Feature Stories - October 2001

Guys and Dolls Meet Nerds

Nevada Officials Ponder Internet Gaming

by Fred Couzens

Imagine a business capable of increasing profits by as much as 50 percent in one year. Imagine stock prices and shareholder earnings from that same company posting record high gains. Imagine hundreds, if not thousands, of new high-tech, hotel administration and casino jobs being created overnight. Imagine generating more than $400 million in taxes – about 10 percent of Nevada’s general fund budget – to help reduce the state’s impending revenue shortfall.

All of this is possible, as Nevada’s gaming industry anxiously awaits the state Gaming Commission’s determination of Internet gaming suitability. This follows the state Legislature’s approval of a bill in June allowing online gaming if certain conditions are met. The decision is extremely significant because it represents the biggest development in wagering since its legalization 70 years ago, revolutionizing the industry in the process.

"The stakes are very substantial for Nevada," said Richard Fitzpatrick, president and CEO of Internet Business Alliance of Nevada (IBAN) and Interactive Gaming Institute (IGI), two non-profit organizations focused on bringing technology suppliers together with resort buyers. "Since Nevada has a sound regulatory environment, the use of the Internet can generate revenue and stimulate high-tech, well-paying jobs in the state. The technology required gives Nevada an opportunity to be the center of a new industry."

What may be especially appealing is that Nevada, with its world-renowned city names and resort logos, could potentially capture up to 20 percent of the growing "off-shore" gaming market, expected to bring in $6 billion in revenues by 2003 – a 500 percent increase in two years. Some 1,400 Web sites are now based on Caribbean islands and other remote locales compared to 400 in 1999. The MGM-Mirage has applied for an online license from the independent Isle of Man (IOM), located in the Irish Sea between Great Britain and Ireland. Compared to Nevada’s $250,000 per year license fee and 6.75 percent winnings tax, the Isle of Man charges only $116,000 per year and has a 2.5 percent levy on winnings. Other "brand names," such as Park Place Entertainment (Caesars Palace), the Venetian, Boyd Gaming, Station Casinos and Steve Wynn’s unnamed new venture are reported to be the "most eager" properties to join in the Internet gaming milieu. Nevada’s casinos could provide an economic windfall if they were able to locate their Web sites in Nevada instead of going offshore. Capturing even 20 percent of the $6 billion offshore market would translate into an additional $400 million in state gaming taxes at a time when the state is struggling to find a solution to the increasing disparity between public expenses and tax revenues.

While some critics fear that Internet gaming will take business away from traditional casinos, Nevadans disagree by saying just the opposite will happen. "This kind of activity may very well whet people’s appetites to come and see Nevada, because watching and participating in gaming on a screen is nothing like enjoying the dining, entertainment and retail shops that make up the total Nevada experience," said Bill Bible, president of the Nevada Resort Association (NRA), which represents major resort properties throughout the state. "I think you’ll see more investment in ‘bricks-and-mortar’ because the people gaming on the Internet at a resort Web site will want to come here and see it in person."

While members of the statewide NRA have embraced Internet gaming with varying degrees of interest, Bible – himself a former chairman of the Nevada Gaming Control Board – is quick to point out that the law passed this year making Nevada Internet gaming possible is only "enabling legislation," meaning this revolutionary new way of betting may not come to pass after all.

Under AB 466, interactive gaming is permitted only after the Nevada Gaming Commission, after advice from the state’s Gaming Control Board, finds that proper safeguards are in place to maintain the state’s reputation and integrity in the gaming world, that any new regulations comply with all applicable laws, and that Nevada gaming Web sites are secured from unwarranted access by underage youth.

It also limits Internet gaming site licenses to major resorts already possessing unrestricted gaming licenses. In Las Vegas, a resort must have 120 rooms in the county, a bar with 30 seats, a 60-seat restaurant open 24 hours and a minimum of 18,000 square feet of casino space with 1,600 slot machines, 40 table games, a sports book and race pool. In Reno, the property must have had its license for five years, and must have either 50 rooms or 50 gaming devices.

"The downside to this are the legal problems that could be encountered at the federal and state levels," Bible noted. "If (Nevada’s legalization) is not done properly, casinos would want to move cautiously, because they could be subject to indictment." Bible’s reference to "legal problems" stems from the federal Wire Wager Act, which prohibits wagering while using a "wire transmission facility," such as a landline telephone circuit offering Internet services. While some have challenged the law’s validity, saying it speaks only to sports betting and events, a U.S. appeals court has upheld the conviction and 21-month sentence of Jay Cohen, who ran an Internet sports gaming operation from the island of Antigua while accepting U.S. bets. However, new technology in the form of wireless services is rendering archaic laws drawn up during the days of gangsters almost impractical.

In recent years, Congress has attempted to prohibit online gaming nationally, only to have measures fail, relegating control to individual states. Even though 48 of the 50 states (excepting only Utah and Hawaii) allow some form of gaming, usually lotteries, Internet wagering is illegal in all states. However, the opposition is slowly eroding, as the financial stakes get higher.

According to the River City Group, a gaming industry consulting firm, Nevada Gaming Commission approval allowing Nevada residents to use the Internet for wagers on football games and horse races "…has set the stage for online betting sites to operate legally in the United States." In August, Governor Gray Davis signed a bill allowing Internet wagering on California horse races from locations across the country. Also, officials in Ohio, New York, Illinois and Washington, D.C. are considering launching online lotteries, which, in total, take in $41 billion annually.

"Our position is if [Internet gaming] is available for one activity, then it should be available to all types," Bible said in response to California’s horse racing bill. "All we’re asking for is a level playing field. If events occur, we don’t want to be left in the dust. If these things are being allowed in other areas, [the NRA] should position itself to be a part of it."

Last year, the NRA was opposed to federal and Nevada online gaming measures, but has since shifted its position 180 degrees as the Internet handwriting on the wall became clearer. "Our concern was that things were changing so quickly," Bible explained. "Since the Legislature meets every two years, the whole situation could change totally between sessions. Because of the nature of the political process, it needed to be legal so we could be prepared to participate."

While the participants discuss legal and political strategies, IBAN and IGI are keeping technological issues on the front burner, because new methods and equipment need to not only be adopted into regulations, but also understood, accepted and approved by the enforcement wing of the state – the Gaming Control Board.

To Fitzpatrick’s way of thinking, everything is right on track when it comes to player identification and personal gaming location – two key issues to be addressed by the commission. He said new federally-required technology used in wireless cell phones can tell if a caller is in Nevada. He also said there is a computer mouse with a transparent side panel that can scan a user’s thumbprint to identify and confirm a pre-registered identity. "What others are seeing as obstacles, are opportunities for us in terms of new jobs and investment," said the upbeat Fitzpatrick, who uses IGI as the meeting and educational ground between resort executives and those developing the technology to make online gaming a reality.

Tom Bell, director of Telecommunications and Technology Studies at the Cato Institute, testified before the National Gaming Impact Study Commission in 1998 and (accurately) predicted, "…As the futility of prohibition becomes more and more evident…cooler heads in state revenue departments will begin to see Internet gaming as huge new cash cows…State governors and legislatures will soon demand a share of that bounty…The same political forces that have led to widespread legalization of lottery, casino and riverboat gaming will thus eventually lead to the legalization of Internet gaming."