Bet on This: Gambling Will Be Legal in the U.S. by 2020

Forecasting today’s biggest business and tech trends.
March 3 2014 5:13 PM

Gambling Is the Next Wave in Mobile Gaming

States—and mobile developers—are fighting for a slice of a $30 billion pie.

Royal flush, smartphone
Mobile gaming will be a royal flush for the companies that bet on it.

Photo by woolzian/iStock/Thinkstock

Ask anyone in Silicon Valley to describe the “gaming industry,” and she’ll tell you about Call of Duty or Candy Crush Saga. Ask someone in Nevada or New Jersey, and you’ll get a very different response. Pretty soon, though, there will be no distinction between these two types of “gaming.”

True to the name of this column, I’m going to place a wager. I predict that gambling will be broadly legal in the United States by the end of this decade. It will start with online poker, which is currently legal only in Nevada, New Jersey, and Delaware. But it will expand from there, both in categories of games and in geographic acceptance. This is already happening, to a certain extent: The wheel’s started spinning, and the ball is in play. When it drops, the video gaming business will win big. The makers of today’s mobile games will build tomorrow’s mobile casinos.

They’ve tried before. Zynga, the granddaddy of social gaming, launched a real-money gambling site in the U.K. last year, calling it Zynga Plus Casino. It collaborated with bwin.party, a Gibraltar-based gambling company that reported nearly 770 million euros in revenues in 2012. (That’s about $1.05 billion in current dollars.) But Zynga has had a tougher time gaining headway in the U.S. Entrenched anti-gambling statutes and complicated interstate regulations are difficult hurdles to clear. Barely a few months after it had opened its casino for business in the U.K., Zynga told analysts that it had given up on plans to let Americans in the door.

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The biggest roadblock facing Zynga, and anyone else, is the Unlawful Internet Gambling Enforcement Act of 2006. Originally drafted as a last-minute rider on a port security bill, the UIGEA has been used to prohibit companies from offering Internet-based poker, sports books, and games of chance to Americans. Its passing put an end to a decade-long gold rush in online gambling in the U.S., led by sites such as Bodog, PokerStars, and Full Tilt Poker. A series of indictments, issued most notably in United States v. Scheinberg, showed that federal authorities were willing to prosecute broadly and aggressively on behalf of the UIGEA. In Scheinberg, U.S. Attorney Preet Bharara alleged that the founders of PokerStars, Full Tilt Poker, and Cereus (Absolute Poker) were guilty of bank fraud and money laundering as a result of transferring funds to and from players online. PokerStars and two other defendants agreed to forfeit over $731 million to settle the case, and PokerStars was permitted to continue business operations.*

Money laundering and bank fraud might seem like unusual charges to levy against online casinos. But the UIGEA focuses primarily on the financial transactions enabling gambling; it focuses to a much lesser degree on the gambling itself. Specifically, the UIGEA “prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.”

By attacking a specific aspect of gambling—namely, the transmission of funds—the UIGEA appears to cut off online gambling at the ankles. If no financial company is willing to handle transfers, then online casinos won’t take on American customers.

The law’s specificity, however, leaves wiggle room at its margins. For one thing, the UIGEA does not seem to apply within the boundaries of states that have already legalized various forms of gambling, or that may do so in the future. But logistical troubles remain: Any businesses running legal online casinos or poker tables must operate entirely within a given state. The UIGEA seems to prohibit the transfer of funds for the purposes of gambling across state lines.

Let’s look at the states themselves. At present, all states in the Union, with the exceptions of Hawaii and Utah, allow for some forms of gambling. Commercial casinos (i.e., for-profit gambling enterprises not including those run by Native American tribes) are permitted in 20 states and two U.S. territories. At the moment, just shy of 500 commercial casinos are up and running in the country. Las Vegas is the biggest and best-known gambling hub in the U.S., but gambling is just about as legal in, say, Iowa or Michigan as it is in Nevada.

These states, and the companies doing business within them, will begin to compete for your dollars—especially online, where you’re most readily available. They’ll start the fight by making gambling as seamless and convenient as possible. The Nevada Gaming Commission, for instance, just voted 4–0 to approve the use of prepaid debit cards for slot machines. The cards could be tied to players’ loyalty points and slots clubs at Nevada’s major casinos. The biggest among them, including Caesars Entertainment Corp. and MGM Resorts International, operate hotels and casinos across the country and around the world. They’ll press for the ability to keep players clubs—and prepaid debit accounts—applicable throughout their interstate gambling ecosystems. They can’t legally do that now, but they’ll have very strong financial incentives to sponsor amendments or challenges to the UIGEA. In the meantime, they’ll redouble their efforts in gambling-friendly states.

Nevada is leading the charge in online gambling innovation. But other states will up the stakes—especially those states that don’t, or can’t, rely as heavily on in-person tourism. New Jersey, in particular, is rapidly liberalizing its gambling policies in an attempt to outdo Nevada. Atlantic City’s tourist traffic and gaming revenues have been declining for most of the last decade. Lawmakers in the Garden State are eager to reverse its fortunes online. State Sen. Raymond Lesniak recently introduced legislation that would open up its online gambling sites to players from out of state. Within the state, the sites are flourishing. In January of this year, players had created a total of nearly 200,000 accounts, bringing New Jersey’s online gambling revenues to $9.5 million for that month alone.

Meanwhile, some gambling-friendly states are experimenting with interstate online poker. On Feb. 25, Govs. Brian Sandoval of Nevada and Jack Markell of Delaware inked the Multi-State Internet Gaming Agreement. The agreement will permit residents of both states to play online poker through specific sites operated as bistate casinos. (Those sites have yet to be built, but the agreement paves the way.)

If and when the Nevada-Delaware compact bears fruit, other states will want to get in on the action, because revenues from online gambling will prove too tempting to resist. Worldwide, revenues from online casinos exceed $32 billion, and Juniper Research estimates that revenues from gambling on mobile devices alone will top $100 billion by 2017. As more states soften gambling laws, and more follow the example set by Nevada and Delaware, expect the $12 billion mobile gaming industry to pay close attention. Zynga, King, and other giants in the mobile gaming business won’t be content to sit on the sidelines. I suspect they’ll strike partnerships with state-based gambling companies to provide the software for the next generation of virtual casinos. They’ll build the infrastructure now, and they’ll move quickly as the walls of the UIGEA continue to crumble, brick by brick. In the near term, they’ll create an interstate gambling ecosystem linking Nevada, Delaware, New Jersey, and other states with congruent online gambling policies. Over time, more states will fill in the framework.

As the Internet goes, so goes the real world. In the long run, I don’t believe offline gambling will remain grounded while online gambling takes off. States like California will loosen their commercial gaming restrictions in an effort to promote tourism. A cascade effect will see state after state lowering barriers and courting casinos, virtual and physical. Overseas competition will make states, and gaming companies, work faster and harder to ensure their customers the best, most convenient, and most rewarding casino experiences.

This all seems a little far-fetched today. (And I’m not the first writer to speculate about a coming casino boom in the U.S., nor will I be the last.) Perhaps the change will come more slowly than I predict it will. Perhaps it’ll come a lot quicker. The one thing I can say is that it’ll come. I can’t actually bet on it. But when I can, I’ll collect.

Correction, March 4, 2014: This article originally stated that the U.S. District Court in the Southern District of New York issued a ruling against the founders of PokerStars, Full Tilt Poker, and Cereus (Absolute Poker) in United States v. Scheinberg (2011). Instead, PokerStars and two other defendants settled the case with the prosecution in exchange for the forfeiture of over $731 million.

Jon Nathanson is a technology columnist, startup investor, and strategy consultant in San Francisco and Los Angeles.

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