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By any imaginable measure, California is the 800lb gorilla of U.S. regulated online gambling.
Their conversation touched up such critical issues as why California is planning to go poker-only, how his state might approach the issue of liquidity sharing and compacts and California’s short-term prospects for regulation.
Richard Schuetz: The reasons why are: I think there’s a belief among our tribal partners that the Internet as a distribution network for gambling products could in some ways cannibalize the brick-and-mortar environment.
One really needs to understand that our brick-and-mortar because the land that was left over to the Indians oftentimes wasn’t conveniently located, it’s a bit of a trek to get to some of these sites.
If it was possible to gamble at home, say, on an Internet environment, it might be fundamentally more convenient than driving the 35 or 45 or 50 miles to a casino. I think that they see it as potentially diluting their monopoly for a lot of these products because they’re the only ones that are allowed to offer slots and really banked games.
I think they see it as a potential threat, and as such because the tribes have very much woven themselves into the fabric of our political tapestry, they can control the debate somewhat. So I think the concern is that to offer a full suite of games is going to potentially dilute the brick-and-mortar and impact the monopoly that the tribal nations have. As such, they’re going to protect that monopoly.
Valerio: Now, you’ve admitted that you said yourself that you go to a lot of these conferences, you’ve talked with a lot of people for sure. So you must know, you must have seen what’s happening in New Jersey. The casinos there don’t seem to be as afraid of something like that. They don’t seem to feel as threatened. Where do you think those two gaming powers are disagreeing?
Schuetz: Well, I spent two days before I came here. I spent two days in New Jersey, and I go back to: I worked in New Jersey in the early ’80s for Mr. Wynn. One has to understand the severe downturn in their numbers, especially on the boardwalk properties.
That’s a sad commentary compared to where it was, say, five years ago. A lot of this has to do with: Gambling was initially introduced in New Jersey as a tool of economic development. With the rapid expansion in the surrounding states of gambling, now they’re launching Internet [wagering] as a tool of economic development. So it’s the same thing.
Look, you’ve seen the asset values on those casinos. They’re in a terribly depressed state. Again, especially the boardwalk casinos. They’re struggling financially. Their earnings are down and every month – last month was down 13 points from the previous year.
I mean, the only good news for numbers-wise in New Jersey is, October probably will be even, and that’s only because Sandy closed the buildings for four days. I mean, no one’s – even in New Jersey – no one’s telling a story that things are going wonderful on the boardwalk. They’re not.
Valerio: You’ve had a chance at this conference and at others to express what seems to be a very unique position amongst the states: California’s position on compacting and agreements with other states. Could you reiterate what that position is?
Schuetz: First of all, we have 38 million people. We’re the eighth largest economy of the world. As such, we aren’t as dependent on – we’re bigger than Canada, so it’s not a case like Nevada that has 2.7 million people.
This is a game about numbers. If the numbers aren’t there, all the wishing and hoping is not going to make it work. In some regards, it’s like a state saying, “We want to be an oil producer.” Well, you better have oil. If you don’t have oil, you’re not going to be an oil producer.
For a small state to try and develop a game that involves big numbers, that’s a problem. So California is in a unique situation with it’s 38-plus million people. Plus we have some wonderful demographics. We have more poker tables in the state of California than every other state in the nation.
So we have that demographic and we have this huge male college person, which is the other end, the new entry into the poker demographic. The people you see in a Bet Raise Fold, that gut group, that’s the California college students and above.
So we have an advantage that few states have. On my last panel it featured Pennsylvania, New Jersey, and Iowa. If you took all of those states together, that’s about 61 percent of our population. This is a game of liquidity.
That’s not to say that we don’t want to participate with other states. I think if we were to launch a game, once the liquidity settled in the top three or four brand names, whoever wins those market battles, I believe that just about any citizen that’s a poker player would want to play on our side. Where are you going to want to play? Are you going to want to go play on a site that has – you know, you might have to wait a bunch of time for a game or you want to play 5/10 and the only thing is available is 10/20, or it’s just three-handed? I mean, come on.
You know you’re going to want to play where there’s a ton of games, and everyone’s going to want to play, I would think, in California. That would shape the debate with regards to compacting. I don’t know that California would be against compacting, but it’s going to be on California terms. We’re certainly not going to give our players to another state, but if another state, especially a small state that couldn’t facilitate a game wanted to come on our game, I’m sure we’d be willing to have that discussion.
Valerio: I see. So you are open to the idea of compacts?
Schuetz: Absolutely. Any industry has to grow and to say we’re not open would be crazy as, say, we’re going to sell cars in California, but if anybody comes from Oregon, we’re not selling them a car. That’s crazy. No. But those compacts are going to be negotiated on our terms largely, I think. It’s going to be a seller’s market. That’s where the citizens are going to want to be.
Valerio: This is going to be a big question, but can you help me and decide like: What might some of those terms be, for instance?
Schuetz: Every participant in a compact is going to want to make sure that they feel comfortable with the integrity of the game. There’s five levels of interest.
First of all, you want to be comfortable with the ownership, that they’re free from any bad associations. That includes the vendors and all of the things. You want to make sure we have good operating controls.
The third thing you’re going to want to make is that all the fees and taxes are appropriately collected. The fourth thing is the integrity of the game; and the fifth thing is we’re going to want to make sure we have protections for the vulnerable.
Valerio: Protections for the vulnerable?
Schuetz: You know, the problem and pathological gamblers. Those are going to be the things. Then it’s just a matter of – I mean, a state may say, “Look, handle this for us. Ring-fence this state. They can play on your state and send us five points.” — something like that. The dimensions are going to be what rate of return do they get and who manages the regulatory function, in those five points. Everyone’s going to have to feel comfortable with those.
Valerio: I know that earlier today you refrained from speculating about when a bill might pass, when something of substance might happen; but, if you could, just give us an overview of what the current situation is and how maybe you foresee it for the short term.
Schuetz: In the short term, it’s real problematic, I think. One, we’re in an election year. That changes politicians’ behaviors. Two, it’s been a contentious debate. I mean, there’s a lot of different participants.
There’s the tribal segment that we have and as you well know Marco, they’re not a homogenous voice. They have disagreements both small versus large, and large versus large. They get into differences.
Then you have the card rooms, and they have their debates between the big and the small. Then you have the card rooms and the tribes sometimes getting into it. Then you have the racetracks. Then you have the anti-gambling coalitions. You have a lot of different things going on.
So it – I’m not a political animal. I have always worked in the private sector. I’m not a very good one to talk to about what’s going to happen. I believe that there are several motivations in California to have Internet [gambling].
The three standard motivations are as follows: tax revenues, business development and employment, and to eliminate illegal activity. That is oftentimes when they make something legal, to get it aboveboard and regulate it.
In California, I think the most important issues are not tax revenues necessarily, but they’re to generate business development and employment, I think is important. Two, to eliminate an illegal activity because we have a lot of Internet [poker] being played in our state right now through U.S. facing sites.
Three, this is kind of a uniquely California thing. When you think of the computer industry, you think of Silicon Valley. When you think of the movie industry, you think of Hollywood. When you think of just about everything, we have a standard of excellence in the state of California where we generate more tourists than any other state in the nation. We lead the league in a bunch of categories and I have every reason to believe that we would want to lead in this innovative delivery method for gaming.
It’s kind of funny, when you have 18 forms of legalized gambling, you know, what’s wrong with the 19th? You have state-run monopolies with regards to the lottery, blackjack, slot machines, poker, off-track betting, charitable bingo, on and on and on; and all of a sudden why draw the line here? Especially a game that because of its technological sophistication, is pretty easy to control, both from a protecting-the-vulnerable card and a whole bunch of reasons. It’s modern.
Valerio: When you were talking earlier about describing California’s market capacity, you said that the field was big, and you were saying, “Players can play the games they want. They can have a lot of liquidity.”
Valerio: That resembles something John Pappas said yesterday during his own panel. Where he said that it’s important to have a broad liquidity pool across various time zones to stimulate many of the same things: access, traffic, etc., etc.
When he said it, he seemed to want it to be a contradiction of what you said because he took your expression earlier in the day to mean, “We are going to be hesitant to compact.” Basically, he took from you, “We can do fine on our own. California, we can do fine on our own.” He was challenging that, I think. He was saying, “No, you want more time zones.” Did you hear that?
Schuetz: No, I didn’t hear that, but I agree. When you look at the evolution of race books in Vegas, they started watching and booking an Australian track so they could expand the hours. Yeah, you do want the hour.
The more time zones you’re able to do, the better off you are. Look, I’m a believer in liquidity. I’m telling you liquidity’s important, and we also want our industry to grow. We think it would be the most – The Economist magazine estimated there’s an addition $200 million English-speaking out there. We want them all on our game. We’re not going to give up our customers, though.
Valerio: Give me an idea of how would it be disadvantageous to California to enter – under what circumstances would California be in a losing proposition or give up players, as you say? Can you explain?
Schuetz: I can’t imagine us giving up players.
Valerio: Let me just make sure I ask this properly. I guess what I’m saying is: How do you make sure that California is in a position of power and under what circumstance – I mean, how could a smaller state take advantage of California’s market without California getting its proper dues?
Schuetz: I have no earthly idea.
Valerio: All right. I’m trying to – it seems impossible to imagine, impossible to envision.
Schuetz: Yeah, always bet on the big puncher, not the small puncher.
Valerio: I understand. What has been the reaction when you state this – because you seem – you called out Nevada, especially, as being a state that is eager to compact.
Schuetz: They have to.
Valerio: They have to. A little more about that – I mean, what do you make of Nevada’s position as an online poker market?
Schuetz: If Nevada’s going to be a viable player in the Internet world, they’re going to have to increase their pool of liquidity.
The only way I can think of is: 1.) go into foreign countries, or 2.) compacting with other U.S. states.
Now the issue becomes on the foreign countries (we’ve heard some of those debates), there’s a legality issue that needs to be discussed. Two, with regards to compacting with other states, one has to ask the question: Why would one want to compact with Nevada?
Now it may be because they have this extraordinarily good regulatory framework in history. Maybe a small state says,”I don’t want to mess with this. I don’t want to build my own infrastructure for regulating this industry, so I’ll just turn it over to Nevada.”
One then has to ask the question: Well then, wouldn’t you want to go with a bigger state because their people are going to want to go onto a site that has more players?
Valerio: I want to ask you: you – we were talking about this at G2E – you are a poker player, right?
Schuetz: There’s been kind of two elements of my life. First of all, I’m pretty analytic. I’ve been interested in the – I started working in the gambling business when I was 21. I got into researching gambling and even spent some time on a Master’s thesis on card counting systems. I had an aptitude that was particularly good for some poker games.
I’m fairly good at doing calculations on the fly, so I was a seven-card stud player because you get a lot of information in a seven-card stud game. You know how many clubs are out – you have a lot of information than you did. I got into that. Now, I also had for many years of my life an attitude that “It’s not done ’til it’s overdone,” so…
Valerio: You play a lot?
Schuetz: I used to play a lot. I’ve changed a lot of things in my life.
Valerio: In California, like in the…
Schuetz: No, no, no. I don’t play at all now.
Valerio: No, no. But did you used to play in California card clubs?
Schuetz: No, I played in Nevada.
Valerio: Oh in Nevada, I see. Final question – Thanks a lot for your time, by the way.
Schuetz: Ah, I’ve enjoyed your company. I like you.
Valerio: That’s what I want! It’s too bad we are at the end of the conference. So – and I was going to ask this earlier – so now you know, you said yourself – and I really enjoyed that comment, by the way, that you’re in so far.
Valerio: That was funny, but you also seemed like you know what you were talking about. I mean, you’ve taken an interest in this and you’ve gone to a lot of places, you’ve met a lot of people. As you’re spending more time – I’ve heard you speak at number of places talking about California.
As you spend more time talking to people, meeting people: What impact do you think you’re having with this platform? How do you think people in the industry are responding to it? How are people preparing – if they are preparing – to work with California and with you?
Schuetz: Well, I think I’ve helped in the regulatory community and in the gaming community, helped put California on the map. Not that it needed to be put on the map, but I don’t think a lot of people knew that it was going on in California. I think I’ve raised its exposure and awareness. I think I’ve helped enhance the brand of our regulatory assets. I seem to be respected.
Valerio: Very true. I have to get one more question in now, I’m sorry, it’s because I’m from the poker world and I deal a lot with poker players. You have a very large poker playing population, which means not only that you can extract revenue from them, of course, but it’s also a large poker community.
Any community assembles, they talk amongst each other. Many poker players are very sophisticated. The poker media can be pretty sophisticated with the reporting of issues. I’m wondering at what point do you foresee, or how do you foresee the communication – how do you see that being like between the regulators, the poker operators in California as you said yourself, and the poker community?
Schuetz: I have to be very careful not to give the appearance that I am an advocate for something because that’s a decision of the Legislature and the Governor. I am here to best affect their plans. So I oftentimes am accused of walking close to that line of advocacy. I don’t believe it’s advocacy.
I think it’s just to increase the literacy because I think one of the mistakes they’re making in California is that they believe it’s a discussion as to whether to have Internet poker or not. I believe we have Internet poker and we have Internet gambling, and the decision is to whether we want to regulate it and [have it] taxed and controlled in a meaningful way, or it’s going to continue to be siphoned off to U.S. facing sites.
I don’t think a lot of people know the reality of what’s happening now in the state, the unregulated gambling that’s taking place. I think I’ve helped in that debate.
Valerio: Very good. Closing statements? Closing thoughts?
Schuetz: We’re going to look back at this interview in five years and laugh.
Schuetz: About what we did and didn’t know.