Online Poker Goes Bust

By Ryan C. Fuhrmann | May 09, 2011 AAA
Online Poker Goes Bust

Since its introduction in 1995, The global market for online gambling has grown rapidly, bringing in more than $25 billion in revenue in 2009. It was estimated to reach nearly $30 billion, before U.S. authorities announced a major crackdown of online poker by seizing five major gambling websites and indicting 11 individuals involved with the sites, on April 15, 2011. (To learn how investing can be like gambling, read Going All-In: Comparing Investing And Gambling.)
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Is it Legal Anywhere?
The U.S. has been a major revenue driver for online gambling, with an estimated 10 million participants that have been operating in a gray area over the legality of gambling over the internet. Thousands of more skillful players reportedly earn a living by playing poker online.

Despite the near-term uncertainty for one of the largest markets for online poker, which first surfaced through a site called Planet Poker and now accounts for approximately one-third of the online gambling market, a number of states are working to legalize the activity for their residents. Washington D.C. is working on making it legal, and there is speculation that the states of Nevada, California, Iowa and Florida may at some point make it legal for those gambling within their respective state lines. (To find out what you can do with your winning or losses after gambling, check out Betting On March Madness? Watch Out For The Tax Man.)

Major Players Shut Down
Internet gambling has officially been illegal in the U.S. since 2006, as legislation prohibited banks from handling payments related to online gambling. The current crackdown saw three major sites have their sites seized and their executives face prosecution over allegations they tricked banks into believing transactions were not gambling related. They also operated companies that hid offshore to try and avoid U.S. regulations.

The major sites indicted included PokerStars, Full Tilt Poker and Absolute Poker and the current charges seek $3 billion in penalties from all parties that are being charged. This represents a huge setback for these firms in their largest market. PokerStars had also recently announced a deal with Las Vegas-based Wynn Resorts to work together and reach more clarity over regulation of the online market but quickly terminated the alliance after the recent indictments.

Other players could quickly take the place of the embattled major sites as states try and legalize online gambling. The traditional casinos, including Wynn Resorts, MGM Resorts and Las Vegas Sands, all of which are based in Las Vegas, could pick up huge share if the activity is legalized in Nevada. States would also benefit and shore up their finances by heavily regulating and taxing online gambling within their jurisdictions. (For more on Casinos, see Casino Stats: Why Gamblers Rarely Win.)

Should Online Gambling Be Illegal?
In an editorial piece shortly after the indictments, former U.S. senator Alfonse D'Amato spoke of Congress passing ambiguous laws to supposedly regulate online poker playing, and suggested that poker is not the same as other forms of gambling as it is a game of skill. In contrast, most other forms of gambling are ones of chance. He stated that, "Since poker is a game of skill that is legal in the home, is should be legal to play online." He also stated that internet poker doesn't violate federal or most state laws, again because poker is a game of individual skill. Toward the end of his piece, he questioned, "Why the Justice Department feels it can roll the dice and pick one form of gaming to ban over another is beyond me, and it is beyond the millions of Americans who are being denied their hobby and, for professional players, their livelihood."

There have been efforts to repeal the 2006 law that made transferring money to internet gambling sites illegal and despite the law's enactment the U.S. market has continued to grow. The current round of indictments has devastated the market in its current form, but has again brought the issue to the forefront of state and federal authorities and could end up being good for the industry if clearer regulations are approved and eventually allow for parts of the country where it becomes officially legal to play poker online. Just last year, Senator Harry Reid of Nevada tried to introduce a bill to legalize online poker, and felt it important to legalize the activity within the next couple of years. A nationwide federal law would be more beneficial than state laws, as it would provide more clarity. (To read about how a professional player became wealthy, check out 6 Overnight Millionaires.)

The Bottom Line
What is clear is that online poker in its current form has been drastically altered in the U.S. The major firms have had their dominance taken away, and the industry will likely have to wait for state and federal regulations before moving forward. Traditional gaming firms are likely to be the eventual winners, though many websites will likely again sprout up to get into the action whether the activity is officially made legal or not. (For more information on investing in casinos, see Conglomerates: Risky Proposition?)

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