Analysis of the Unlawful Internet Gambling Enforcement Act
THE WEEKLY SHUFFLE, 2006-10-08, by TwoGunOn September 30, the United Stages Congress passed the "Unlawful Internet Gambling Enforcement Act" (UIGEA), a bill which aims to curb Americans ability to play online poker. The act instructs banks and other financial institutions to block money transfers that are used for unlawful internet gambling.
Since we are not lawyers, we will not attempt to give a legal analysis of the UIGEA. This shuffle will merely analyze the potential effects of the bill. Nothing in this shuffle should be construed as legal or business advice.
What the UIGEA Does
In short, the bill aims to curb internet gambling by having banks and other financial institutions block payments used for "unlawful internet gambling." Banks have 270 days to develop policies to identify and block transfers to these sites. In particular, banks are instructed to block credit card payments and electronic funds transfers. Banks already have a method of blocking credit card payments, but it's not clear how effective they will be at blocking electronic funds transfers to online gambling sites.
The bill makes it illegal for a person engaged in the business of betting or wagering to accept money to be used for unlawful internet gambling. Unlawful internet gambling is defined as gambling that is "unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made." Those who violate this law face up to five years in prison.
One thing to note is that the law does not make it a crime for a player to send or receive money from an online poker site. While US players may find it difficult to play online poker in the future for real money, the Department of Justice (DOJ) will not be knocking down John Q's door to arrest him for sending $50 to an online poker site to play $.25-$.50 hold'em. However, this does not mean playing online poker is legal, as it may violate a state anti-gambling statute.
Impact on Players
The impact of this law will come in two waves for US players. First, many poker sites are no longer accepting US players. Many popular poker rooms that used to be frequented by US players (such as Party Poker and Pacific Poker) have closed their doors to US players. This first wave of effects will take place immediately. As soon as Bush signs the law, many sites will close US players' accounts and send those players whatever money they had remaining in their poker accounts.
The second impact of the law for US players will take time. This is when the banks begin blocking transfers to online poker sites. Banks have 270 days to set up these regulations, so this effect will likely take awhile. It is not clear how aggressively banks will enforce this bill. US players may be able to easily get money into online gambling accounts like they had in the past, or it may be increasingly difficult.
One thing to note is that while US players cannot play at the sites that do not accept Americans, European players can play at both the US-facing sites and the non-US-facing sites. This means that if the games are fishy at the US-facing sites, European sharks will play at them and bring them to equilibrium. However, if because of this law fish are not able to fund their poker accounts, the games at the US-facing sites will likely be very tough. This is because the sharks will still find ways to fund their accounts (not that they need to anyway since they mainly just cash out!) So while the games at sites that do not accepting Americans will likely be typical, the games at the US-facing sites may range anywhere from average to very difficult.
Sites that have decided to no longer service US players generally fall into two categories. The first are ones that are publicly-traded companies (or use software of publicly-traded companies). These sites cannot act illegally or potentially act illegally out of a duty to their shareholders. The second group of sites that dropped US players are ones that had few US players to begin with.
Since most of the publicly-traded poker companies are now closing their doors to US players, these companies stand to lose a significant amount of revenue. After the bill passed, the share price of these companies' stocks plummeted. The share prices of several online gambling stocks dropped by 50% or more.
Rooms that still allow US players will likely see an increase in business, at least in the short term. This is because of the departure from the US market by leading firms such as Party Poker. However, the long term is very gray for these sites. Most sites that will continue to allow US players were very US-dependent in the first place. It's a fair estimate that US players accounted for 80% or more of these sites revenues, even 90% or more is likely. It is probable that these sites will stay US-dependent in the future. Whether or not this strategy works depends on how aggressively this act is enforced, the ability of these sites to market to Americans, and how popular poker remains in the United States.
Businesses that were indirectly helped by Americans playing online poker will suffer as well. Most notably, Harrah's (the owner of the World Series of Poker) will likely see a modest drop in revenue. This is largely because there will likely be far fewer entrants at the 2007 WSOP than the 2006 WSOP, which means fewer people visiting Harrah's casinos and likely smaller television royalties for Harrah's.
First, most Americans who qualified for the WSOP did so through internet satellites. It's not clear how accessible online poker will be for Americans in the future. However, it's safe to assume that there will be fewer Americans playing online poker than there would have been had the bill not passed. Furthermore, even if an American qualifies for the WSOP through an online site, it's not clear if the WSOP can accept that money. The WSOP can only turn so much of a blind eye to how the person qualified, and Harrah's may decide to not accept money from companies that clearly accept wagers from Americans. Finally, it's likely that Party Poker and many other online poker rooms will shift their focus to European tournaments. There is little point for Party Poker and other non-US-facing sites to advertise at the World Series of Poker now. They will likely focus their marketing on European tournaments, since that is now their target audience.
Impact on Poker's Image
Poker has made tremendous headway in recent years to legitimize itself in the eye of the public. It is now generally viewed as a game of skill, or at the very least, a form of gambling distinct from casino games. Unfortunately, poker did not come far enough to get a carveout in the UIGEA like fantasy sports and horse racing did. It is also likely that a lot of the gains poker made in recent years will be reversed because of the effects of the UIGEA.
Online poker legitimized itself largely because many of the leading firms, such as Party Poker and Pacific Poker, are now public companies. Fears that games were rigged, that people would not receive cashouts, or that sites were acting improperly were largely abated since the companies were public and transparent.
Due to this law, sites that accept US players will likely be smaller, private companies. More rogue operations will likely pop up, and online poker will likely be viewed again as something somewhat "shady" by Americans. This, in turn, will likely significantly shrink the American poker market in general.
Bush will likely sign the UIGEA into law next week. No one knows for sure the ultimate ramifications of the bill, though one thing is clear. The poker world as we know it will definitely change.
The Weekly Shuffle is our Sunday column with our observations and commentary on the poker world. Have an idea for an article? Leave a suggestion on the feedback page.
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