DOJ opinion could sink US online poker

Can US Online Poker Survive The New DOJ Wire Act Opinion?

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A new opinion from the Department of Justice Office of Legal Counsel (OLC) has turned the US online gambling industry on its head.

The exact implications remain undetermined for now, but online poker may be among the games hit hardest by the news.

While the opinion doesn’t change the law, it does lay out the OLC’s updated interpretation. The office no longer believes that the Wire Act only applies to sports betting — which means they believe it also applies to online poker.

Whether the new stance will stand up in court is an open question. The previous opinion issued in 2011 may still hold, but that’s not the point.

The issue now is that there is no longer any clarity about which forms of online gaming are legal and which are not.

Uncertainty yields a cautious approach

States that have not introduced recent gaming legislation will likely take a cautious approach going forward. Why expend political capital to pass a law that may be nullified by the courts?

The four states with legal online poker today are Nevada, Delaware, New Jersey and Pennsylvania. The latter has not yet launched online poker, but the licensed casinos are preparing to do so early this year.

Pennsylvania Gaming Control Board (PGCB) Communications Director Douglas Harbach offered OPR a brief statement in response to the new opinion:

“We must thoroughly review and discuss the opinion to gauge any ramifications to gaming activities in Pennsylvania. Meanwhile, as Pennsylvania’s current gaming is all intrastate and legal within the borders of the state, we will continue to regulate the legal forms of gaming as provided for in the Gaming Act.”

The risk may be small. But if uncertainty remains high by spring, it’s possible the PGCB may delay the rollout of online poker.

Interstate compacts at risk?

The other three states are all members of an interstate compact that permits operators to share online poker player pools.

Here is where the new opinion may have the most immediate impact. In Part I of its new interpretation, the OLC opines that the Wire Act applies to all electronic gambling transactions:

The second clause bars any such person from transmitting wire communications that entitle the recipient to “receive money or credit” either “as a result of bets or wagers” or “for information assisting in the placing of bets or wagers.”

Assuming that the OLC is correct and the Wire Act is not restricted to sports betting, this clause would seem to make multistate online poker compacts illegal.

It is a double whammy. The new opinion will make states question whether it’s even worth the effort to legalize online poker. And if they do, it may prevent them from creating a competitively large player pool.

Sharing liquidity across state lines is a critical element in rebuilding a national online poker market.

Market size tied to marketing spend

Pennsylvania has over 12 million people — about the populations of the other three states combined. Odds that PA online poker will join that interstate compact are now close to zero unless courts decide that the new opinion is wrong.

Only currently operates across multiple states, and Delaware’s 888 Poker sites serve a minuscule market. Adding multistate online poker into the mix in Pennsylvania would have allowed shared player pools for PokerStars and partypoker, the two giants of the industry in the rest of the world.

The importance of serving a large poker population is hard to overstate. A combined player pool of over 25 million people might have a tipping-point effect on US online poker.

Only large player bases can create the kind of life-changing tournament prizes that have become fundamental to acquiring new players. Marketing budgets can only grow as the metrics of player density and average spend move in operators’ favor.

Is ring-fenced online poker sustainable?

The participation rate in Delaware online poker is far lower than it is in New Jersey. A major factor is the tax system, which deters the three operators from marketing a game which generates negligible profit.

The state’s population of about 1 million also means that there is little chance a ring-fenced online poker site can maintain a viable player pool. When the player base is that small, poker rooms simply cannot offer a full variety of games or stakes. Players have to be channeled toward a smaller selection of games to keep them running.

Other small states — anything less than 10 million is small in the context of poker — will struggle to provide a sustainable ecosystem. Even the NJ online poker market of 9 million residents is struggling. It accounts for less than 7 percent of total NJ iGaming revenue.

Back in 2013, GamblingData (paywall) forecast that online poker would comprise 40 to 50 percent of the New Jersey market. It estimated first-year online gaming revenues in excess of $113 million. In the most bullish case, that figure could rise to $235.7 million by year four — 2017.

Since NJ online poker sites launched in 2013, they have produced just $126.5 million in total revenue — far less than forecast. Online casinos, on the other hand, have generated revenue of $865.6 million — comfortably above the bull projection.

The comparative numbers don’t bode well for states considering online poker legislation. Unless there is a mechanic for sharing player pools, poker may struggle to stay afloat in the US. There will be no return to the Golden Age.

A court case to establish the legality of interstate compacts and shared player pools is urgently needed.

- A former founder of Poker Industry Pro and Head of Content at PokerNews publisher iBus Media, Joss Wood is a graduate in English from the University of Birmingham. Joss also holds a master’s degree in Organisational Development from the University of Manchester. His career path has taken him from the British Army, through business and finance to seven years as a successful professional poker player.
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