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Only The Beginning

iGaming is a brand new industry, and it needs time to develop

Only The Beginning

Imagine a world without the internet.

We’d have to use travel agents again to buy airline tickets. Pizza would only be delivered to your home after using the phone. To get books, you’d have to go to a library or a book store.

And reading on a tablet? No way! Your fingers would get dirty with newsprint from the newspapers that would tell you what happened yesterday instead of 10 minutes ago. When trying to find an address, you’d have to break out a map, open it up, locate the destination and figure out how to fold that darn map up again!

And you’d have to go to the casino to get a bet down on a sporting event, play a slot machine, or make a wager on blackjack.

How barbaric!

Yet, all around the world we can do all those things online now—except for gambling on the internet. While that’s acceptable in dozens of countries around the world, in the U.S., you can only do it in three states now.

Internet gaming revenues have been described as “disappointing” in the U.S., even in New Jersey, where many people expected the industry to skyrocket. Tom Breitling, chairman of Ultimate Gaming, the first company to go online with a poker room in Nevada in April 2013, says it’s just the start.

“When Amazon went live, in their first year, they did $750 million in revenue,” he says. “Today, they do $75 billion. I’m not saying we’re going to reach that level, but we’re just getting started.”

But unlike online shopping, iGaming, like other forms of gaming, is evolving from illegal roots. There are still many sites flaunting the laws of countries where they take bets. So it’s going to take some time to shake those illegal operations and shape a positive public perception, says Mitch Garber, CEO of Caesars Interactive, and there’s no reason to interpret a slow start as being disappointing.

“It’s analogous to being disappointed at being scoreless in the first inning of a baseball game,” he says. “There’s so much left to play. This doesn’t concern me at all. The market size will be determined. What is most important is that the technology works well and the regulatory environment is protected.”

Brian Mattingley, chief executive of 888, admits that the numbers have been surprisingly low.

“It’s been slower than anyone could have imagined. It’s been slow to the extent it’s almost disappointing,” he says.

Conversely, he says, the other elements of iGaming have been successful, particularly in New Jersey.

“I think the launch was absolutely excellent and was done perfectly,” he points out. “We haven’t received any complaints about anyone gambling from out of state or any complaints about underage gambling or collusion or whatever. If there are any issues, the regulators move immediately to investigate. The work they have done has been exemplary.”

Mark Lipparelli, who led the Nevada Gaming Control Board when it was investigating and establishing regulations for iGaming in his state, says a little perspective should be employed when considering the launch of iGaming in the U.S.

“We’re less than a year and half since everything got started in this country,” he explains. “I understand that there is some disappointment, but think about where we were three years ago. We had no legalization, no revenue, no jobs, no people producing product, no companies addressing these critical issues. And let’s consider where we are now. I know it’s not where we want to be, but it’s far from where we started.”

Technical Troubles

The launch of iGaming in New Jersey was really the first time geolocation had been tested on such a wide scale. With hundreds of thousands of people within a mile of the state borders, locating them was crucial for a successful launch.

But with such new technology, and rigid rules that called for multiple certifications of location—ISP, GPS and several others—geolocation took some time to iron out. But with the industry’s most accurate system operated by GeoComply leading the way, location errors became less and less.

David Rebuck, director of New Jersey’s Division of Gaming Enforcement—who has been praised in all corners for the way the DGE prepared to launch iGaming in the state—says the technical issues are diminishing each week.

“The geolocation issue has largely been solved,” he says. “There were problems in the beginning with false positives, where individuals who were clearly within the state of New Jersey were blocked because the standards were so high. It still happens, but to a very small degree, especially along the borders close to New York or Pennsylvania. We’re in good shape now.”

Mattingley agrees.

“Geolocation is now working as well as it can,” he says. “The people who worked on this have done a spectacular job to assure that people who gamble are indeed located in the state, and very few mistakes are being made about the in-state locations.”

Matt Katz, the CEO of CAMS, a multi-solution technical provider, says most of these technical problems should have been anticipated.

“The two biggest issues are payments and geolocation,” he says. “I’m surprised that these have been talked about so much, because we knew these were going to be problems right from the start. The 7995 (gambling) designation for credit cards is a red flag, and that would be unacceptable in most cases, and geolocation for state borders had never been tried before. These were foreseeable issues. The industry has rolled out exactly as expected.”

The payment processing issue was more than technical, however. It involved federal regulations along with corporate business decisions. Rebuck says 50 percent of Visa transactions and 75 percent of MasterCard transactions for iGaming are now being accepted in New Jersey.

“E-commerce systems have been embraced,” he says. “But the major players like PayPal, Amex and Discover are still sitting on the sidelines and watching. But they’ll come around when there are more people, which we are reaching quickly. When you add the population base of the three states currently legal, it’s 12 million or 13 million. So it’s just a matter of time.

“It’s a business decision, but there is no regulatory impediment at this time.”

Frank Fahrenkopf, the former president and CEO of the American Gaming Association, says these problems were the things the AGA was worried about when considering the support for or against iGaming during his tenure.

“This was probably predictable,” he says. “The problem with regulators maybe overplaying their hand making sure that people who were out of state could not play probably kept some people who were in state from playing. That clearly limited the success of this effort.”

Garber, the former CEO of PartyGaming, agrees and says it is the responsibility of the iGaming companies to explain to banks about the realities of the industry.

“For better or for worse, there have been kinks in the technology,” he says. “We had problems with payments, but that’s not unusual in the beginning of a business like this.

“I think payment processing is simply a matter of education. For years, online gaming was illegal until New Jersey permitted it. The issuing banks with departments that are current with the new legislation and are understanding of the environment are accepting the product. But others that aren’t so up to date are not responding, and it’s in our hands to be spending the time speaking to the credit card organizations and the issuing banks about how we’ve got this strict regulatory environment and that it’s only going to be a larger industry.”

Regulatory Response

Much of the appreciation of the way Rebuck has handled the launch comes because of his willingness to learn and reconsider regulations that may have been overreaching, according to Garber.

“Rebuck has listened to what we have to say about the licensing, the rules, the technology,” he says. “He’s willing to make modifications to make the technology better as long as it remains tightly regulated and secure. We have to say that working with the DGE has been a very pleasant and fluid experience for our company.”

The “new” DGE, which has dramatically reformed regulations covering land-based casinos in Atlantic City, realized that it was not the expert when it came to iGaming, so flexibility in regulations was necessary.

“We are open to any suggestions that make the system better,” he says. “We’ve done massive changes on the bricks-and-mortar side, which have had very positive results. We’ve made few changes to the original regulations on iGaming, but we will make adjustments necessary as long as we continue to maintain the controls.”

Lipparelli says the DGE consulted with his agency early on.

“I think New Jersey benefited greatly from the work that we did,” he says. “They were able to go through this process in a much shorter length of time. There’s always a give-and-take. There’s a danger of going too fast, but when you move that quickly with innovators, there must be adequate financial return.

“The first round of products were probably not the best products, but that doesn’t mean these same companies won’t be improving. They’ll figure out the right product that will improve the customer experience.”

Rebuck says the DGE is now permitting license holders in New Jersey to operate with up to five separate platforms.

“We gave each licensee five skins,” he explains. “Most of them have realized they don’t need five skins, so we’re going to allow them to substitute a platform for a skin. It’s great for the state because it means more money invested into the state and more jobs. I think we’ll see at least two casinos add new platforms this year.”

Although there were some technical problems at the start, Lipparelli says the most important aspect of the new industry was integrity in the regulatory process.

“The major overarching concern was how these companies could launch, and launch in a controlled way with little downside,” he explains. “That came through very successfully.”

Breitling says the work all parties put in has been gratifying.

“This has been a wonderful example of a public-private journey where we work together to address these issues,” he says. “At the end of the day, you have to create a really good customer experience. That’s the only way we can thrive and prosper.”

All agree, however, that the critical regulatory issue remaining is the blocking of the illegal iGaming sites that are still operating in the U.S.

“The problem is the illegal operators,” says Mattingley. “I know for a fact that one large grey-area online casino operator has actually increased their market share in New Jersey over the past four months.”

Katz says it’s an important concern that must be fixed.

“The big issue, which the DGE is just starting to address, is the participation of illegal operators,” he says. “We’re talking about regulated operators who have invested tens of millions of dollars into this industry. Yes, there have been somewhat lackluster results. But they are still competing with offshore operators who haven’t invested that money, and who don’t adhere to the strict controls that regulated the licensed operators in New Jersey. So there is a component of unfair competition. How do you adequately block these illegal sites? It’s difficult.”

Lipparelli says getting the attention of the agencies who could stop this is also difficult.

“There are some creative ideas now bubbling to the surface,” he says. “This is a difficult area of law enforcement. There’s little doubt that illegal operators are violating federal and state laws. There is some doubt whether we have enough tools in the law enforcement basket to pursue cases with good success. That’s a challenge to any district attorney or attorney general. We may have to create additional laws that make it more difficult for illegal operators.”

Market Makers

The size of the market has been hotly debated, particularly with the disappointing revenues. Everyone agrees, however, that education is the answer, and will spur more interest.

“Education is a big part of it,” says Breitling. “The consumers are not aware of what we’re doing. There’s a lot of time and money devoted to advertising and marketing. But it will evolve, and the activity will be as normal to people as the way they shop is today.”

Fahrenkopf says it may convince customers of the illegal online casinos to make the crossover.

“If you had more education, maybe these customers who are playing at the offshore sites would move to the regulated site,” he says. “But they’re comfortable there and there are also some customer loyalty issues, I’m sure. This could have been overcome by intelligent advertising and communication.”

Garber says critics of the industry need to understand that it takes more than simple legalization to build the market.

“Some people think that once a bill is passed, everyone knows about it,” he explains. “But with iGaming, we don’t have the beautiful skyscraper casinos that we saw in Atlantic City in 1978, and everyone in the state and beyond knew about it. This is something that has no new construction attached to it. It requires only marketing. We’ve all done a lot of marketing, but to get a new product and service into the minds of people takes more time than we’ve had. And it probably shows that marketing can be improved.”

Mattingley agrees that the marketing in the early days may have been either too confusing or too sophisticated.

“We have to do a better job at education,” he says. “We almost have to go back to basics and talk about the steps you need to take to sign up, get geolocated and make deposits. I don’t think we’ve totally pushed that yet.

“This is a new industry. We need to show players how it works. We need more exposure to the customers. Let’s tell them that online gaming is legal, it’s fun and it’s easy to do.”

The big and recognizable companies in the industry have so far dominated. Garber says Caesars could do a better job.

“We need to cross-market to our offline customer base a little bit better,” he says. “We need to get the frequent visitors to Atlantic City to also play with us online, and the customer who is playing with us online and who has never visited Atlantic City should do so through the Total Rewards program. We need to get better at that.”

Breitling says the big brands like WSOP, PartyPoker and Borgata have thrived because people know the names.

“This entire industry is based on trust,” he says, “and people gravitate towards a brand they can trust. Many of those brands have established themselves over time, and have a relationship with many of the potential customers. This industry has matured over almost 40 years in New Jersey. There’s a lot of brand equity there, as well as large databases.”

But he says he’s confident that brands like Ultimate Gaming and 888 will be able to establish an audience.

“There’s an opportunity for new brands to find their niche,” he says. “We’re building the relationship with customers for the first time. We’re trying new things and looking forward to the next 10 years and building relationships with our customers. It comes down to trust and awareness. This is about the next 10 years, not the last 10 years.”

One method of marketing that is not well-established in the U.S. is affiliate marketing, which has been the engine that fueled iGaming growth in Europe. Regulations surrounding these affiliate marketing sites had been confusing until the DGE refined its rules in May.

“We didn’t really understand the affiliate and sub-affiliate market at all when we first started,” says Rebuck. “I don’t think the casino operators even understood it. The platform providers, primarily from Europe, understood it, so we learned from them.

“We realized that it’s a powerful marketing tool and we needed to get ahead of it. Some of the standards were restrictive to the point where it hurts the operators. We met with them and issued advice about how they should be registered with the division depending upon the payment mechanisms and systems. I think the affiliate industry is pleased with the standards we’ve put out there. And we’re following up with these guidelines.”

When the DGE discovered that some affiliates were marketing the legal New Jersey casinos alongside the illegal sites, cease-and-desist letters were sent.

“We gave them a choice,” he says. “Either you want to continue to represent the illegal casinos or you can come with us, get registered or licensed, and represent our legal casinos. You can’t have it both ways.”

Mattingley is hopeful affiliates will get more traction in the U.S.

“Affiliates can play a big role in the U.S. once they all understand the rules.,” he says. “They are a large part of the European market, and there’s no reason they can’t become as important in the U.S. spreading the word and giving us a big boost.”

Katz agrees that affiliates would be a positive addition to the marketplace.

“Affiliate marketing is a great form of advertising,” he says. “It’s very effective and has relatively low risk from the merchants’ perspective. What’s unique in New Jersey versus Nevada is that affiliates have to get licensed or register with the DGE, which is a disincentive for them. There’s a lot of opportunity here, where there could be huge increases in business should more affiliate networks go through the process.”

Bad Actor

The recent purchase of PokerStars by Amaya could shake up the New Jersey iGaming industry. PokerStars’ application to operate in New Jersey had been put on hold by the DGE because it operated in the U.S. after the passage of the Unlawful Internet Gambling Enforcement Act of 2006. The “tainted assets” were deemed a problem because the owners of the company at that time remained in place. The former chairman, Isai Sheinberg, is still under indictment by the U.S. Department of Justice, even though the company worked out a settlement with the DOJ. Sheinberg’s son, Mark, remained as chairman.

But the Amaya purchase cleared up those problems, and the DGE is now considering an application by already-licensed Amaya to permit the usage of PokerStars in New Jersey (PokerStars has an agreement with Resorts Atlantic City to operate as the online arm of the casino should it be approved).

Rebuck says he’s looking forward to PokerStars’ participation.

“Amaya worked with us to get licensed, and understands our standards for suitability,” he says. “We’ve  had significant discussions with them about the acquisition of PokerStars. There will be no surprises. Amaya has a very good reputation, and it’s a company we trust. I fully expect that subsidiary, whether it be PokerStars, Full Tilt, or whatever, will not have a problem in getting licensed. It’s going to be a very exciting time for the state, Amaya and the world’s largest internet gaming operator. And we’re going to do it right.”

The existing operators are not as sanguine as Rebuck about the entry of PokerStars into the market.

“We ought to see the regulators saying that they can come in, but because they were taking wagers illegally for those years, you are going to have to suffer a penalty where you can’t operate for a given period of time,” says 888’s Mattingley. “I think two years would make some sense. That company built a significant worldwide business on the spoils of illegal wagering in the U.S. And they built a huge database during those years that truly is all-encompassing. As competitors, I think we should be allowed to establish our brands, which could be done in two years.”

Everyone agrees, however, that a “bad actor” clause in legislation is a bad idea, and that regulators should be given the responsibility to approve or ban a company.

“PokerStars needs to be subjected to the same regulatory scrutiny as everyone else,” says Lipparelli, even though Nevada’s legislation contained a bad actor clause. “It’s not fair to them or anyone else that any regulator should prejudge if anyone is suitable. They face the same issues as any operator: Can we educate the financial community on payments? Can we get law enforcement to find a way to shut down the illegal operators? Can they break through the market? The first step is they need to be vetted by regulators.”

Fahrenkopf agrees, even though the AGA had worked hard to block PokerStars from the New Jersey market.

“The AGA was quite active when PokerStars attempted to acquire the Atlantic Club,” he explains. “We filed a long brief with the DGE. But if you assume that Amaya is a clear purchase by people not affiliated in the past with PokerStars, then there should be no problem. But in our brief, we found a pyramid of companies affiliated with PokerStars with people involved who should not have been involved. I’m confident the DGE will get to the bottom of it.”

Montreal-based Garber says he sees both sides of the issue.

“I know David Baazov very well,” he says. “He’s a local Montreal guy who’s done a phenomenal deal from a business and capital viewpoint. He’s raised $5 billion to complete the deal, which is something I haven’t seen very often in my business career.

“At the same time, he’s bought an asset that comes with a lot of success and a lot of controversy. The regulators are going to have to weigh the success and the controversy. We believe that well-informed regulators make well-informed decisions. And we believe that the regulators today are very well-informed about the history of PokerStars and how that company has been built, and will make the right decision.”

Rebuck says regulators are clearly able to make the determination.

“The decision to allow the regulators to judge the suitability of bad actors was a good one,” he says. “We’ve knocked out many people from New Jersey, and will continue to do so. But we have the flexibility to revisit the companies if the bad actors are taken out of play. This is a standard the state has held to since the beginning, because there were bad actors in the bricks-and-mortar world too.

“If a company is sold and the bad actors are removed, we have the ability to make sure that there’s a good level of integrity and transparency.”

Roger Gros is publisher of Global Gaming Business, the industry's leading gaming trade publication, and all its related publications. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its fourth edition. Gros was named "Businessman of the Year" for 1998 by the Greater Atlantic City Chamber of Commerce, and received the Lifetime Achievement Award from the American Gaming Association in 2012.