Jeff Ifrah Presents on the Future of Online Gaming at J.P. Morgan Global High Yield & Leveraged Finance Conference
Yesterday, at the annual J. P. Morgan Global High Yield & Leveraged Finance Conference in Miami Beach, Florida, Ifrah Law Founding Member Jeff Ifrah shared his predictions for the growing online gaming industry in the U.S. and in Europe. Susan Berliner, an analyst with J.P. Morgan who covers gaming and lodging, moderated the panel, which also included Marc Falcone, CFO of Fertitta Entertainment/Station Casinos, and Eamonn Toland, President of Paddy Power. The panelists addressed the potential for online gaming’s additional expansion in the states as well as payment and logistical issues.
J.P. Morgan’s conference attracted a crowd of over 1,000 CEOs, CFOs and other C-Suite executives from high-growth companies across an array of industries, including gaming, entertainment, energy, and transportation and institutional investors. Questions from attendees at Tuesday’s panel indicated that investors were most interested in the rollout of online gaming in the three states that presently permit it: Delaware, Nevada, and New Jersey.
Ifrah noted that one study predicts online gaming revenues in the U.S. to reach approximately $670 million. According to Ifrah, how online gaming grows depends on what the states do to permit gaming and their licensing processes and what other states come online in the near future. Ifrah shared that just a couple hours before, Delaware and Nevada announced an historic agreement to pool their liquidity to increase their prize pool, allowing poker players in those states (and any other states which may subsequently sign on to the agreement) to play online poker offered by operators in either state, and to play against players in the other state. Governor Sandoval of Nevada and Governor Markell of Delaware met in Wilmington yesterday to announce this exciting development. The State of Delaware, an Ifrah Law client, launched online gaming in November.
Marc Falone of Station Casinos observed that run rate revenues for online gaming are estimated at $150 million in 2014. While online gaming is still in the early stages, it has the potential to be a much larger business with significant long-term growth potential. Falcone pointed out five challenges to online gaming growth, about which the panel generally agreed:
* General awareness – many consumers still do not understand that online gaming is legal in Delaware, Nevada, and New Jersey, which hinders participation and growth.
* Payments – despite online poker’s legality in the three states, Mastercard, Visa and other payment processors nevertheless decline to make deposits on online gaming sites.
* Geolocation – the states utilize geolocation technology to confirm that only residents in those states play. Many individuals have found the geolocation confirmation process unwieldy and difficult with which to interact, causing them to choose another activity. Falcone, Ifrah and the other panelists agreed geolocation technology and ease would improve over time.
* Security – in the age of high profile data breaches at Target, Neiman Marcus and elsewhere, and a reported breach on the Sands website, consumers’ interest in online gaming may be chilled. New Jersey requires a player enter a social security number. Consumers are understandably reluctant to provide that type of sensitive personal information in a website form. Industry needs to continue to work on secure procedures that will boost consumer confidence.
* Offshore gaming – licensed operators in the three states still compete with offshore gaming sites.
Eamonn Toland of Paddy Power stressed that online gaming revenues are currently as anticipated; growth takes time as consumers become more aware and some of the “wrinkles” identified above are ironed out. He sees a significant revenue growth of 28% month-to-month. As to whether online gaming “cannibalizes” land-based casinos, Toland and the other panelists concurred that the online gaming player is an entirely different demographic and they did not see the cannibalism effect. Toland believes online gaming will grow significantly as states contract with each other like Delaware and Nevada just announced.
As to other states that may authorize online gaming, Ifrah and the other panelists mentioned California, Illinois, New York, and Pennsylvania as potential markets. The panel participants cautioned that while these are exciting developments at the state level, the federal government would be monitoring online gaming operations to see if there are any significant issues, such as consumer protection issues. However, at least one panelist believes that online gaming has extensive protections – such as age verification, protections for problem gamblers – that result in fewer losses for consumers than in land-based casinos.
The Cheyenne and Arapaho Tribes have filed suit against Secretary of the Interior Sally Jewell after the Department Interior blocked their effort to offer real-money online gaming to international customers.
The Tribes were prepared to launch Pokertribes.com after coming to a revenue-sharing agreement with the state of Oklahoma. Pursuant to the terms of the agreement, the Cheyenne and Arapaho Tribes were permitted to offer their online gaming to clients overseas, but were prohibited from offering gaming to clients in Oklahoma or elsewhere in the United States. Under the compact, the tribe would pay the state 4 percent of the first $10 million in annual net revenue from electronic gaming, 5 percent of the next $10 million and 6 percent of any subsequent amount, plus a monthly 10 percent from non-house banked card games.
However, the Department of Interior Assistant Secretary of Indian Affairs disapproved two versions of the plan, in August and November 2013 respectively, finding that the state of Oklahoma could not offer exclusive access to an international market and that therefore the state’s “concession is illusory” and it is not entitled to revenue sharing. Notably, however, the Department of Interior explicitly declined to “reach the issue of whether internet gaming as contemplated in the Agreement was lawful,” restricting the basis of its opinion to the fact that “the State has not offered a meaningful concession” sufficient to justify sharing revenue from the online games. Since the Department did not approve the agreement, Pokertribes.net is currently inactive.
The Cheyenne and Arapaho Tribe filed the complaint against the Department of Interior on December 26, 2013 alleging that its decision was arbitrary and capricious, an abuse of discretion, and otherwise contrary to law. The tribe seeks declaratory and injunctive relief to prevent further obstruction of the website’s operation. The case is currently pending before Judge Timothy D. DeGiusti in the Western District of Oklahoma.
Instead of trying to resolve this issue through litigation, we think the better path forward for the Tribes would be to use their political leverage to pass state legislation allowing the Tribes to offer intrastate online gaming to Oklahoma residents, as well as to players internationally. If the Tribes were successful in getting this legislation passed, their authority to offer online gaming would be derived from state law rather than tribal compact and would therefore preclude federal involvement. Offering gaming to Oklahoma residents as well as international customers would also resolve any concerns about the state’s allegedly illusory concessions.
As long-time observers of and participants in the internet gaming industry, we at Ifrah Law looked forward to 2013 as a year full of promise for internet gaming, particularly in the United States. In the end, industry progress in 2013 was mixed:
The year saw the enactment of online gaming in New Jersey and online poker in Nevada and Delaware, but also saw a district court judge and then a three-judge panel of the United States Court of Appeals for the Third Circuit block New Jersey from proceeding with sports betting. During 2013, a number of the individual defendants charged in the Black Friday case in the Southern District of New York settled their cases, and the former customers of Full Tilt Poker saw the beginnings of the remission process that is promised to return to them some or all of the money they had on deposit with Full Tilt at the time of the April 2011 seizures.
After a year filled with so many changes, we naturally are looking forward to see what will happen in theinternet gaming industry in 2014. Here are a few of our predictions:
This past year we witnessed the definitive shift away from an expectation that poker would be legalized through federal legislation, and toward state-by-state enactment of regulatory schemes for online poker. The limitation of the state-by-state approach, of course, is that the legalization of poker in a state only permits individuals in that state to play against other individuals in that same state. In a state like Nevada or Delaware with small populations (and small player pools), there will be significant pressure to increase player liquidity by executing agreements with other states that will permit individuals from all of those states to play against one another. It is very likely that Delaware, New Jersey and Nevada will enter into a multistate poker agreements with each other in 2014, and that any other states that enter the market will be close behind. To the extent that states other than New Jersey authorize online gaming other than poker, those agreements may also encompass other games such as slot machines. The result will be more people at the tables, bigger prize pools, and more competitive games. This, in turn, is likely to increase the popularity of the games, meaning more money coming in for the states to share. And more money will likely to encourage states on the sidelines to enter the market to get a cut of the earnings. These latecomers may actually rely on the established regulatory bodies – such as those in New Jersey and Nevada – rather than creating licensing and regulatory infrastructure in their own states.
It seems obvious to us that other states will want to tap into online poker or gaming as a source of revenue. But it is less clear which states will make the move – particularly the states with massive markets like California. With a population of some 38 million people, California has nearly five times the population of New Jersey and more than a dozen times the population of Nevada, making it potentially the most lucrative online market in the United States. So will California join the fray in the coming year? Odds are even; numerous bills have been discussed in the past, but the state will have to start accelerating its legislative agenda in order to get anything off the ground in 2014. The prominence of tribal gaming in California poses special challenges, as the Native American tribes – who view gaming as their special prerogative –will undoubtedly demand a significant share of revenues. The only certainty is that, if California does enact online gaming, the size of its population will permit it to dictate to other states the terms of interstate agreements for its players.
Hail Mary Pass
No list of predictions for the year would be complete without calling one longshot. In 2012, New Jersey attempted to enact sports betting in its casinos, but progress was barred after a suit by the National Collegiate Athletic Association and professional sports leagues under the Professional and Amateur Sports Protection Act (PASPA). The past year saw the district court issue its injunction in NCAA v. Christie, and a federal appellate court uphold that prohibition. This year we will see whether the United States Supreme Court will take the case and, if so, how it will rule. The case poses just the kind of issues that the Supreme Court often addresses, including the balance of power between the power of the federal government and the rights reserved to the state by the United States Constitution. If the Supreme Court were to hear the case and rule in favor of New Jersey, intrastate sports betting would undoubtedly soon begin, and be followed soon thereafter by online sports betting. But the numbers do not lie: The Supreme Court historically acceptsfewerthan one percent of thecases it is asked to hear. In the end, we have to concede that a favorable ruling from the Supreme Court is a bit of a HailMary pass. But like its football namesake, to watch it happen can be awfully exciting because of what is at stake.
Here at Ifrah Law we will be keeping a close watch on developments in 2014 so that our clients may benefit from all of the new opportunities that are sure to appear in the online gaming industry.
Today, New Jersey became the third state in the country to legalize online gaming within its borders, as New Jersey Governor Chris Christie (R) signed into law a bill legalizing online gaming in the state.
Here is a video in which Jeff Ifrah, founding partner of Ifrah Law, discusses this exciting development.
Both houses of the state legislature had previously passed the bill by large margins and Gov. Christie had sent the bill back to the legislature requesting minor changes to the bill. The legislature made the changes requested by Gov. Christie, and on Tuesday the state General Assembly voted 68-5-1 to pass the bill with the Governor’s requested changes. The State Senate then voted to pass the bill by a margin of 35-1. Governor Christie signed the bill into law shortly thereafter.
The changes requested by the Governor included an enhanced level of funding for compulsive gambling treatment programs, a requirement that state employees and legislators disclose any representation past or present of entities seeking Internet gaming licenses, and an extension of a prohibition on any casino-related employment for state employees and legislators to include companies involved in Internet gaming.
New Jersey’s online gaming law would allow the state to participate in interstate gaming compacts with other states that have legalized online gaming within their borders, as long as this is consistent with federal law. Online gaming compacts would allow for the possibility of generating much larger player pools for the games as well as significant extra revenue for the state.
Under the law, casinos or their affiliates would be allowed to offer the same games that are currently offered on Atlantic City casino gaming floors. All players must be physically located in New Jersey, but do not need to be residents of New Jersey. There is no definitive word yet on when games will become operational, but it is quite possible that it could happen this year.
The law will help to stimulate the New Jersey economy and created needed jobs and revenue for the state.
“Internet gaming will provide a lifeline to New Jersey casinos by producing more jobs and additional revenue,” said bill sponsor New Jersey State Senator Raymond Lesniak (D). “At the same time, it will contribute to the state’s economic recovery and generate more revenue for state programs for seniors and the disabled.”
Under the law, all equipment used in Internet gaming is required to be located in Atlantic City. This will create a significant number of jobs in the region.
We are very happy to see New Jersey enact an online gaming law. This will be an enormous boost for the state as well as great news for gamers, who will soon be able to play online again.