Editorial - Feb. 1, 2003: The Dawning of a New Age in Online Gambling

4 February 2003

What phoenix will rise from the ashes of the tatts.com's closure on this unique date?

Tatts.com wasn't the only orderly closure this week; Kerzner Interactive, a subsidiary of Kerzner (formerly Sun International), also announced the closure of Casino Atlantis, an online casino operated from the Isle of Man.

And probably even more telling was the bloody nose the online gambling industry took this week when Ladbrokes, after losing a court case in the Netherlands, said, "We will close the site to Dutch residents by the weekend." As reported on europemedia.net, "The court's verdict is unique for Europe, and other countries are expected to follow suit."

One, two, three in a week!

Tattersall's is a very serious gambling operator and license holder. They were a pioneer of the online gambling business; and tatts.com was a major corporate strategy they were committed to as the opportunity in the dot-com days to float off part of the Tattersall's business. (It's still a "trust," albeit with a set of beneficiaries that would rival a lot of public companies' lists of shareholders).

For Tattersall's (and Kerzner Interactive), to walk away from online gambling is a damning indictment of it--and a huge vote of no confidence in the future of online gaming--at least the prospects of "free trade in gambling services across borders."

These brand closures will have a broader flow, as UBS Warburg analyst Robin Farley explained. "We believe that Kerzner's shutdown of its online gaming operation does not bode well for the profitability of Internet gaming operated from tightly regulated jurisdictions like the Isle of Man, and it could indicate that MGM Mirage's Web site may not be able to achieve profitability in the near to medium term," Farley said.

The "maturity" picture that "free-trade" proponents paint is one of properly regulated gambling (for example, to the much lauded Aus Model) where First World-licensed brand operators rule (so that governments can be assured that unregulated/unlicensed operators can be smothered out by best-practice "responsible" gambling providers) in a competitive environment that operates in the interest of the punter.

However, the real maturity of online gambling is clearly becoming one where gambling is self-contained within a jurisdiction and offered by operators holding licenses issued by that jurisdiction. Where online gambling is permitted, it is merely an extension of licensed physical gambling.

Operators who must comply with regulations that the jurisdiction determines are in the interest of the player (including competition between licensed operators in the jurisdiction, that's if competition is permitted).

It all comes down to the simple fact that jurisdictions wish to be able to enforce their regulations by coercive force on the gambling service providers--providers with something to lose!

What has turned the tide? The watershed is that as Internet technology is maturing, it is becoming blindingly apparent that the Internet is not some stateless place, as the technology now exists (and is getting better by the day) to facilitate real-time identification of the user's jurisdiction.

Now rather than Web site operators saying, "They can't comply with their user jurisdiction's laws as they don't know it," it's a case of "I won't." As the closure of tatts.com graphically illustrates, brand gambling operators cannot afford to say, "I won't." There is just too much at stake.

Proponents of free-trade gambling will argue that this is a sad day, as illegal operators will prosper in the absence of competition, but that is plainly a fallacy. Illegal operators are as much under threat; technology now exists to put the onus on third-party facilitators (financial institutions and ISPs) to block such illegal activity (an onus that was unreasonable in the absence of reasonably available compliance tools).

Just this last week again the U.S. state of Indiana moved a step closer to enacting legislation that would punish I-gaming operators and those who advertise and facilitate their services. The bill, SB 71, was passed by the Senate Monday on a 49-1 vote. As reported in IGN on Jan. 28, "The legislation would give prosecutors the authority to identify illegal gambling sites and force ISPs to remove them or make them off limits to customers in Indiana. The ISPs would then be given 30 days to either comply or face felony charges." And despite this onerous obligation, "Indiana's ISPs, meanwhile, have been silent up to this point"

We have seen earlier (pre-emptive) decisions by companies like Yahoo (which dropped Internet gambling advertising in July last year) and PayPal (which stopped processing online gambling funds), which highlight that the developing case law is decidedly in favor of jurisdictional integrity. Additionally there is not the financial incentive for these third-party businesses to risk breaching the almost ubiquitous laws in respect to gambling advertising and funds transfer, now that they have--and use--technology that lets them know a lot more about their users in real time, not the least being the jurisdiction they are in.

Feb. 1, 2003 is indeed a defining date in history of online gambling. With tatts.com's closure, and Ladbrokes "acceptance" of a foreign court's orders, it's the day when jurisdictional integrity without doubt gained ascendancy over the Wild West Internet cowboys.

To underscore the importance of this change in opinion, I offer the following insight from an essay, "The Physics of Opinion" by Bruce Schechter, first published at www.newscientist.com (in my opinion mandatory reading for any bookmaker wanting to offer a book on election results).

Take a simple question, of the kind pollsters ask every day: Do you think the future will be good? When Polish physicist Sznajd ran a computer simulation of this, it showed that opinions fluctuate wildly in time, as you might expect. But the opinion an individual holds at a certain time can be correlated with the opinion he has a short time later. The researchers found that the probability that an individual would change his mind after a certain length of time had elapsed followed a power law: The probability of changing one's mind after time t is t1.5.

Power laws occur in many natural phenomena, from sand dunes to earthquakes, and indicate the existence of "self-organized criticality." In other words, the system repeatedly moves into a state where things are finely balanced and a small disturbance in one part of the system can trigger massive changes across its entirety. Indeed, the Sznajds found that, in certain critical situations, one person changing his opinion could cause an "avalanche" of opinion changes, just as one extra grain of sand could cause a critically loaded sand dune to collapse.

This, then, is almost deja vu --a rerun of the dot com crash. The Internet has been portrayed as a whole new paradigm for online gambling where new-age gambling companies would market to the world. But that's just not the case; as with so many other parts of the dot com world, it is "bricks and clicks," it is the physical incumbents who will simply use the new distribution channels (for wagering and lotteries) and enabling technology for online gaming to expand (or better service) their existing market place.

The brand operators that will benefit will be those who are permitted to extend their physical gambling services using online systems to persons resident in their jurisdiction. They will have the benefit of protection (by virtue of legislative publishing and advertising restrictions as well as illegal unlicensed gambling prohibitions) from foreign operators (who are more than likely operating with some price or other legislative distortion). But it will come at a price: the full compliance with all gambling regulations and payment of any tax or excise which part of the overall net public benefit associated with the permissibility of the gambling in question).

Tatts.com has kept its Web site operating as a channel to sell lottery tickets, but their terms and conditions (esp. Section 3, and explicit exclusions of persons domiciled in Australian states where Tattersall's doesn't hold a license, highlights that jurisdictional integrity rules.

That's not to say that the free-trade lobby won't fight on. In fact Ladbrokes has said it will challenge the Netherlands decision in the European Court of Justice ... and the case in Italy that was stood over this week to July as well as another case in Sweden. ... And that's just in Europe, where there's supposedly a community.

The head of Ladbrokes' e-gaming division, John O'Reilly's, comment, "The British government, through the Treasury and DCMS, is following the free-market approach and wants Britain to be center of the global gambling operation," highlights that despite the dictum, "No man is an island." The United Kingdom is starting to look decidedly isolated as the only First World jurisdiction promoting free-trade gambling--an aggressive position considering its legislative platform as a result of the Budd Report is still under development.

It is also peculiar, even hypocritical, that this is the same U.K. government that in 1999 sued the International Lottery in Liechtenstein Foundation and Electronic Fundraising Company to prevent them from competing with Camelot (the state-licensed U.K. monopoly lottery provider) and won, relying on the same key ZENATTI 1999 and SCHINDLER 1994 European Court of Justice decisions that Ladbrokes (and supposedly DCMS) now want overturned.

The United Kingdom has made a rod for its own back. Faced with U.K. bookmakers using offshore operations to avoid the onerous betting duty, they were faced with a carrot-or-stick dilemma to stop the significant leakage of excise. They opted for a carrot: They would dramatically lower the excise for bookmakers located onshore, effectively facilitating the United Kingdom becoming the "center of the global gambling operation." However, the rest of the world has opted for the stick approach--and big sticks at that.

One of the most troubling aspects of the U.K. approach is that the GPT is an excise (or an inland consumption "sin" tax). So, while physical excisable goods are sold domestically with an often severe impost, they are generally exported free of excise with the expectation that the jurisdiction importing them (if they are permitted) will impose its own excise. Surely this same principle applies to "virtual" goods. Not only that, using excise in such a way appears to be clearly counter to the European Directive on e-commerce VAT, which is based on the domicile of the consumer, not the supplier!

It will come as a great disappointment for the Chancellor of the Exchequer that the United Kingdom was dependent on foreign excise to offset lower domestic excise for the Treasury's GPT revenue projections when foreign excise looks like being just another aspect of the dot-com bubble.

Against a wall of international opinion, an armory of better technology tools, along with differing opinions internally (e.g. HMCE enforcing bans on 'foreign' bookmakers advertising etc.) in the United Kingdom in protection of (domestic) excise revenues, the U.K. government (or DCMS) is looking like it's backing the losing side. In fact, it looks like some serious players have dumped a bucket on a "critically loaded sand dune" and they (and their operators) may just be inundated by the tide of international opinion against gambling free trade!

It certainly sets the scene for an interesting time at the Swiss Institute of Comparative Law's Conference "Law of Internet Gambling: from National Regulation to Global Solutions" in Lausanne on February 12-13.

Tim Ryan is a graduate of Agricultural Science, though he is probably best described as an innovator. He has worked in consumer online information and transaction systems since their inception and was the Australian pioneer of television data broadcast and is still the Consultant General Manager of the Seven Network’s teletext and datacast services – the principal provider of real time wagering information in Australia. Tim was an innovator of integrated wagering information and transaction systems. He has also consulted to a number of wagering system developers on the internationalisation of their systems. Tim became a NSW licensed bookmaker early in 2000 for regulatory reasons associated with the development of wagering systems. Despite not being a ‘working’ bookmaker Tim was appointed to the Australian Registered Bookmakers Advisory Council, Australia’s peak body representing all its 800 bookmakers. In this capacity he was instrumental in lobbying the independent Senators and the Government to ensure the exclusion of wagering from the Interactive Gambling Act.