With Temperature Tepid, Online Gambling Regulation May Be Climbing Uphill In 2016

Regulated Online Gambling Expansion In 2016? Your Guess Is As Good As Mine

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Since New Jersey passed its online gambling bill in February of 2013, online gaming expansion in the United States has been, for lack of a better word, frustrating. A number of states have talked about online gambling, some have introduced bills, but thus far none has acted.

As we head into 2016, the situation is no longer merely frustrating, it’s becoming concerning.

2016 may be bellwether year for online gambling

The fate of real-money online gambling in the United States could be in serious jeopardy if, for the third consecutive year, no state passes an online gambling expansion bill.

When they decided to get involved in regulated online gaming in the U.S., the current operators, particularly those in Nevada and Delaware, expected several more states to be online by 2016, and for partnerships and interstate agreements to be in place that would make their early investment in these small states worthwhile.

With expansion stalled since 2013, and just 3 percent of the U.S. population living in one of the three states with legal online gaming, online gambling is starting to look like a failed experiment. Virtually every potential operator sees a situation where it’s not financially viable to launch an online gaming site in the current environment.

Most of New Jersey’s operators are underwater, and any that have turned a profit are doing so by the slimmest of margins, barely keeping their head above water. Operators in Nevada and Delaware are in even more dire straits, as they’re more or less hemorrhaging money, waiting for the early hopes of widespread legal online gaming in the United States to be realized.

There is a growing fear that if more states don’t come online soon, online gambling might fail in the U.S., as operators – and the vendors that keep the industry running smoothly – might be incapable of turning a profit if the status quo remains.

The hope is 2016 will see some movement, but even with the progress made in Pennsylvania, expansion is facing new challenges and a changed landscape in 2016 that makes growth efforts unpredictable.

Challenge #1: Election year politics

A lot is made about election years (and more so in presidential election years), and the typical lack of progress in legislatures during what I’ll sarcastically call the silly season.

I’ve already touched on why I don’t feel like this will be as big an issue for online gaming in 2016 as it has been in previous election cycles. But aside from the gambling issue, and online gambling becoming “normalized,” the discussion has moved beyond talking in several states. It’s usually during the talking phase that many lawmakers tend to get cold feet and try to avoid the issue altogether.

In several states, most notably in Pennsylvania, the leg work has already been done, and all of the protestations have been heard. If there hasn’t been any political fallout against the people championing gambling expansion, it’s doubtful there will be if and when a vote is cast, particularly since the law won’t go into effect until well after the election, as it will take many months to craft regulations and even longer before any online gambling product would be ready to go live.

That being said, politicians are pretty set in their ways. If a politician still ascribes to the “no controversial legislation in an election year” policy, and that lawmaker considers gambling a controversial policy, everything I said above might not matter.

Challenge #2: Motivations for action have changed

In 2014, the question virtually every lawmaker had was, “How much revenue will this bring in?”

While this is still a key point, the results from New Jersey over the course of 2014 dumped a bucket of cold water on the notion that online gambling is some kind of deficit-fixing panacea. While revenue is still a motivator, it’s not the only one.

In 2016, I expect the conservation to continue to move towards other arguments for legalization. Specifically these two that started to catch on in 2015:

  1. Enacting strong consumer protections.
  2. Bolstering a state’s brick and mortar casino industry.

Revenue is still a solid reason to pass an online gaming bill (where else is a state going to find $25-$100 million in non-cannibalistic gaming revenue?), but the ability to enact strong consumer protections has done a good job of winning over some lawmakers and making online gambling expansion an easier sell to the general public.

Also, while revenue may be underwhelming, by and large the New Jersey operators with online gambling have fared much better than the casinos that chose not to launch online products. Furthermore, while profits may be scarce, iGaming operators in New Jersey have certainly stumbled upon some unexpected benefits of online gaming, namely marketing to new demographics and reconnecting with inactive customers.

The problem in 2016 is convincing state lawmakers that online gaming is an issue they should care about when the easy sell (massive tax revenue!) has fallen by the wayside, and the new reasons are far more nuanced and hard to measure in a tangible way.

Challenge #3: Will DFS muddy or clear the water?

Based on the zeitgeist, it appears online gambling will take a back seat to daily fantasy sports in statehouses around the country in 2016. DFS is the hot topic of the day, and it appears to be the issue lawmakers want to tackle thanks to the media attention the DFS industry has received.

However, as is the case in Massachusetts, DFS regulation could also bring about an omnibus approach to online gambling legalization and regulation in certain locales. Any state that is looking at DFS that is also considering online gambling expansion would be wise to take this kill two birds with one stone approach, as there is a lot of overlap between DFS and iGaming regulation.

Unfortunately, this will only be possible in a select few states, where both DFS and online poker/casino legalization have been seriously discussed, or could be passed without much fuss. For instance, in California, New York, and Massachusetts, online gambling expansion is well past the “this is something we should explore” phase, and DFS could provide the final nudge these states need to take action on online gambling.

The good news

On the bright side…

Bad actor clauses are pretty much dead.

It was already trending this way in 2015, but with PokerStars receiving a transactional waiver from the New Jersey Division of Gaming Enforcement, bad actor clauses are pretty much off the table, as even the hardliner tribes in California are starting to soften on this issue.

This removes impediments in several states, particularly in California where PokerStars and the bad actor debate have been a key reason online poker legislation has stalled the past two years.

On the bright side part two…

New Jersey’s online gambling industry had a terrific 2015.

The narrative heading into 2015 focused on the failures of New Jersey, Nevada, and Delaware to meet their revenue expectations. The industries in the early adopter states were much maligned and deemed failures.

As we head into 2016 the narrative has changed. New Jersey’s online gambling industry grew by 17 percent in 2015, with revenue nearly reaching $150 million, and with New Jersey’s slice of that pie totaling $25 million.

And finally, what if…

Pennsylvania can get an online gambling passed?

If this happens in early 2016, the industry will be able to breathe a sigh of relief. Pennsylvania passing an online gambling bill will likely lead to several other states ramping up their efforts, and could lead to the signing of more interstate agreements.

- Steve covers nearly every angle of online poker in his job as a full-time freelance poker writer. His primary focus for OPR is the developing legal and legislative picture for regulated US online poker and gambling.
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