Anyone's Guess

The choices that gaming executives and federal legislators make in the next few months probably will change the face of Internet gambling forever.

Traditional brick-and-mortar casino operators are anxious to break into the business so they can parlay their brand-name recognition before some offshore operator becomes the Amazon.com of the gaming industry. Yet many feel constrained by Nevada regulators who demonstrated their disdain for Internet gambling when they caught a licensee in a sting operation on the Internet.

Depending on what happens with federal legislation in the next couple of months, the industry may continue down an irrevocable course. Some think an Internet prohibition bill is destined to pass by the time Congress adjourns this month, if not next year. Others say the Internet Gambling Prohibition Act may be aborted if backers don't win a swift victory this fall.

"If it doesn't pass this year, it may be too late," says Sen. Richard Bryan (D-Nev.), who joined Sen. Jon Kyl (R-Ariz.) as an original cosponsor for the bill. "That's not to say it couldn't pass next year," Bryan says. "It's tougher now than it was."

The longer action is delayed on the bill the more numerous and entrenched Internet gaming operations will become, Bryan reasons. "All of a sudden you lose the momentum to carry it forward. There's so much more Internet gaming today than when this was proposed two years ago."

Anthony Cabot, an Internet expert and gaming lawyer with Lionel Sawyer & Collins in Las Vegas, doesn't like the Kyl bill but predicts it will pass, probably next year. This year, it may be too late, given budget votes and other major legislation pending before Congress, Cabot says.

"They've got a big agenda in the house of other things to do," agrees Frank Fahrenkopf, president of the American Gaming Association. Yet "I think the best chance to pass it is this year. ... It's anyone's guess what will happen," Fahrenkopf says.

"At the end of the day, there is going to be an Internet Gambling Prohibition Act," Cabot says. "The question is what are the exceptions."

Exemptions, expansions

The Kyl bill has passed the Senate but a companion bill introduced by Rep. Robert Goodlatte (R-Va.) narrowly failed in a House vote in July.

The House bill was submitted to a vote under a provision that limits debate, prohibits amendments and requires a two-thirds majority for passage. The Goodlatte bill fell 25 votes short of two-thirds. It was favored by 245 members but opposed by 159 members. The bill exempted state lotteries and pari-mutuel games including horse racing, dog racing and jai alai from the prohibition. It also allowed continuation of fantasy sports leagues on the Internet, where players pay fees to form their own fantasy teams and compete with others by computer.

The Christian right splintered on the issue, because some contended the bill granted too many exemptions. Others in this movement favored the Kyl and Goodlatte bills.

"Most of the opposition to the bill has been based on the premise that it would expand gambling on the Internet. I think that is completely wrong," says Frank Jemley, vice president of public affairs for Churchill Downs Inc.

The horse racing industry believes an exemption from the Internet ban is vital to its future viability. The horse racing industry uses simulcasts which give off-track betting parlors an opportunity to take wagers and show the race live. Simulcasts account for 80 percent of the money wagered on horse racing annually, Jemley says.

In addition, 10 states allow telephone account wagering on races outside of those states. "A Kentuckian can wager on a race in New York using a telephone account," Jemley explained.

To stop such practices would hurt a $35 billion agribusiness nationally that employs half a million people, he says.

The Kentucky Derby, which Churchill Downs runs, "is one of America's most famous sporting events," he observed. "We think this bill continues the new technology like the Internet to bolster the horse industry."

Cabot put it more bluntly. Loss of the exemption could exacerbate the steady decline of tracks that has continued over 20 years. "The only thing that has kept it alive has been off-track betting," Cabot says. "The future of that industry really hangs in the balance."

The horse industry currently relies on the 1978 Interstate Horse Racing Act as authority for simulcasts and off-track betting. "If this bill does not pass with the exemption, we still strongly believe simulcasting is legal because of the 1978 law," Jemley says.

Some state lotteries opposed the Goodlatte bill, because it didn't exempt them from the Internet gambling ban. Many state lotteries are quietly pushing for an exemption, because the Internet would make lottery sales more convenient than they are even at a neighborhood store. "They've done so quietly, because they don't want to be seen in a bad light," says one Congressional source.

Yet the lottery in Arizona, Kyl's home state, openly opposes the idea although it might push up sales that totaled $255.5 million in the fiscal year ending in June. "There are those [lotteries] that feel that way, but that's not our position," says Kevan Kaighn, lottery communications director. "There are no controls, and we've got a real strong conviction to protect against underage gambling," she adds.

Brand Extension

Even the traditional land-based casino industry appears divided on Internet gambling. The American Gaming Association position is that Internet gambling requires strong regulatory and law-enforcement oversight. "We do not believe at the present the technology exists to provide that kind of oversight," Fahrenkopf says.

Expansion of Internet gambling will hurt casinos that exist only as places to gamble, but destination casino-resorts won't be hurt, Cabot believes. A potential patron, however, won't substitute online gaming for a trip to Las Vegas, he says.

Even if the prohibition bill is adopted, it could benefit traditional casinos by clearing up uncertainty over federal laws. The big names in brick-and-mortar casinos could operate online gambling sites that are available to people in other countries, as long as they could stop domestic Internet visitors from gambling at their online casinos, Cabot says.

Both MGM Mirage and Harrah's Entertainment say that prospect sounds appealing if it were legal and secure from bettors in the United States.

"There's no doubt that Harrah's is interested in the area of Internet gaming, but we also intend to be in full compliance with the law and we would not look to enter this area until there are changes to the law," Jan Jones, senior vice president, says in a prepared statement. "... As long as it's properly regulated to exclude underage gambling, the morality of Internet gambling is no different than casino gambling," she adds.

"A lot of this has to do with brand development, brand marketing and what folks in the consumer products industry would call brand extension," says Alan Feldman, vice president of MGM Mirage. He compared it to Nike, the running-shoe company, branching into other wearing apparel.

MGM Mirage in August announced it is working with Silicon Gaming to create an Internet site called WagerWorks.com that would let people compete for prizes, such as free rooms and show tickets. It also will recreate virtual or electronic versions of its properties on the Strip as well as Beau Rivage, its Mississippi casino.

Unlike regular online gambling sites, visitors to WagerWorks won't be able to make bets-at least not initially. "We know that there's a vast number of people that are visiting these [Internet gambling] sites," Feldman explained. "This gives us a chance to tap into these markets."

Harrah's Entertainment is pursuing a similar strategy and offering prizes for free games on the Internet. Harrah's says the Internet complements its Total Rewards program, which runs on a database of about 20 million Harrah's gamblers. "Harrah's will not play a secondary role on the Internet but will play a leading role if regulations permit," Jones says.

The company is improving its website "in order to capitalize on the brand name recognition that Harrah's carries with it," Jones adds. "For example, people will be able to visit our virtual casino on our website for fun only obviously there won't be any gambling," she explains. "The marketing opportunities are certainly there on the Internet and that's one reason this fall that we're revamping our website."

This fall, Harrah's will also offer prizes and free visits to its 21 casinos around the country to 13 million new potential customers through the sweepstakes-oriented websites of iwin.com in exchange for their email addresses. Later, promotions will be emailed directly to iwin.com customers. "We're trying to tie their umpteen million users and their interest in games to us," Harrah's COO Gary Loveman tells the Wall Street Journal. Although Harrah's has a small investment in iwin.com, the operation is similar to MGM Mirage's WagerWorks site.

Cat and Mouse-click

MGM Mirage would like to transform its free Internet games into gambling if it could do so without violating the law and without antagonizing regulators. It also would insist on "regulatory integrity" that prevents illegal gambling by people in the United States on its Internet site, Feldman says. "It requires a level of technology that no one to this point has."

Operators cite American Wagering Inc. as a case in point. The Las Vegas company is best known for operating Leroy's Race and Sports Book in casinos around Nevada, but it operated an Internet sports betting site for overseas gamblers. Last year, a Nevada gaming agent using a fictitious name managed to make Internet bets on baseball games at the site.

Industry observers doubt that the company intended to permit illegal betting on its Internet site, but it agreed in July to pay a $10,000 fine and to sell its Internet bookmaking operation, which was based in Australia. The fine was small by Nevada standards, but American Wagering is also a small company and its stock was clobbered on Wall Street. Slot machine giant International Game Technology bought a minority stake in Access Systems, a Sydney, Australia, software maker, last year.

For a while, it supplied Access with IGT slot machine games for Internet use. When Nevada regulators expressed concern, IGT dropped its involvement with Access and promised to sell its interest in the company.

"Our main interest is manufacturing slot machines," explains Ed Rogich, IGT's vice president of marketing. "With the ambiguity and unclearness on Internet gaming, we won't pursue anything until that picture becomes much clearer," he says.

Park Place Entertainment, similarly, holds a 20 percent interest in Jupiters Ltd., an Australian company which owns the online gambling site centrebet.com. Park Place also manages two land-based Australian casinos for Jupiters. Park Place says it isn't involved in the online casino.

Some gaming-industry experts worry that Australia will become the Internet capital of gaming if big-name American casino operators wait too long. Cabot pointed out that Amazon.com established itself as the leading bookseller on the Internet and traditional bookstore chains have yet to overtake it in cyberspace. "Just because you have a trade brand doesn't mean you have an Internet brand," Cabot says.

Casino operators continue to flirt with Internet gambling ventures but know they could lose gaming licenses in the United States if they step beyond the edge of propriety.

Cabot believes the Kyl bill, meanwhile, will fail in its goal of halting the growth of Internet gambling. The bill authorizes state and federal government officials to seek federal court injunctions against Internet service providers allowing their customers to access casino websites.

The government could focus on large ISPs, such as America Online, but that won't be an effective deterrent, Cabot argued. The casino website could then transform itself into another website. "It would be sort of a cat- and-mouse game," he says. "There's literally thousands of ISPs that have contact with thousands and thousands of Internet sites," he continued. Furthermore, an Internet gambler could use a satellite connection to reach an ISP that is offshore.

Another bill, introduced in May by U.S. Rep. James Leach (R-Ind.) looks more practical to Cabot.

Leach is chairman of the House Banking Committee. His bill would prohibit banks from processing Internet bets made by credit card, debit card, checks or electronic transfers.

"It seeks philosophically to reach the same issue" as the Kyl bill, Bryan says. "One complements the other, in my judgment." Cabot agrees in part. "This clearly would be very effective, but in my opinion, it's the least likely of the bills to gain popular acceptance, because you put the credit-card companies in a horrible position," Cabot argues. "It's a very difficult thing. I don't think you necessarily want to put the credit-card companies into the position of trying to police what its vendors do," Cabot says.

Congress could try to stop Internet portals, such as Yahoo!, and Internet sites from carrying ad banners for online casinos, Cabot says. "Are any of these [strategies] going to be very effective?" he asks. "Probably not."

Perhaps nothing captures the paradox of Internet gambling prohibition than the case of Jay Cohen, co-owner of World Sports Exchange, a gambling website based on Antigua in the Caribbean.

A federal jury in Manhattan last February found Cohen guilty of operating an illegal sports betting company that took wagers by telephone and Internet. In August, a judge sentenced him to 21 months in prison and fined him $5,000.

Cohen's real mistake, according to Cabot, was returning to the United States. His partner stayed on the island and continues to operate World Sports Exchange. He is beyond the so-called long arm of the law in the U.S.