Research Note: California Internet Poker Update

On April 23, 2014, the California Assembly Governmental

Organization Committee (AGOC) convened an informational
hearing on the fscal and policy implications of legalizing
intrastate Internet poker. GamblingCompliance attended and
provided testimony on the state of the regulated U.S. Internet
poker market. Key takeaways, both from our testimony and
from that of others, are set out below.
The regulated U.S. Internet poker market is of to a slow start. On
a run-rate basis, the market, which encompasses Delaware, Nevada
and New Jersey, is on track to generate approximately $49.4m in gross
gaming revenue (GGR) (see Ex. 1 below). That compares to 2005, when
the unregulated market encompassed 41 states and generated at least
$920m in GGR, according to GamblingData. The regulated market,
which opened in April 2013, has been negatively impacted primarily by
payment-processing and geo-location issues, low customer awareness
and competition from unlicensed operators domiciled in non-U.S.
jurisdictions. Notably, player trafic on regulated sites decelerated
between late January and early April but began to stabilize in mid April,
according to PokerScout.com. Given modest GGR generation and
decelerating/fat player trafic, regulated-market states have begun to
consider ways to boost their economic fortunes. Delaware and Nevada
in late February entered into the Multi-State Internet Gaming Agreement,
which would allow them to pool player trafic. New Jersey, for its part, is
weighing whether to join that agreement.
Exhibit 1: Regulated-Market States: Run-Rate Internet Poker GGR
State Monthly GGR Run-Rate GGR
Delaware 84,392 1,019,184
Nevada 824,000 9,888,000
New Jersey 3,210,663 38,527,956
Total Regulated Market 4,119,055 49,435,140
California is set to vastly outperform the current regulated market.
The state, whose adult population is over three times larger than the
combined adult population of Delaware, Nevada and New Jersey, is
1
U.S. Internet Gambling Regulatory Tracker
Chris Krafcik
Research Director North America
(+1) 636 236 6319
Chris@gamblingcompliance.com
Daniel Stone
Head Of Content - GamblingData
(+44) 0207 921 9980
Daniels@gamblingdata.com
May 6 2014
Source: State Gaming Regulatory Agencies / GamblingData April 2014
The question of how best to handle bad actors, or entities that
formerly accepted or facilitated the acceptance of unregulated
U.S. Internet wagers, was not resolved. Indeed, a newly-announced
partnership agreement between PokerStars, the Morongo Band of
Mission Indians and three Los Angeles-area card rooms has caused
a rift between the Morongo group and two politically powerful tribal
gaming coalitions. After hearing testimony both from the Morongo
group and from members of the two tribal coalitions, AGOC members
did not indicate whether they intend to (i) legislate an answer to the
bad actor question (e.g., as the Nevada Legislature did in 2013)
or (ii) avoid legislating an answer to that question (e.g., as the New
Jersey Legislature did in 2013) (see Ex. 3 below). Regardless, with the
Morongo group threatening to challenge any legislation with bad
actor provisions in court, and with the two tribal coalitions threatening
to kill any legislation without such provisions, the path forward for two
pending Internet poker bills, AB2291 and SB1366, remains unclear. For
context, we lowered our Momentum Rating on California from HHIto
HIIin mid March to refect uncertainty created by the then-prospect of
2
California Internet Poker
April 30 2014
200
400
600
800
1000
Y4 Y3 Y2 Y1
Bull Case Base Case Bear Case
$
U
S
m
597.3
545.0
444.5
317.5
211.7
282.4
335.2
360.0
423.4
620.6
773.9
854.4
Source: GamblingData April 2014
expected to generate approximately $317.5m in GGR in its frst full year
of operation, rising to $597.3m by its fourth, according to GamblingData
(see Ex. 2 below). Our base-case estimates assume that California will
not be as severely impacted by payment-processing issues as New
Jersey, but that such issues will act as a signifcant drag on the markets
size in its frst full year of operation before partially alleviating over time.
Exhibit 2: California Internet Poker Data Forecasts: Years 1-4
a partnership agreement between PokerStars and the Morongo group.
Exhibit 3: Proposed Bad Actor Provisions In AB2291, SB1366
Jurisdiction Nevada California
Bill No. Status AB114 Enacted AB2291 Pending SB1366 Pending
Triggering
Conduct
Knowing and
intentional
operation of, or
knowing and
intentional provision
of services to, an
interactive gaming
facility that operated
interactive gaming
involving patrons
located in the United
States.
Acceptance of a
wager from any
person in California
on any form of
Internet gaming.
Knowing and willful
acceptance of, or
knowing and willful
facilitation of the
acceptance of, bets
from persons located
in the United States
on any form of
Internet gambling
that has not been
afirmatively
authorized by state
or federal law.
Triggering
Conduct Cut-Of
Date
12/31/2006 12/31/2006 12/31/2006
Restrictions
Targeting
Covered
Persons (Or
Similar)
Yes Yes Yes
Restrictions
Targeting
Covered
Assets (Or
Similar)
Yes Yes Yes
Waivers
Contemplated
Yes No Yes
Proof Required
To Attain Waiver
Conduct of
Covered Persons
did not occur after
12/31/2006, in
violation of state
or federal law; Use
of Covered Assets
did not occur after
12/31/2006, in
violation of state or
federal law.
N/A Use of assets did
not occur after
12/31/2006, in
violation of state or
federal law.
Burden Of Proof Not Specifed N/A Clear And Convincing
Evidence
The California Bureau of Gambling Control, the agency tasked with
conducting background investigations, raised questions about its
3
California Internet Poker
April 30 2014
Source: GamblingCompliance Research Services April 2014
4
California Internet Poker
April 30 2014
readiness in the event that the Legislature speedily enacts Internet
poker legislation. Stacey Luna-Baxter, assistant chief of the state
Bureau of Gambling Control, told AGOC members: Currently, within
the bureau, we do not have existing resources that we could just shift to
this new workload. We would not be able to absorb the new workload
associated with Internet poker. Luna-Baxter said that the Bureaus
licensing division, which is already short 22 positions, would require
additional personnel, and that its compliance and enforcement division
would require both additional personnel and training. Luna-Baxters
remarks threw cold water on hopes that the Bureau would be positioned
to conduct expedited background investigations. Such investigations are
called for in AB2291. If youre expecting background investigations to be
done in 90 days, that simply is not possible, she said, later adding that
the Bureau is weighing up a process whereby license applicants could
be issued interim licensure before a full background investigation is
completed.
The California Gambling Control Commission, the agency tasked
with promulgating regulations for Internet poker, said that it would
need at least 205 days to do so. Commission Chairman Richard Lopes
told AGOC members: In regard to the reg process, the formal process
is 205 days. That is without workshops, drafting language, etc. We could
go with the emergency regulation process, but that certainly does not
allow for as much participation from the various stakeholders. I would
ask for as much time as possible when promulgating these regulations.
Lopes said that the Commission intends to hire a consultant, on a part-
time basis, to help draft the regulations but that additional personnel
would not be required. He later added that the Commission would not
require additional budget allocation to complete work on the regulations
and that its staf are currently poring over existing regs from other
jurisdictions to see what would ft in California. Lopes remarks threw
cold water on hopes that the Commission would be positioned to
promulgate regulations in 120 days, as is called for in SB1366.
Time is running short. The fnal bill-passage deadline is Aug. 31, 2014,
and the Legislature is in recess between July 3 and August 4. Although
the Morongo group and members of the two tribal gaming coalitions
told AGOC members that Indian Country was closer to reaching a
compromise position on Internet poker than ever before, none, notably,
said that a solution to the bad actor question would be reached before
September. Still, legislative sources we spoke with said that SB1366 may
be taken up in by the AGOCs sister body, the Senate Governmental
Organization Committee, on June 10 or June 24.
Suggestions for further reading. For an analysis of how states and the
federal government are approaching licensing for bad actors, see our
special report, U.S. Internet Gambling Licensing Approaches To Bad
Actors. For an analysis of AB2291 and SB1366, see our special report,
California Internet Poker Legislative Analysis.
Use Of Information
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This research note is no substitute for local legal advice in each
jurisdiction covered. Before acting or refraining to act on any information
you read in this research note, it is strongly recommended that you
obtain independent legal advice.
Copyright 2014 GamblingCompliance Inc. All rights reserved. The
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5
Momentum Ratings
Momentum Ratings are included in this research note. They are as
follows:
HHH Movement very likely in CY14
HHIMovement likely in CY14
HIIMovement unlikely in CY14
The ratings are based on sources expectations regarding Internet
gambling legislation in each state where such legislation is pending. The
ratings will be updated from time to time and are current only as of the
publication date of this research note. Please see Use Of Information for
further information.
California Internet Poker
April 30 2014
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