California, PokerStars And the Specter Of Unregulated Online Poker

August 22, 2016
California, PokerStars And the Specter Of Unregulated Online Poker

If you would have asked me a few months ago when California would legalize online poker, my response would have been, “Hopefully sometime before I’m dead.”

As political developments go sometimes, though, an opening appears to have arisen. While it’s still far from a sure thing, there’s a real chance for legal online poker sites to be operating in the most populous US state by the middle of 2017.

The problem in California remains the same

The issue that’s still holding things up is a familiar one. It’s been THE issue in California up to this point, which essentially boils down to the question of which entities are entitled to the spoils.

And the potential spoils are indeed grand. A joint study by Academicon and Poker Scout suggested the California market will generate hundreds of millions of dollars in revenue per year. And there are a lot of competing interests who want a piece of the action.

The latest legislative update is that an amendment has been added to the online poker bill currently being considered. That amendment would prohibit companies from offering online poker in California until 2022 — if those companies offered real money poker in the state after the federal law UIGEA was passed in 2006. (Whether that bill is going to be brought up for a vote today — or at all — remains a question mark.)

There is only one company that would likely seek a license and that also meets this description: PokerStars.

Does the reasoning against PokerStars have merit?

Steve Ruddock wrote an op-ed earlier this week claiming that using the date of UIGEA passage as a bright line for who gets to play and who is left out is arbitrary and makes no sense.

Today, California gaming lawyer David Fried countered that take in his own op-ed. He opined that PokerStars both knowingly broke the law and gained significant advantages that have allowed them to dominate markets worldwide as a result of their decision to stay in the US market after the UIGEA.

Both takes have validity, and I’ll try to add a little more context to this discussion. If you are familiar with the history of online poker in the US, you can skip the next section, though it may be worth refreshing your memory.

A short history of online poker

Everyone who’s been around online poker as long as I have remembers which sites they first played on. My first was Poker Room, followed by Party Poker and Ultimate Bet.

I also spent significant time playing on Titan, PokerStars, 888 (Pacific Poker), Bodog, Paradise Poker, Full Tilt, and a bevy of other sites. I lived in the US and played on all of these sites, all of whom knew my identity and where I was located.

I also remember that certain sites did not accept US players in 2005. Ladbrokes, Betfair and William Hill were all part of that group. They were established land-based gaming companies and were much more risk-averse than fledgling internet startups.

And while their overall businesses have done fine over the years, they were never able to take even a sliver of the online poker market that the top 5 or 6 sites held in 2006. If you want a similar present day situation, look at how FanDuel and DraftKings are dominating the daily fantasy sports market. Companies like Yahoo, ESPN, CBS and even Amaya have either stayed away entirely or just haven’t been able to keep up.

Things changed a lot after the UIGEA, and things changed a lot again after Black Friday. There’s no time period — in all of this history — where operators were all doing things the same way, or submitting to the same level of scrutiny. There’s just a timeline, and at some points along that timeline certain operators left the US, with others gaining market share as a result.

The companies in regulated US markets

Online poker in the US has a complicated history, and the companies that currently offer legal online poker in Nevada, New Jersey and Delaware have their own complicated histories.

Party Poker rose to the top of the market worldwide by operating in the US before the UIGEA, and has, along with its founders, since forfeited hundreds of millions of dollars to the US government. While it left by its own accord after the UIGEA passed, Party still gained massive advantages worldwide by operating in the US before the UIGEA.

It is, in fact, quite obvious that the market positions companies like 888 and Party Gaming hold today would be very different had they not originally offered real-money wagering in the US market.

It should also be noted that both Party and 888 offered more than just poker to US customers before they left the market. Each company had a full array of gambling options available to US customers, while PokerStars stuck strictly to poker. All of these companies have generated many billions of dollars in revenue over the years, much of which can be attributed to early advantages they gained while they were still US-facing.

Fried’s article suggests that because PokerStars was able to gain a dominant market share between 2006 and 2011, its position in California would be unfairly advantageous. As he stated, “The brand, software and a usable customer list derived from PokerStars post UIEGA activity provide it with a huge competitive advantage.” It’s hard to argue against this point.

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Why keep PokerStars out?

However, let’s assume PokerStars finds itself on the outside looking in, making its inclusion a moot discussion. Why wouldn’t we be able to take the argument further at this point and say that Party and 888 also enjoy unfair advantages over other remaining companies based on their past participation in the US market?

The biggest difference with PokerStars is that its involvement in California presents a massive obstacle today for other companies who want to grow a share of that market. Party and 888, while strong companies with strong products, do not present that same obstacle.

Potential market participants don’t want to have to compete with PokerStars because of the company’s present-day advantages. But that is not a good reason for legislators to write a law in a way that purposely and exclusively leaves them and only them on the outside looking in.

I have no doubt that California legislators and the interests they’re concerned about have more on their mind than simply punishing a company for past misdeeds, and that’s to be expected.

Fried, perhaps unintentionally, cuts through the smokescreen at the end of his piece: “This will cost California hundreds of millions of dollars in economic investment and tens of millions of dollars in fees and tax payments. Instead of a robust market with 6-8 competitors, we will have far fewer license applicants and less money for the state.”

And now at least we’re talking about what this is really all about.

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