Cake Walk and the Hellmuth-Duke Guessing Game

The online poker industry ended 2010 with a bang in what is typically a slow news week.

One story that hasn't gotten a ton of play (yet) is the abrupt departures from Cake Poker of two ranking executives, Serge Ravitch and Card Room Manager Lee Jones. Neither Jones nor Ravitch gave any concrete reason for his departure; Jones only would comment (rather ominously) on 2+2 that "management has made some strategic decisions with which I’m not comfortable". Ravitch cited "the same reasons" for his departure.

Jones was the person who most loudly sounded the alarm about the current status of payment processing while the entire industry was debating the pros and cons of the Reid poker bill a few weeks back. It's a pure hunch on my part that Cake may be moving in a payment processing direction that Jones and Ravitch are unwilling to follow.

Regardless of whether my hunch is even remotely in the ballpark, it's clear that something's rotten in the state of Cake Poker. Jones has had an exemplary career over the last decade in the online poker industry. For him to abruptly resign from Cake, followed immediately by Ravitch, is not a good sign for players at that site.

An equally intriguing story developed yesterday when Phil Hellmuth (finally!) announced his departure from UB as a sponsored player. Starting around the time of the November Nine (Nov. 9th), Phil was regularly seen not wearing his standard UB garb, but was always mum about the subject. Now it's official -- he's left UB.

Annie Duke also announced yesterday that she left UB, saying "So why am I leaving UB? In a nutshell, professional and personal growth. I’m going to explore and pursue other business opportunities on a full-time basis." She highlighted that she will remain a part of the poker industry going forward.

Lots and lots of questions here. First and foremost, did Hellmuth and Duke leave UB on their own or did UB, which is clearly going younger (and rumored to be announcing new sponsored pro Prahlad Friedman next week), gently guide them out the door?

It's hard to imagine that Duke and Hellmuth were "too expensive" for UB at this point. Hellmuth and Duke are not hard-core tournament circuit grinders. They play a full slate at the WSOP, some WPTs, and make some TV appearances. In any event the publicity that Hellmuth generates and Duke's qualities as a spokesperson probably justify the expense of each. Hellmuth, after all, garners more attention at the WSOP every year than just about any other player.

Logically I'd lean towards Hellmuth and Duke initiating the split -- and UB, which seems resigned to being a second-tier poker site, not being terribly put off by it.

Second question: where will they land?

I believe that where they land will say a lot about who is placing what bets for the new poker landscape that's going to start emerging in 2011. And although it's easy to say they'll be snatched up by PokerStars or Full Tilt, you have to ask why either would go to those sites -- and why those sites would want either player.

Would the Poker Brat fit in with the PokerStars identity? Would he want to be "just another horse in the stable" at Tilt? What does Duke give either site that they don't already have? If she were going to have gone to Tilt to join brother Howard Lederer, wouldn't it have happened by now? Duke and Hellmuth made their bets on UB in 2004. It seems pretty late in the game for them to move over to Tilt in 2011.

Many have speculated that Hellmuth will go to WSOP.com. The WSOP has been ramping up U.S. awarness of its online arm, waiting for the day that regulation arrives so that it can start offering real-money online poker to U.S. residents. Hellmuth would give that site an instantly recognizable face, one that in many ways is synonymous with WSOP after all of the air time that Hellmuth received over the last six years.

Duke also has significant ties to WSOP through her work for WSOP Academy. Her standing as one of the top female tournament players in history, along with her "celebrity tv" cross-over appeal, are good fits for WSOP. She would bring to the table what Hellmuth lacks in terms of corporate spokespersonship.

But Caesars / WSOP.com isn't the only company that's rumored to be sitting on the sidelines of the U.S. online poker market, waiting for its regulatory golden ticket to be punched. For now at least, WSOP.com may not need more than Hellmuth to hawk a product that nobody can yet buy. That could send Duke to one of those other idling companies...

Third question: what does this mean for regulated online poker in the U.S.?

Directly, it means nothing. But again, where Duke and Hellmuth land will give some guidance as to who is placing what bets for online poker in 2011. For example, if Hellmuth goes to WSOP.com, it may show that Caesars -- a party heavily involved in the back-room dealings during the recent Reid Bill saga -- is confident that U.S. online poker regulation is on the short-term horizon. Otherwise there would be little reason to bring Hellmuth on now.

Generally speaking, in business, politics and life, if you follow the money trail you find your answers. For now we'll have to wait to see what Hellmuth and Duke do next but I'll lay a good price that they don't wind up at Stars or Tilt.

Of course this is all just rampant armchair speculation from me. Take it for what it's worth. If nothing else, 2011 is shaping up to be an interesting year for online poker.

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Harry Reid's Internet Poker Bill: Talking Points and State Rights

Even though the internet poker bill that Harry Reid was shopping around Congress, the "Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act", has (most likely) been shelved as a Congressional agenda item for the rest of 2010, it continues to get some play in the media. One of the things that is driving me absolutely bat-shit crazy is an argument being advanced in certain quarters that regulating online poker at a federal level will take away a state's right to decide if regulated online poker should be permitted in that state.

Listen, people trying to push that argument. I know that the 10th Amendment has become the flavor of the day, but on this one particular issue you couldn't possibly be more wrong. Let me state this as clearly as I can.

The Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act would NOT take away a state's right to decide if regulated online poker should be permitted in that state.

In fact, the complete opposite is true. Under the Reid bill, each state makes its own choice to opt in to or out of the online poker regulatory and licensing scheme created by the bill. Period. Full stop.

If you don't believe me, read the bill yourself:

SEC. 108. PROHIBITION ON USE OF LICENSES IN CERTAIN STATES AND INDIAN LANDS.
(a) IN GENERAL. — Except as provided in section 104(b)(3), Internet poker provided by Internet poker facilities licensed under this title shall be lawful in the United States only with respect to the acceptance of bets or wagers from individuals located in States and Indian lands that have not opted out or have opted in, as the case may be, under this section.

It drives me nuts to hear people arguing that this bill creates a "federal right to gamble" and to read that states are up in arms because they would be pre-empted by this bill. It's a massive communication failure by the people that are supposed to be managing the message of this bill, largely because those people never wanted to manage the message in the first place. Instead they were hoping to slip the bill through Congress unnoticed during the lame-duck.

Guess what? The genie's out of the bottle. It's way too late for slipping things through unnoticed. If the poker industry ever wants this bill or a future variant of the bill to come off the shelf and make it into law -- and it's that or watch the industry collapse on its own through a payment processor death spiral -- it's time to start pro-actively managing the message.

Your talking points are: Job creation. Tax generation. Consumer protection. State rights. Aren't all of those things what the electorate was so angry about this past November?

Go forth and multiply.

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What's Next for U.S. Online Poker?

With Harry Reid's internet poker bill (seemingly) dead, it's time to think about what the U.S. online poker universe could look like in 2011.

1. Fragmentation of the industry - this is something that I touched on briefly during This Week in Poker on Tuesday. Fragmentation of the industry is gaining speed. Already, Washington State has banned online poker. Now California, New Jersey and DC are pushing ahead with efforts to legalize intra-state online poker (intra-state because of the misguided notion that the Wire Act of 1961 prohibits online poker across state lines).

On one level it's good to see the states trying to take the lead on this issue. But if history is a guide, it means the federal government will only be that much slower in developing national standards while it waits to see how things play out at the state level. It also gives anti-gambling legislators like Sen. Jon Kyl (R-AZ) another argument against creating a national system.

If intra-state poker becomes the prevailing model, the industry will be split into multiple miniature player pools on a state-by-state basis, to the detriment of American poker players as a whole. And once Humpty Dumpty has shattered into 50 different pieces, good luck trying to put him back together. There *will* be differences in how online poker is run and regulated from state to state. Balancing and unifying all of those competing differences, and competing state interests, in national poker legislation will be exceedingly difficult.

Reid-bill detractors might point out that there would have been fragmentation under that bill as individual states opted in or opted out. While that's true, at least all of the opt-in states would have been playing in the same player pool with the same set of rules. Under state efforts, there's a different pool -- and most likely different rules -- for each state.

2. Continuing deterioration of payment processing - For anyone who thinks the status quo is fine, here's a reality check:

* Online sites are now cutting paper checks out of Singapore.

* Electronic deposits and withdrawals have started taking weeks to show up in players' bank accounts.

* The card room manager of Cake Poker -- someone with a vested interest in peddling the fallacy that all is fine in the payment processing world -- has gone on record as saying, "The [Department of Justice] is bolder than ever and Washington State has set an ugly precedent. It will come down to payment processors who have no more scruples than your average Mexican drug or African arms dealer." That's not a healthy direction.

* In 2010, more than $30 million was seized by the U.S. government for UIGEA violations. That was money that belonged to U.S. bettors, some of it traceable to PokerStars and other online poker sites. The amount seized in 2011 stands to increase.

* At this very moment, the Southern District of New York is investigating payment processors and how they code online poker transactions.

The status quo is NOT fine and cannot continue indefinitely. The government is starting to catch up to what the UIGEA intended four years ago. The DOJ is getting itself up-to-speed so it can shatter the backbone of the U.S. online poker industry -- money movement. Without the Reid bill or similar legislation, players in states that aren't moving forward intra-state poker legislation will find it more and more difficult to move money onto and off of online poker sites. No money means no games. It's as simple as that.

3. U.S. abandoned? -- It's hard to imagine that this will happen in 2011, but at some point the risk/reward ratio of operating in the U.S. may become too unfavorable for the online poker sites. Businesses are going to operate like businesses. When it no longer makes economic sense to stay in the U.S., they'll get out while the getting-out is good.

**

The Reid bill didn't fail because it was bad policy. And the Reid bill didn't fail because it got too much publicity (no matter what the gambling lobby wants you to believe). The Reid bill failed because its proponents, and the businesses that stood to benefit the most from it, allowed social conservatives and opponents of both Reid and the bill to shape the debate.

How much did we hear about the job-creation and tax-generation aspects of regulating an industry in which 15 million Americans already participate? Not very much. On the other hand, we were treated ad nauseum to arguments about: (1) the "social evils" of problem and under-age gambling; (2) how the bill was a quid pro quo for Big Gaming's support of Reid during his campaign against Sharron Angle; (3) some sort of nonsense about the illegality of creating a "federal right to gamble"; and (4) who was going to get screwed by the bill: Indian tribes, state lotteries, my Aunt Martha's bingo hall.

There's nothing that says we won't get another bite at the apple in 2011. But split control of Congress -- the Republicans now have a majority in the House -- will make any legislation more difficult to pass. Historically, Republicans have not been very friendly to poker legislation.

As 2010 comes to a close, we're left with an online poker future that is murky at best.

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Harry Reid's Internet Poker Bill: Busto... Most Likely

Tough times for online poker in the United States.

The Reid bill appears to be all but dead. It's looked that way before, of course, but the prospects now are exceedingly grim. Reports indicate that the bill has not been attached to the tax-cut extension nor does it appear in the omnibus appropriations bill. Those two pieces of legislation were believed to be the only real vehicles for poker, since the Reid bill almost certainly will not get a reading on its own merits before the end of the Congressional session.

The most credible source declaring the bill officially dead is Andrew Feldman at ESPN Poker. Today Feldman cited an email message from John Pappas, Executive Director of the Poker Players Alliance, in which Pappas wrote, "We are disappointed that Congress failed to act and provide the necessary consumer protections and sensible oversight over this multi-billion dollar industry."

For the moment, no similar update appears on the PPA website. Unless I missed something -- entirely possible -- the most recent statement relating to the Reid bill is Pappas' December 9 statement endorsing the bill.

Last week Pappas was quoted as saying that the Reid bill wasn't dead until Congress adjourns. Congress hasn't adjourned yet, making this an odd about-face in a span of less than a week. Pappas also doesn't definitely say "Game over" in his comments to Feldman. But his remarks track the below-the-surface rumblings of others in the industry.

They also match a general feeling of unease that I've had as days have ticked by since Friday with few poker-bill updates from Washington, Reid or the PPA. Yesterday on This Week in Poker I declared my feelings that this bill had a 50/50 shot. To be fair, that declaration wasn't based on anything specific. Most likely was it just hope talking because I believe, for several reasons, that poker needs something like the Reid bill.

I wouldn't expect to hear anything from Harry Reid on this issue, so in a sense Pappas' comments last week were "right" -- we can't really be sure that the bill is dead until Congress adjourns. For the time being, however, I'll be operating under the belief that the bill will not be passed. Tomorrow I'll delve into what that could mean for poker going forward.

In the meantime I'll retain the tiniest sliver of hope that the situation changes.

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Some Financial Impacts of Harry Reid's (Still Kicking!) Internet Poker Bill

After a wild afternoon yesterday, it appears that Harry Reid's internet poker bill is still alive and making the rounds on Capitol Hill.

Some interesting commentary this morning comes courtesy of Forbes.com. That's where Michelle Minton penned a piece entitled, "Legalizing Online Gambling is a No-Brainer". Minton is someone without a dog in this fight -- she's the director of insurance studies with the Competitive Enterprise Institute, a non-profit public policy organization dedicated to the principles of free enterprise, limited government and individual liberty.

Free enterprise and limited government? The Reid bill? I'd guess Minton hasn't read a copy of the bill. Still, she's probably correct that the Reid bill would create jobs, and she almost has to be correct about the revenue and tax generation benefits of the bill.

Last night at the Bellagio (where the WPT Five Diamond final table was taking place) the Reid bill was a lively topic of conversation. Opinions are mixed on (a) whether the bill is #goodforpoker and (b) whether it can (or will) pass. People who are among the most nervous about the bill are the media -- many of whom work for sites that derive large chunks of their revenue from affiliate marketing. If the Reid bill passes and existing operators are forced to leave the biggest online-poker market in the world for 15 months, affiliate revenues will drop drastically. In fact, there's no guarantee that affiliate marketing would come back in its current form at the end of that time.

Rakeback is another financial item that might wind up a casualty of the Reid bill, especially in a U.S. market where the barriers to entry would be impossibly tall for all but the largest casinos. Why offer rakeback when there's only 1 or 2 other sites you're competing against? Some might argue it's long time for rakeback to go away anyway, having out-lived its usefulness to existing online poker sites as the market has matured. If rakeback did die a quiet death after the black-out period, the bottom line of U.S. online pros would suffer.

So keep the status quo, some say. Don't change online poker just yet. Keep using the existing legally-gray system. The problem there -- I have read and heard from multiple sources that it's getting harder and harder to find reputable payment processors for the sites to work with. I don't have any direct knowledge on the issue but common sense would dictate that the payment processing mess isn't going to get any *better* under the existing UIGEA. It can *only* get worse.

Just some financial food for thought as we all continue to watch Washington closely.

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Harry Reid's Internet Poker Bill: Deal or No Deal?

Over the last few days I've had some discussions with gaming attorney Stu Hoegner about whether or not the new version of the Reid poker bill would allow an existing poker site (like, say, PokerStars or Full Tilt) to sell itself to a U.S. casino (like, say, MGM) to get around the 2-year exclusion period that is mandated by the Reid bill for poker sites that are not backed by a U.S. casino. Stu has largely convinced me that yes, the new version of the bill would allow that scenario.

It's probably an academic discussion though. Who would buy? Why would they buy and/or why would the sites sell?

Let's tackle the second question first. The most obvious reason for an existing U.S. online poker site to sell itself to a U.S. casino interest is that the site would be able to access the U.S. market at the earliest possible moment. Also, people who own big pieces of the U.S. site could finally "cash out" and go buy an island somewhere. The major downside would be a loss of operational control and becoming a small cog in a much larger gambling conglomerate.

From the casino's side, they'd have instant access to technology, IP and branding, and players so that they would be ready to "hit the ground running" as soon as the 15-month blackout period expires.

But who would buy those poker sites?

Harrah's Caesars WSOP.com already has an online poker partner. Its UK-based poker site is run in conjunction with 888. WSOP also has been registering players through its U.S. play-money site for months. It doesn't need to buy another site, either for the technology, the branding and goodwill, or the players.

That leaves MGM as the main potential suitor for any of the large U.S. poker sites. Maybe Wynn. Maybe some group like the Stations or LVS. But all of those groups would have significant difficulties paying for the acquisition.

There are lots of ways to set a purchase price for a big corporate acquisition. Valuations come in every shape and flavor. One of the simplest ways is to use a multiple of the target's net operating income. Net operating income is a company's operating income after operating expenses are deducted, but before income taxes and interest are deducted. It's a fairly easy, non-manipulable way to get a snapshot of a company's health.

Let's say, for example, that PokerStars' NOI for 2010 is $500 million. Maybe it is, maybe it isn't, but as a ballpark number $500 million probably works. An acquiror would then pay a multiple of that $500 million to buy PokerStars. The multiple depends on negotiation and a host of factors that I'm not going to delve into here. But you can see that we're talking billions of dollars.

When you attempt a multi-billion dollar acquisition, you don't usually pay for it in cash. Most companies don't have billions of dollars in the vault. The consideration is often a combination of cash, equity (shares of the acquiror) and debt. Let me reiterate that I'm simplifying things a great deal here. The payment portion of a corporate deal is often HIGHLY complex.

But back to cash, equity and debt. Have you seen how much debt MGM is carrying on its books? As of September 30, almost $13 billion in long-term debt. They're drowning in debt. The same is true of LVS and isn't the Station group in bankruptcy? None are in a great position to issue more debt, and if I'm the person selling the U.S. poker site, I'm not sure what a great bet I think it is to take a big chunk of debt from such a highly leveraged acquiror.

There might be some cash available -- MGM raised $500 million back in September -- but I'd guess that a sizable portion of MGM's cash is tied up as a debt reserve and/or already earmarked for debt service. Investors don't let you take out $12.9 billion in debt for free. You have to pay for that privilege.

That leaves equity. Do a full equity deal? I guess it's possible. Depends how bullish the target site is on the acquiror. Even there, however, you have problems. Such a sizable equity issuance isn't done easily.

But even if this were to happen, there's only one MGM. There are multiple online sites out there. MGM wouldn't need to acquire all of them, or even the largest of them. They'd need just one site with a decent U.S. player base. Where does that leave the rest of the sites? Fighting to be acquired by LVS or Wynn or the bankrupt Stations?

How about "Without a chair when the music stops" for $500, Alex.

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Harry Reid's Internet Poker Bill: While We Wait

Harry Reid's proposed bill to license, regulate and tax internet poker, the "Prohibition of Internet Gambling, Internet Poker Regulation, and Strengthening UIGEA Act of 2010" doesn't lend itself to much of an acronym. PIGIPRSUA? Meh, let's just call it the Reid bill. Anyway, the Reid bill continues to be a moving target. Significant developments this morning:

1. As noted by PokerGrump, among others, the PPA is suddenly in favor of the bill, telling its members to call their Senator and ask him/her to support it. This is not 24 hours after the PPA made a non-statement about the bill.

Remember that the PPA is basically a mouthpiece for the major existing players in the online poker industry. Could it be that the 2-year exclusion for non-casino-backed operators -- the so-called penalty box provision -- has been removed in the latest draft?

2. Rumblings that this thing *will* be attached to the tax-cut extension bill, *before* it goes to the floor of both chambers of Congress (rather than after approval, as was done with the UIGEA). Pokerati Washington correspondent Tricia Takanawa Scarlet Robinson seems to think tomorrow or Friday for attachment. And how weird is it that Pokerati has a Washington correspondent? When did Michalski get to the big leagues?

If President Obama was worried about Senators and Representative voting against the tax cuts yesterday, wait until Harry Reid attaches the online poker bill!

3. Bill Rini made a great point I hadn't considered previously, namely: offshore sites that try to give the US government the middle finger, and continue to operate in the US in spite of this legislation (if it were to pass), will quickly wind up on the DOJ's UIGEA blacklist of sites with which financial transaction providers are forbidden from doing business. Those sites may not have to worry about the $1 million per day penalties and the 50% non-licensing fee -- being outside the jurisdiction of the US -- but how are their customers going to get money on and off the sites?

4. This thing is starting to get quite a bit of mainstream media attention after Politico picked up the story yesterday. Not sure if that's #goodforpoker or #badforpoker, and how it will affect Reid's chances of getting the thing attached to the tax cuts and passed. For that matter, there are a lot of people questioning whether the #reidbill itself is #goodforpoker or #badforpoker, largely because of the 15-month #pokerblackout that would result if the bill passed in its current form (never mind the penalty box provision).

I continue to believe that, long term, any scheme that makes online poker 100% legal and legit is good for the game. But there may be some bumps in the road -- short-term variance -- along the way. Obviously the bill in the forms that we've seen so far heavily favors the casinos, to the detriment of existing online poker sites and (perhaps) players. But with a few tweaks it could turn into something that everyone -- the casinos, the existing sites and the players -- could live with.

Right now all we can do is watch and wait.

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Quick and Dirty Summary of (Version 2!) of Harry Reid's Internet Poker Bill

Here we go again. A new version of Harry Reid's internet poker bill, the "Prohibition of Internet Gambling, Internet Poker Regulation, and Strengthening UIGEA Act of 2010" (what a mouthful!), started making the rounds on Capitol Hill yesterday. Thanks to Kevin Mathers, I was able to get a look at it this morning to see what (if anything) had changed.

Unfortunately, because of wildly divergent formatting, and the fact that this version of the bill is MUCH more "fleshed out" than the first version, getting a blackline of the two versions proved exceedingly difficult. So if I miss any major differences, that's the primary reason why.

My summary of the original version of the bill is available here.

On to the highlights of the new version:

* Let's get the bad news out of the way first. Contrary to previous reports, this version retains the two-year exclusion for operators who have not owned or controlled a casino or race track for a minimum of 5 years prior to their application. [Sec. 104(f)(2) and (3)] That means that sites like Full Tilt and PokerStars would be excluded from the market for 2 years after the first license is issued.

[EDITED TO ADD: Some seem to think that Sec. 104(f)(2)(B) might allow a site like Stars to sell itself to MGM and therefore become an applicant "owned or controlled by" a casino in operation for 5 years. On its face, that might be possible although I highly doubt it's what's intended.

The reason I doubt it -- Sec. 118(c)(2) is explicit that a license can't issue to any person that "purchased or acquired, directly or through an affiliate or intermediary, in whole or in significant part" any person who owned a U.S.-facing site prior to the Act. My only question about 118(c)(2) is if it's supposed to apply to ANY U.S.-facing site, or only those U.S.-facing sites that refuse to wind down as required under the "One bone..." paragraph described below.]

* The 15-month total blackout period on issuing *any* license still applies. [Sec. 118] No qualifying body can issue a license until 15 months after passage of the Act. That means that no operator could legally offer internet poker in the U.S. for those 15 months, and sites like Full Tilt and PokerStars would be shut out for 39 months.

* The U.S. player pool continues to have to be segregated from the rest of the world for at least 3 years after the first license is issued.

* One bone for Full Tilt and PokerStars: they would have 30 days to cease offering poker in the U.S. after passage of the Act, and 2 years to return all customer deposits. [Sec. 118(b)] The first version of the bill was much harsher, requiring immediate cessation of poker and 30 days to return deposits. Sites that are currently operating in the U.S. are required to comply with those provisions as a condition for eventual licensing.

["Paper sales" paragraph deleted and replaced by italics above!]

* There are now provisions at Sec. 104(k) to guide the determination of whether or not something is "internet poker" -- something that's rather key for legislation that seeks to limit online gambling to only internet poker. The determination is left to the qualified body that issued the license. So, for example, if Nevada issues a license to WSOP.com, Nevada would determine what constitutes "internet poker" in all states in which WSOP.com operates (presumably, all states that have opted in and those states which haven't opted out).

Could we see instances where certain games aren't offered in certain states? I'm thinking of the specific example of razz, which (as far as I know), is not an allowed game in New Jersey. If someone applied for a license from a state like that, would they not be allowed to offer certain games? Obviously operators would then favor making applications for a license from the state with the most comprehensive definition of "internet poker".

* It appears there is now the potential for a 5-year prison term, in addition to the $1,000,000 per-day penalty, for operating without a license. [Sec. 103(b), Sec. 104(m)(1)(D)] Those of you who thought that Full Tilt and PokerStars might remain in the States anyway (in the 15-month total blackout period) should think again. Not only that, but...

* A few changes to the licensing fee: first, it appears previous confusion in the definition of "internet poker receipts" has been cleared up. That term now means, essentially, the rake. The licensing fee is 20% of the rake.

More importantly, anyone who operates an internet poker facility WITHOUT a license is subject to a 50% "licensing fee". The bill is explicit that this fee in no way limits the liability of the operator under *any* other provision of the bill. So, if Stars or Tilt were to remain in the U.S., not only would they be subject to $1,000,000 per-day penalties and potentially 5 years in prison (for the executives), but they'd also have to pay 50% of the rake they received to the IRS.

My good buddy Shamus questions how this can be enforced if the sites, executives and servers are all located offshore. It's a good question. I'm not sure, but I suspect that, if a regulatory and licensing scheme were put into place, the US would exert some diplomatic pressure on places like England (Stars) and Ireland (Tilt) to bring those operators into line. In any event, Stars seems to pride itself on always operating within the law. Operating without a license would be expressly illegal under this bill.

* One aspect of the bill I didn't discuss during Round 1: to be automatically designated a "qualified body", for licensing purposes, a gaming regulatory board has to have been a gaming regulator for 5 years prior to enactment of the Act, and has to have been responsible for regulating at least 5% of total United States casino gaming revenue for at least 3 out of those 5 years. I don't know how gaming revenue breaks down nationwide but I would suspect this gives Nevada and New Jersey a leg up over the rest of the nation.

The reason why that's important is because other state gaming boards that want to be able to issue licenses have to apply to the Commerce Secretary, but only after all the final regulations under the Act have been issued.

Not only that, but sites that were U.S.-facing prior to the Act could only apply for a license through the automatic qualified bodies -- i.e., Nevada and New Jersey. Would existing casinos apply pressure to NGC / NJCCC to shut out those formerly U.S.-facing operators...?

* The opt-in / opt-out provisions for states and tribes remain. [Sec. 108] They appear to be largely unchanged. States wishing to opt-in or opt-out have until December 31, 2011 to make that determination. After that, their status can be changed on 60 days notice to the Secretary of Commerce.

* The concept of "cheating" is greatly expanded in this version. Cheating in the first version was largely limited to the use of "cheating devices". In the new draft, there's an outright prohibition on "knowingly violating, attempting to violate, or assisting another in violating the rules of play established by the licensee for the purpose of obtaining prohibited or unfair advantage in any game authorized under this title". [Sec. 113(a)] The use of bots is also expressly prohibited in the new version. [Sec. 113(b)(2)]

* Conviction under Sec. 113 for cheating entails two possible penalties: a permanent ban from playing internet poker, and a criminal penalty consisting of a fine and/or up to 2 years in prison.

That's all I've got for now but I'll continue to study this version of the bill and any new version that emerges. What does everyone else think?

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Harry Reid's Internet Poker Bill: How a Tack-On Would Work

With all of the buzz surrounding Harry Reid's proposed internet poker bill (new version said to be circulating today; if and when I see it, I'll highlight the changes in a new "summary" post), I thought it might be useful to remind people how this could potentially become law. Most likely it's not going to go to a floor vote in the House of Representatives and Senate. There's just not enough time left in the session, especially with so many other more pressing issues.

Instead, in a little bit of parallelism that would make J.J. Abrams proud, the bill would most likely be tacked on to a "must-pass" piece of legislation in the same the way that the UIGEA was tacked on to the SAFE Port Act. It would be appended to something like the Bush tax cut extension, something that is virtually guaranteed to be approved by both chambers of Congress.

To refresh your recollection, the SAFE Port Act was a piece of legislation designed to improve U.S. port security in an age of global terrorism. It passed the House of Representatives on May 4, 2006 by a vote of 421-2 and the Senate by a vote of 98-0 on September 14, 2006. The UIGEA was not tacked on to the bill at that time.

What happens in the U.S. legislative process once both houses have passed a bill is that if the bill passed by each chamber is not 100% identical in all respects, a bicameral conference is convened to iron out the differences. The Representatives and Senators in that conference create a uniform version of the bill. They then submit a Conference Report back to each chamber with the final approved, identical version of the bill that each chamber must again pass.

The UIGEA was tacked on to the bottom of the SAFE Port Act by the conference. The Conference Report with the final version of the SAFE Port Act (and the UIGEA!) then went back to each chamber and went up for a vote. As a matter of practice, once a bill has passed a full floor vote, the Conference Report is viewed as a formality. No surprise that the SAFE Port Act's Conference Report passed in both chambers. Two weeks later the SAFE Port Act was signed into law by President Bush with the UIGEA tacked on.

If Harry Reid's internet poker bill will be passed, it will most likely be tacked on to something like the Bush tax cut extension after both chambers of Congress have voted to approve that extension. That means we won't know if a tack-on is going to happen at the moment of the floor vote; we'll only find out once the final Conference Report is submitted and approved.

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Quick and Dirty Summary of Harry Reid's Internet Poker Bill

Yesterday the Las Vegas Review Journal placed online a copy of Harry Reid's proposed online poker bill, the "Prohibition of Internet Gaming, Internet Poker Regulation and UIGEA Enforcement Act”. I spent a few hours last night looking it over and distilling its 75 pages down to these 700 words:

• The bill would set up a licensing, regulatory and tax framework for fully legal online poker in the United States. Operators wishing to offer online poker to U.S. residents would be required to apply for a license from a state or tribal gaming authority that has been qualified by the Commerce Department to issue licenses. Applicants would bear all costs of their application. Once issued, licenses would have a 5-year term.

• The first license cannot be issued until at least 15 months after the bill is passed into law. "Rogue" operators (operators like PokerStars and Full Tilt that have offered internet poker in the U.S. prior to passage of the bill), as a condition of eventual licensing, would be required to immediately cease unlicensed activities upon enactment of the bill and, within 30 days, return all customer deposits.

Thus, if the bill passes in its current form, there would be a period of 15 months where there would be *no* legal internet poker offered in the U.S.

• States and Indian tribes have the ability to opt-in or opt-out of allowing licensees to operate in their jurisdiction. The 35 states that do not currently permit "live" commercial poker may opt-in. The 15 states that allow it can opt-out. This status can be changed at any time upon at least 60 days notice to the Secretary of Commerce. Thus, we could potentially have a situation where internet poker is offered in some states but not in others.

• For two years from issuance of the first license, licenses can only be issued to applicants who have (a) owned or operated a casino or race track; or (b) manufactured and supplied slot machines to casinos; for at least 5 years prior to passage of the bill. For these purposes, a casino is a facility that "hosts 500 or more gaming devices in one physical location pursuant to a duly authorized license issued by a state or Tribal gaming regulatory authority." This is, obviously, designed to favor existing U.S. casino interests at the expense of existing, powerful internet poker sites like PokerStars and Full Tilt.

• All other operators would be ineligible to receive a license for a period of "[xx]" years after issuance of the first license under the Act. Supposedly "[xx]" is currently pegged at 2 years. When the 15-month lead time is factored in, it means existing operators like PokerStars or Full Tilt would have to leave the U.S. for a minimum of 39 months. They CANNOT get around this black-out period by selling the ownership or the assets of their organization to a "clean" entity. This is expressly prohibited by the bill.

• The U.S. player pool of licensed Internet poker operators would be segregated from the rest of the world for at least three years from the date the first license is issued. After three years, the Commerce Department can determine to allow commingling of the U.S. player pool with players from other jurisdictions where online poker is not illegal.

• The licensing fee is 20% of the licensee's "internet poker deposit receipts" each month. I admit I'm confused about what "internet poker deposit receipts" means. In one place, it's defined as "the aggregate… of the rake, tournament fees and all other fees or charges required or received from customers directly as a result of Internet poker, from deposits into any account maintained by the licensee or on behalf of the licensee." To me, that sounds like 20% of the rake. But in another place, the bill provides that "funds received from a customer by an operator of an Internet poker facility and made available in any form… for the purpose of placing a bet or wager… shall be regarded as deposits in calculating Internet poker deposit receipts."

• The UIGEA gets a little work-over with the creation of a list of "unlicensed internet gaming enterprises". The list will be maintained by the Treasury Department and will give financial transaction providers a definitive "black list" of entities for whom it is unlawful to process financial transactions.

• With respect to each internet poker player account, licensees are required to report to the IRS on an annual basis the following information: name; address; tax ID number; gross winnings, wagers and losses; calendar-year net winnings; tax withheld; year-start account balance; year-end account balance; and all calendar-year deposits and withdrawals . A copy of the IRS report should also be sent to the account owner.

Obviously this is a very cursory summary of the bill's provisions. Hopefully it's enough to educate people on the bill's contents and stimulate discussion. The bill is drafted in surprising detail, showing that someone's been working on it for quite a while.

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