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Gaming: And Then There is Poker

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June 16, 2011
Bill Geoghegan - Bill@LGTConsulting.com

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Two of the most respected names in the gaming world, Caesars Entertainment (formerly Harrah’s) and Wynn Resorts, recently announced joint ventures with Internet poker companies in efforts to bring both legitimacy and recognition to the online game. 

Caesars, the rights holder to the famous World Series of Poker (WSOP) franchise, joined with the 888 Holdings PLC subsidiary, Dragonfish, who would provide the technology behind a Caesars labeled Internet poker site. After a two hour hearing, the Nevada Gaming Commission voted unanimously to approve the relationship.
Wynn had entered into a strategic partnership with PokerStars, the largest online poker cardroom in the world, wherein they would work together to create federal legislation that would conclusively define what is considered illegal Internet gambling and provide law enforcement authorities with tools to help stop such activities and protect customers through regulation.  The partnership would also set up a method for the assessment and collection of taxes. Once federal legislation is passed and licenses are provided, the companies would run the U.S.-only PokerStarsWynn.com poker site. 

The WSOP started in 1970 when Benny Binion, owner of the Horseshoe Casino in downtown Las Vegas, invited six of the best-known poker players to a single tournament.  The ultimate winner, Johnny Moss, was selected by a secret ballot by his peers, and received a silver cup as his prize.  In 1971, the tournament began in earnest, and the yearly $10,000 buy-in Main Event grew slowly, with 52 participants in 1982.  Famous names such as “Amarillo Slim” Preston, Doyle Brunson, Bobby Baldwin (currently a top MGM Resorts executive) and Stu Ungar have held the winning hand at the final table. 

In the early ‘80s, casinos began running satellite tournaments, where 11 or 12 players would put up $1,000 each, with the winner of that small tournament receiving the $10,000 entry fee for the Main Event. Before Harrah’s purchase of Binion’s Horseshoe and the WSOP name in 2004, the event had been held in downtown Las Vegas, with up to a few hundred players anteing up for the tournament.  Harrah’s sold the hotel/casino, but kept the Horseshoe and WSOP tournament names.

Internet poker was given a huge boost in 2003 when Chris Moneymaker, an accountant by trade, earned his $10,000 seat by qualifying for the Main Event through an online poker site with an investment of $40.  He was one of 839 entrants and won a $2.5 million first prize.  The resulting rise in the popularity of online poker has been known as the Moneymaker Effect. The number of entrants in the WSOP quadrupled in 2004, and eventually peaked at over 8,700 entrants in 2006, many having earned their way into the tournament through online sites.  That 2006 tournament holds the record with a $12 million first prize.

In October 2006, President Bush signed the Safe Port Act, which was aimed at enhancing security at U.S. ports, but to which an attachment had been added known as the Unlawful Internet Gambling Enforcement Act (UIGEA). According to the UIGEA, “unlawful internet gambling” means to place, receive or otherwise knowingly transmit a bet or wager by means of the Internet where such bet is unlawful under any law in the state in which the bet is initiated, received or otherwise made. Additionally, the UIGEA prohibits online gambling sites from performing transactions with American financial institutions. As a result, many of the sites serving the U.S. market, including 888 Poker and Party Poker left the U.S. market, and the number of entrants earning their way into the tournament fell by almost 30 percent. 

To enforce the financial prohibitions of the UIGEA, the banking industry was prohibited from taking any transactions from companies with an industry code associated with gambling. Not to be discouraged by the UIGEA, companies found a way to accept deposits from U.S. citizens, sometimes by processing through non-U.S. banks. One legal and acceptable method (although slow and labor intensive) is to get a cash advance from a credit card that is processed by the gaming company on behalf of the player. More often, the prohibition was circumvented by processing payments through non-gaming related companies. By purchasing a “product” through a third party, a player could fund an online account. By returning that “product” the player could have his or her credit or debit accounts receive a credit for returned merchandise. In some instances, small banks looked the other way and permitted the financial transactions to process.

Eventually, the stigma lessened, and by 2010 there were over 7,300 WSOP Main Event entrants, with a winner’s share of over $8.9 million. The WSOP has added additional tournaments throughout the world, with Norwegian Internet Poker sensation Annette Obrestad winning the first prize of the 2007 inaugural WSOP London event one day before her 19th birthday.

It seemed that online poker had gained both the popularity and legitimacy that would allow continued growth. Then, on Friday, April 15, 2011, the websites of PokerStars (based on the Isle of Man), Ireland’s Full Tilt Poker and Absolute Poker of Costa Rica, along with Ultimatebet.com and UB.com, were seized by the U.S. Federal Government, and 17 bank accounts in 14 countries were frozen.  The companies and their executives were charged with fraud (remember the third party “products” and the banks that looked the other way), money laundering and running illegal casino operations in the U.S.  Their websites were replaced with a U.S. Department of Justice Seal and notice that their domain name had been seized by the F.B.I.  and the warning “Conducting, financing, managing, supervising, directing, or owning all or part of an illegal gambling business is a federal crime…”, and “For persons engaged in the business of betting or wagering, it is also a federal crime to knowingly accept, in connection with the participation of another person in unlawful Internet gambling, credit, electronic funds transfers, or checks.”

The ripples were felt immediately.  Wynn announced that its relationship with PokerStars was terminated. Caesars commented that the company had “never offered any real online gaming in the United States.”  Walt Disney Company’s ESPN announced that it would no longer carry Internet poker sponsored events, although it will carry the 2011 WSOP, but has lost millions in advertising dollars from the online cardrooms. Many online site sponsored events, both live and satellites for other tournaments, have been cancelled.

The ripples looked more like a tsunami. Millions of online players were denied access to their own money. While the Department of Justice has come to an agreement with some of the offending companies allowing them to reopen their sites for the purpose of allowing players access to accounts, many thousands of players who considered online poker as their vocation were immediately out of work and income.  The Poker Players Alliance, which claims well over a million members, has mobilized its efforts to overturn the law and convince lawmakers that a licensed and regulated industry is a much better environment that one that is run by individuals and companies outside of the law.

The questions begin with what is gambling? According to noted gaming law professor, Nelson Rose, gambling is defined as, “any analysis started with examining whether all three elements of gambling are present: prize, chance and consideration.” 

Many will argue that poker is not a game of chance, but rather a game of skill. If it were not, then the famous names that we see winning tournaments would not rise to the top regularly, and if poker is a game of skill, then it would not be considered gambling. The definition of a game of skill is left to each individual state.

On the other hand, fantasy sports could be a form of gambling, where participants pay a subscription fee to play, chance is certainly involved, and prizes are awarded to the winners of a league. What about commodities trading, where whenever a contract changes hands, there is always a winner and a loser? Wouldn’t things like political unrest, natural disasters or changes in the weather constitute chance?  Why would insurance not be considered gambling, where the insurance company is wagering a prize (the payout of a policy) on the chance that the insured may have an accident or die, for consideration (the premium).

The definition of what constitutes illegal gambling is left up to each individual state, but many legislatures and governors are looking for U.S. Congress to end the confusion. Just a week before what the poker industry refers to as Black Friday, the Washington, D.C., city council approved a budget allowing the district’s lottery to operate a poker website available only within the city’s boundaries.  With state budgets crumbling, many look to taxing legalized poker play as a method of gaining revenue. This story is not over.

Bill Geoghegan is a consultant in Las Vegas. He can be reached for comment at Bill@LGTConsulting.com.

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