positive momentum of online regulation.
The Index components As both US and European companies continue to jockey for position in advance of regulation of poker and casino (note: ADW was not included in the Unlawful Internet Gaming Enforcement Act), we carefully examine the potential investment opportunities and investor/analyst reaction as the world’s most coveted market finally begins to open up. For the launch of the iGaming Index North America, we thought it would be of interest to explain the rationale behind the inclusion of each one of the Index components.
European operators bwin.party (-3.4%): bwin.party’s share price ended the two-month period (Feb-Mar) at a marginal loss. It is no secret that bwin. party has been eyeing the US market for some time. To date, it remains one of the most active participants in the US online market in pre-regulation. For several years, co-CEO Jim Ryan has been quoted in the press on his intention to be a leading player in the online market. The acquisition of World Poker Tour enabled bwin.party to maintain a legally active presence in the US with its ongoing support of subscription based ClubWPT. The acquisition allows bwin.party to keep its database warm. The company also announced a joint venture partnership with MGM and Boyd whereby the two US operators would own 25% and 10% respectively of a three-way joint venture.
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As part of the relationship, bwin.party would supply the two US operators with software and services for 15 years. William Hill (+16.3%): William Hill’s share price shot up on news of solid yearend numbers for fiscal year 2011 while the company’s online division reported 30% growth in the first seven weeks of 2012. William Hill’s inclusion in the Index stems from a series of strategic acquisitions that included two US regulated sportsbetting properties, Cal Neva and AWI (acquisition price of $39 million) giving the company 103 properties, plus a third follow-on acquisition which will add another 16 properties to the portfolio and increase William Hill’s market share to 80% of the US sportsbetting market. (Note: the acquisition is still under review by the Nevada Gaming Commission.) Paddy Power (+11.4%): Paddy Power’s share price continues to trade at a premium relative to the remainder of the sector. The company reported record turnover in March of €4.6 billion for fiscal year 2011. This was in spite of continued tough economic conditions and the absence of a football (soccer) World Cup. Rationale for Index inclusion: since August 2011, Paddy Power has made clear its intention of entering the US market by applying for a license with the Nevada Gaming Commission as a manufacturer and distributor of gaming equipment as well as an operator of mobile gaming systems and handheld devices. The company is still in the process of obtaining these licenses. Ladbrokes (+13.0%): Ladbrokes’ share price also ended the period strongly. During the period, Ladbrokes announced a positive end to 2011 with the growth in land-based gaming machines offsetting the unfavorable results in sports. Analysts still have mixed views on whether the company can successfully turn its online business around without a strong partner, such as the William Hill/Playtech relationship. Rationale for Index inclusion: Ladbrokes has acquired leading US sportsbetting software supplier,
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Stadium Technology Group, which powers the underlying software for a number of large Nevada casinos. 888 (+21.0%): Shares in 888 continue to soar after the company demonstrated unprecedented turnaround figures. For the year ending 2011, 888, which was on the brink of crisis as little as a year ago, reported a 94% increase in EBITDA and 26% growth in revenue. The company’s poker liquidity continues to outperform. In the past year, 888’s ranking on pokerscout.com has gone from a low of between 10th and 12th largest site/network to steadily ranking at number four. Rarely has any company seen such a move outside of UIGEA and Black Friday. Rationale for Index inclusion: 888 has been one of the leading contenders for the supply of poker into the US market. In 2011, the company passed “suitability” with the Nevada Gaming Commission as a poker software supplier for Caesars’ World Series of Poker. In addition, the company was one of the first applicants for full licensing in Nevada as a software vendor. Still hungry for more, 888 was recently rumored to be in late stage discussions with Trump. Betfair (-0.2%): Shares in Betfair slipped slightly this period. The company reported results in-line with analyst expectations yet analysts remain generally bearish on the company citing potential tax liability, exposure to unregulated markets and limited cost cutting opportunities. Rationale for Index inclusion: in 2009, Betfair acquired leading ADW site, TVG for $50 million establishing itself as the one of the first European operators to be a license holder in the US. Further expanding its horseracing presence in the US, Betfair recently acquired the naming rights for California-based Hollywood Park. While the company has yet to apply for a Nevada license, there is no reason to suggest that it won’t in the future. Betsson (11.8%): Similar to Paddy Power, Betsson’s financial results and share price continue to outperform the remainder of the sector. This period, investors remained
positive on the company’s continued acquisition spree in its regional Scandinavian market, this time with the acquisition of competitor Nordicbet. Rationale for Index inclusion: while Betsson has yet to apply for a gaming license or announce a partnership with any US licensed entity, the brand has been apparent to those who have been following the US market closely. Betsson was one of the few sponsors of every GIGSE since 2009 and was the only European operator to take a booth at last year’s G2E. While the company continues to seek a way into the market, a US land-based operator could benefit from the company’s operating expertise. The only risk remains how gaming commissions view the company’s history with regards to its Turkish business. Sportingbet (-2.0%): Sportingbet’s share price remains under pressure. The company reported half-year results which saw its Australian business now account for 50% of revenue. However, the massive growth in Australia was offset by a decline in Europe. Even without the sale of its Turkish business, revenue in core markets such as Greece and Spain continue to decline. The company finished the period with a blow to its Spanish business where land-based gaming operator Codere successfully secured an injunction against Sportingbet’s Spanish websites Miapuesta.es and Miapuesta.com, against which Sportingbet has filed an appeal. Rationale for Index inclusion: in 2010, Sportingbet settled with the US Department of Justice, paying $33 million and paving the way for the company to potentially re-enter the US market. In 2011, rumors surfaced that Sportingbet was in advanced discussions with Foxwoods whereby the two companies will create a joint venture and jointly market their operational expertise to other US licensed entities.
European suppliers Playtech (+21.7%): Playtech’s share price continues to soar after finishing the prior period up 26%. During the period, the company announced financial results that
Business and Finance
iGaming Index North America: July 2011 to present 1,300
1,200
1,100
1,000
900
800
700
600
500 7-11
8-11
9-11
were ahead of expectations and gave further guidance that revenues for the first nine weeks of 2012 were 23% ahead of 2011. Analyst sentiment is generally bullish on the company citing aggressive acquisition and joint venture strategy as reasons to be positive on the stock. Rationale for Index inclusion: Playtech, through its joint venture with Scientific Games, is the software provider for the California Online Poker Association (COPA) site Calshark. In addition, Playtech was instrumental in Sportech’s acquisition of Scientific Games Racing whereby three Playtech board members were placed on Sportech’s board requiring key employee licensing by the New Jersey Racing Association. Optimal Payments (+1.6%): Optimal Payment’s share price edged up this period with financial results that were in-line with expectations. Analysts at Canaccord remain bullish on the company and its ability to perform despite standard operating risks. Rationale for Index inclusion: while Optimal Payments has yet to announce a partnership
10-11
11-11
12-11
in the US to date, the company is the only payment processor to offer both “straight through” transaction processing and “stored value” which could be a critical success factor for operators once deposits are finally permitted, as it is likely the payments side will be more complicated than expected.
US suppliers International Game Technology (+5.8%): Shares in IGT ended the period up. In a report cited “No Need to Buy a Vowel”, Credit Suisse analysts were particularly bullish on the company not only for its financial report – which saw a 32% increase on year-overyear replacement unit sales – but also for the increased visibility into the company’s recent acquisition of social gaming company Double Down after the investment community gave IGT a “hand-wringing” for the acquisition. Rationale for Index inclusion: IGT has been the most proactive of all of the US suppliers. The company has been active in the online market since 2005 with the acquisition of WagerWorks. This platform allowed IGT
1-12
2-12
3-12
to become one of the most successful slots suppliers in the European market. In 2011, IGT acquired European poker supplier Entraction and while the company has taken some criticism for the acquisition, it was the first supplier to put a stake in the ground and execute. Most recently, IGT acquired Facebook app casino operator Double Down for $300 million (with an earn-out of up to $500 million). After again taking some initial criticism from the investment community, the company is now sitting on one of the most coveted apps on Facebook. Shuffle Master (37.6%): Despite being later to game than IGT, Shuffle Master has made great strides since the appointment of former Bally Technologies COO, Gavin Isaacs. Shuffle Master’s share price popped on news that the company had finally acquired European poker supplier Ongame for $27.5 million. In addition to the Ongame acquisition, Shuffle Master continues to develop a broader strategy with the appointment of games development legend, Louis Castle.
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Bally Technologies (+10.7%): Bally’s share price also ended up. According to research from Janney Capital Markets, Bally, along with IGT, will benefit from the improved 2013 pipeline stemming from either the Illinois Video Gaming Act or Ohio Racetracks. Analysts are bullish on Bally as the premier positioning of its best-in-class systems business and momentum in its game operations business to continue to fuel the growth of the company. Rationale for Index inclusion: Bally’s recent acquisition of Chiligaming further strengthens its position as a leader in the gaming platform business. WMS Industries (+8.4%): WMS’ share price increased slightly less than its main competitors. Analysts, Macquarie, remain more bullish on the company than analyst consensus, citing strong titles such as EPIC Monopoly and CLUE in the beginning phase of installation. The analyst consensus remains cautious as sustained inflection on
the install base remains unclear. Increased competition from WMS’ closest competitor remains the leading reason for such caution. Rationale for Index inclusion: in 2010, WMS acquired the gaming assets of an online gaming supplier. In January 2011, after a few months of delay, WMS launched its UK-facing gaming site, Jackpot Party, which featured a full casino platform as well as its own proprietary branded slots. WMS continues to expand its online presence, most recently with the launch of Facebook casino app Luck Cruise. Lottomatica (+7.1%): Shares in Lottomatica ended positively on news the company may actually be able to turn its GTECH subsidiary around. According to a report by Credit Suisse, for the past five years Lottomatica has continually outperformed in its core Italian market with exceptionally strong growth (EBITDA up 36% year-over-year) yet disappointed
with the lack of performance of GTECH (-12% year-over-year). According to the report, GTECH was at an inflection point and is well positioned for positive momentum. Rationale for Index inclusion: GTECH is one of the premier suppliers for the US lottery market. In addition, its G2 subsidiary is one of the leading suppliers in Europe. To date, GTECH G2 has launched a play-for-fun site with Native American tribe Barona and is rumored to be in discussions with several other tribes. Global Cash Access [GCA] (+47%): GCA was the Index’s top performer. The company’s share price soared on news that it became the first and only Nevada licensed “cash access and wagering instrument service provider.” According to a report issued by Sterne Agee, the license positions GCA to be the leading processor of online wagering transactions for casino operators seeking Nevada Gaming Control Board (NGCB)
iGaming Index NA vs. S&P 500 Feb-Mar 2012 1,200
1,150
1,100
1,050
1,000
950
900 2/1/12
2/8/12
2/15/12
2/22/12
2/29/12
iGaming Index NA
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3/7/12 S&P 500
3-14/12
3/21/12
3/28/12
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approval to conduct real-money online poker games. “In essence, we believe GCA has the opportunity to become the “PayPal” of the Nevada hub for online poker”, the report concluded.
US Operators Caesars Entertainment (-4.2%): Caesars ended the period down 4.2% after beginning trading on February 8. Since the IPO, Caesars’ share price has yet to trade above its initial price. While Deutsche Bank analysts remain positive on the company’s positioning especially in the US, the deferred cap ex, potential threat from Revel and potential share sales from Apollo and TPG continue to put pressure on the share price. Rationale for Index inclusion: Caesars remains the best positioned casino operator in the US regardless of federal or state regulation. The company acquired the largest casino app on Facebook, Playtika for $90 million and continues to expand its online gaming presence in Europe – first launching Caesars Casino and Bingo in the UK and now rumored to be looking into other regulated markets. Churchill Downs (-0.1%): Churchill Downs shares remained relatively flat this period despite a Q4 result that “crushed” expectations. According to analysts, the 144% increase in EBITDA largely stemmed from a 9% increase in revenue in higher margin business including online and gaming. Rationale for Index inclusion: Churchill Downs’ acquisition of YouBet, coupled with its already large presence from Twin Spires, makes it one of the largest ADWs in the US. The company continues to look for ways to expand its online gaming presence. Boyd Gaming (-10.6%): Boyd Gaming lost value during the period as analyst sentiment on its Borgata operations remains highly cautious due to the recent opening of leading Atlantic City competitor Revel. Overall exposure to less favorable markets such as Atlantic City, Mississippi and Las Vegas coupled with a fairly full current valuation,
prompted JP Morgan analysts to retain an “Underweight” on the share price, despite tweaking estimates upwards. Rationale for Index inclusion: Boyd, along with MGM, announced a joint venture with bwin.party as well as a 15-year license. MGM Resorts International (+4.4%): MGM Resorts’ share price remained strong after the company reported positive results for Q4 2011. Wholly owned EBITDA increased 18% from the prior year. Including MGM’s share of Macau, EBITDA was up a more impressive 33%. CityCenter reported an impressive 62% increase in resort operations EBITDA to $58 million, as the resort generated strong results at Aria, Crystals and Vdara. CityCenter generated $236.5 million of EBITDA in 2012. Rationale for Index inclusion: MGM, along with Boyd, announced a joint venture with bwin.party as well as a 15-year license. Sportech (+4.7%): Sportech’s share price remained resilient as year-end results were in-line with analyst expectations. Both the UK pools and the US horseracing businesses continue to produce solid results. Rationale for Index inclusion: Sportech Racing processes circa 50% of all horseracing bets in the US as well as having a B2C monopoly in Connecticut. Zynga (+25.4%): Zynga surprised investors when it announced support for third-party developer partners on its new Zynga.com platform on March 1, then executed the largest M&A transaction in its history with its acquisition of OMGPOP (Online Massive Games People Often Play) for $180 million at the end of the period. According to analysts, the acquisition provides Zynga with a creative edge, enhances its New York presence, builds its international audience, and keeps a disruptive mobile game out of competitors’ hands. Rationale for Index inclusion: despite not being a licensed gaming operator or supplier in the US, Zynga’s Texas Hold’em player base of 36.7 million active monthly users places the company somewhere in the
value chain of the online gaming sector in the US. It is believed that 21% of its revenue is coming from its Texas Hold’em app on Facebook. It is also rumored that Zynga may be seeking real money operational expertise in Europe.
The Index performance For the two-month period ending March 30, the iGaming Index North America ended up 16.2%. This was far above that of the boarder market (S&P 500 ended the comparable period up 7.3%). As a large portion of the Index relies on the performance of the European companies, the strong performance was mainly attributable to Playtech, Paddy Power and to a lesser extent 888. The strong overall growth was the result of a very favorable end to 2011 where a number of the largest Index components released solid results ahead of expectation. The growth in casino and poker was the main driver as unfavorable sportsbetting results during the year and a lack of large betting events such as the FIFA World Cup offset any gains in casino and poker.
Looking forward As the size and breadth of the Index components is quite large and diverse, going forward, we will only be reporting on the components of the Index that are most newsworthy. The iGaming Index North America is in its infancy so we expect that there will be a large number of changes as we tweak the ideal components and metrics in the coming issues.
Melissa Blau has been in the Media, Technology and Finance sectors for 20 years. She is currently an advisor for the online gaming industry bridging US and European interests as well as a financial advisor working in conjunction with Akur partners providing M&A advisory for online gaming companies.
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The Process of US iGaming Legislation The prognosticators have been extremely busy recently forecasting the legalization of online gaming in the United States. Many want a federal platform to emerge when Internet gaming laws roll out across the land. Others believe gaming should remain a state-protected business and the Feds should keep out. The Feds rule Following December’s ruling by the US Department of Justice (DoJ), which said the Federal Wire Act of 1961 applies only to sports wagering and gives states the authority to determine if they want to legalize intra-state online gambling (reaffirming lottery games), states have been more vocal about their rights. The National Conference of State Legislators recently indicated the organization’s long-standing opposition to “unwarranted federal pre-emption of state authority”. The lawmakers asked Congress to allow state legislatures to decide whether to approve Internet gaming initiatives within their boundaries. We believe the debate on whether some form of Internet gaming will be legalized has now evolved to the question of when Internet gaming will be legalized on a state-by-state basis. Federal standards may or may not be helpful.
Timing of the rollout With the DoJ ruling acting as a catalyst, efforts have been made recently to legislate gaming on a state-by-state basis. Many lawmakers have introduced bills in state legislatures and efforts are underway in California, Connecticut, Iowa, New Jersey and Nevada. While progress is in motion,
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many believe that legalization is still distant as several issues need to be worked out, including i) tax revenues, ii) tribal sovereignty, iii) inclusion of lotteries, iv) morality, v) underage gaming and vi) opt-in/opt-out functionality for states. Other issues, such as state compacts, a framework providing uniformity of rules across different states, and potential issues arising from Tribal Gaming, also need to be sorted out before iGaming can be rolled out on a state-by-state basis.
Potential size of market There has been much conjecture as to the potential size of the iGaming market in North America. The size of the industry is dependent on timing of the rollout, games being legalized (online poker only, or other games) and whether the rollout is on a stateby-state basis (most likely) or at a federal level. Online poker looks likely to be the first casino game to be legalized, and the size of the US online poker market is probably some $4.3 billion, while we estimate the overall US online gaming market at $10 billion to $12 billion (excluding sportsbetting). Should online poker be legalized, it would create a very modest new source of state tax revenues, which would only somewhat help in bridging the budget gaps (state or federal).
Operators lay groundwork for potential legalization In December, the Nevada Gaming Commission adopted rules that would let companies apply for licenses to operate in-state poker websites. A number of US operators have applied for licenses, including Caesars Entertainment, Boyd Gaming Corp, Cantor Gaming, Bally Technologies and International Game Technology (IGT). US operators have laid the groundwork to take advantage should iGaming be legalized, in some cases by entering into joint ventures and in other cases acquiring existing
Internet gaming companies. For example, IGT acquired social game developer Double Down for $500 million in 2012 and Entraction for $90 million in 2011. Another example is bwin.party Digital Entertainment partnering with MGM and Boyd in a joint venture, whereby MGM/Boyd will be permitted to use bwin technology under its own brands with a revenue share split 6525-10. While these JVs are not a significant revenue generator at this time, we believe the business and technology knowhow through these partnerships will put US operators (MGM, Boyd and Caesars) in good standing should online/Internet-based gaming become legal in the US.
Land-based operators choose strategy Land-based operators may choose from any of these strategies – whether go it alone, JV or acquisition of existing online operators – but, ultimately, they will have to make that decision based on how involved they want to be in online gaming and what the revenue potential of online gaming is for land-based operators. There has been much discussion on the value of land-based operators to online gaming. Some believe that such operators will succeed as they have well-known brands that consumers associate with good service, and they know the customer and have the geographic presence and database to take advantage of iGaming if it is legalized on a state-by-state basis. Looking at the contrarian view, others think land-based operators have little technical knowhow of the Internet gaming business and must connect with a new customer base (much younger), and may ultimately face cannibalization from Internet gaming.
Cannibalization or not? Many believe Internet gaming will increase overall US gaming revenues by helping to develop new online customers and
possibly follow-on visits by Internet users to casinos. Others believe Internet gaming will cannibalize land-based casinos. We are of the view that Internet gaming will grow the overall gaming market but will surely, to some extent, cannibalize the bricks-and-mortar gaming operators as online gaming will be more convenient for many customers and possibly reduce an incremental visit. We have seen time and time again that gaming customers often put convenience above the overall experience. The first case of “cannibalization or not” will occur in Nevada as operators begin offering poker online, either later this year or in 2013. Given most customers have great proximity to a Nevada land-based casino, we believe cannibalization will be greater there than in other locales.
Andrew S Zarnett, Managing Director, currently serves as Deutsche Bank’s Gaming, Lodging and Leisure High Yield Debt Analyst, Co-Head of High Yield Research and a member of the Executive Committee of the Leverage Debt Group. Previously, from 1996 – 1999 he was the Senior Gaming Equity Analyst, Gaming, Lodging and Leisure at Ladenburg Thalmann & Co., Inc. where he also served as a member of the Board of Directors. Before joining Ladenburg Thalmann, Mr Zarnett was the Assistant to the Chairman, Furman Selz LLC. Mr Zarnett is frequently quoted in both the trade and national press, including the Wall Street Journal, New York Times, Las Vegas Sun and the Las Vegas Review Journal. He is also a lecturer at University of Nevada Reno Annual Executive Development Program for Senior Level Casino Executives. In 1985 Mr Zarnett received a BA degree in Economics from York University. In 1988 Mr Zarnett received his MBA in Finance, from Babson College. Further in 2002, 2003 and 2004, Mr Zarnett was named to the Institutional Investor All Star Team. And in 2005, Zarnett was awarded the number 1 Institutional Investor All Star Team covering gaming and lodging.
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The Keys to Optimum Performance Kieran Storan, Partner in the BDO UK Betting and Gaming unit, assesses the key performance indicators in online gaming and industry reporting. The online gaming industry is well established and many of the businesses are now entering into an era of maturity and diversification that companies in other sectors take many decades to reach. There is still, however, a lack of understanding of the industry in the financial markets, often demonstrated by the volatility of share prices. Whilst this clearly has much to do with the ‘perceived’ regulatory and other external risks faced, it is also impacted by the often poor levels of reporting of key performance indicators (KPIs), the importance of diversity of product offerings and consistency of reporting and accounting policies. The platform for KPI reporting is a common basis of accounting policies to establish some of the key measures. This creates inconsistencies across different reporting frameworks, for example, the flexibility of UK and other local reporting standards has meant that turnover may have been defined in different ways. The wider adoption of International Financial Reporting Standards (IFRS) requires the concept of ‘fair value’ of turnover to be considered and as such bonuses (free bets, freerolls, prop players, loyalty programs and other promotional activity) should generally be netted from turnover to arrive at fair value. There are a number of other inconsistencies within
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company reporting that need to be aligned to make different businesses comparable. The reporting of KPIs themselves also gives rise to a great deal of inconsistency. Even among the larger listed businesses there is a lack of common definitions and standards of reporting. The impact of different product offerings on individual reporting should not be understated, nor should the impact of cross-sell between those products (for example, comparing a pure online poker business with one that has multiple product lines and therefore relies on cross-sell between those products). Whilst acknowledging the difficulties in establishing and interpreting the KPI metrics produced by individual businesses and even agreeing on the terminology to be used, there are a number of generally accepted measures that would be considered to be the most important. I would categorize the main areas into eight sections.
revenue pre and post bonus activity would be very helpful to understand how bonuses are driving activity).
2 Cost of acquisition Actual cost of acquisition is often a commercially sensitive piece of information. As such it is normally expressed as an overall number which does not provide enough understanding of how successfully the business acquires its customers and retains them. Ideally, this should be further analyzed between: • offline and online activity • bonuses • affiliate payments (analyzed further between profit share and fixed fee) • retention activity and new sign-ups • free play Affiliate activity in maturing markets has become a key business driver itself (so much so that the affiliate, not the end user, may be the key customer) and having further information on the reliance on affiliates and the related costs is fundamental.
1 Revenue/Yield Often described as a yield per player or ‘active’ player, the total revenue per player per product is fundamental. This also needs to be considered in conjunction with all other KPIs to understand what is driving revenue and the quality of that revenue. Revenue should be net of ‘bonuses’ earned (information on
3 Player sign-ups Information is often provided on player sign-ups – normally registered players and active players. There is no clear definition of what these represent and how to determine the category of player. It is important to distinguish between real money players and
Business and Finance
play money players, and sometimes those playing ‘micro’ games (very low money play) and the conversion of play and micro players to real money. It is also important to track the product to which the player first signed up and the cross-sell obtained to other products. As shared wallets become more practical, the use of blended KPIs will be required. The normal sign-up definition is where a player has registered and deposited funds.
4 Activity There is a variety of terminology used for activity and the timeframes for determining when a player is considered active. An active player should be determined as one who has contributed to ‘revenue’ in a given period. The level of activity of those active players (i.e. how often they play during a given period) also provides key information.
5 Retention This is one of the more poorly reported KPIs but can be one of the best indicators of the sustainability and quality of the business model. The ability of the business to retain the customer may far outweigh a headline low yield per day or justify a higher cost of acquisition. Many businesses demonstrate the 80/20 rule whereby there is a 20 percent cash cow of customers who are more ‘sticky’ and generate 80 percent of revenues.
6 Cross-sell As businesses develop multiple product lines, the metrics of each product line become less important and either a blended KPI or some measure of additional revenue or cross-sell obtained from a customer becomes more relevant. This factor often contributes to operators being reluctant to give individual product information as it can be misleading if considered in isolation.
7 Lifetime player value
Summary
Although a product of a number of the aforementioned KPIs, an average lifetime player value gives a good summary measure and also accounts for cost of acquisition and, hence, contribution. This is not commonly quoted in external KPI reporting even though the industry now has sufficient historic information to produce more accurate data.
Having KPIs that can be reliably used to measure the performance of a business allows investors, managers and competitors to understand and benchmark that performance. The points detailed in this article are viewed as the minimum that should be considered along with other matters that may be more specific to individual businesses.
8 Other There are a number of other specific measures that may be important to businesses depending on the individual circumstances. These may include such things as seasonality, geography, VIPs and regulation.
Kieran Storan is a Partner in the BDO UK Betting & Gaming unit. He can be contacted on +44 (0)1707 255925 or Kieran.storan@bdo.co.uk.
iGamingBusiness North America | Issue 01 | May 2012 | 81
Data Center
US Demographic Snapshot Competitive Intelligence Services company, Experian Hitwise, provides structured demographic breakdowns for many of today’s international gaming markets. Its US data offers insight into the gaming sites most visited by American consumers on a monthly basis, as well as the split of visitors by age, gender, state, income bracket and credit risk. The VantageScore® system calculates risk on a scale between 901 to 501 – the lower the number the higher the risk category. Most popular websites in gambling ranked by visits share – month of March 2012 Websites
Domain
Visits Share
1
Lottery Post
www.lotterypost.com
4.40%
2
Mega Millions
www.megamillions.com
4.11%
3
NY Lottery
nylottery.ny.gov
4.04%
4
California Lottery
www.calottery.com
3.79%
5
FreeSlots
www.freeslots.com
3.60%
6
Texas Lottery Commission
www.txlottery.org
3.53%
7
Pennsylvania Lottery
www.palottery.state.pa.us
3.43%
8
Florida Lottery
www.flalottery.com
3.32%
9
slots.pchlotto.com
slots.pch.com
2.74%
10
Georgia Lottery
www.galottery.com
2.67%
Age of visitors to gambling
Gender of visitors to gambling
Female 48.34%
Male 51.66%
State of visitors to gambling
40% 30.41%
32% 22.41%
24% 16%
16.73%
18.27%
12.18%
8% 0% 18-24
25-34
35-44
45-54
55+
-1%
1-5%
5-10%
10-20%
20-50%
>50%
Household income of visitors to gambling
VantageScore® of visitors to gambling
40%
30%
32%
33.47% 25.76%
26.63%
24%
24.46%
24%
19.74%
21.13%
23.28%
18%
16%
12%
10.68% 5.62%
8% 0%
9.22%
6% 0%
<30K
30-60K
30-100K
100-150K
>150K
82 | iGamingBusiness North America | Issue 01 | May 2012
A (901-990)
B (801-900)
C (701-800)
D (601-700)
F (501-800)
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