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June-24-2009,
The Online Gambling Industry in America is Far Different Than What it Could Have Been...By Hartley Henderson

Part I

To most online gamblers, it probably seems like internet wagering has been around for decades. But, in fact, the first legitimate internet gambling website didn't exist until 1996. Of course as soon as the first site went up, several more followed and an industry was born. As a result of the growth, John Kyl and other neo-conservatives tried to stop the expansion in the U.S., claiming that allowing internet wagering would lead to devastation. Anyone who has followed the history of internet wagering will recall well Kyl's famous threat that a child could steal a parent's credit card and with a click of a mouse lose the house. Of course the hysteria was unwarranted. As a result of Kyl's ridiculous contentions (as well as projections that the industry could generate revenues in the billions of dollars), the U.S. government decided to appoint a National Gambling Impact Study Commission to identify just how big an issue gambling, including online gambling, was. The report was fairly unbiased and illustrated a vibrant and exciting potential online gambling industry. It suggested that the benefits from online gambling were vast, while the negative social impact was fairly minimal. Not surprisingly, religious groups and many right wing politicians dismissed the report as folly. So 10 years later one has to wonder what exactly went wrong. What exactly happened in the last decade that turned a potentially huge online growth industry into the rather small industry that exists online today for U.S. facing gambling establishments? The following are what I and a few other industry insiders deemed as the biggest mistakes (and other factors) the online gambling industry made and what could have been done to change that. These six issues are certainly not the only issues that curtailed growth in the industry, but were the most significant. Hopefully learning from the past will prevent similar mistakes going forward.

1. The inability or unwillingness of offshore operators to unite early on.

In 1998 Janet Reno issued arrest warrants for several owners of offshore books, including those at WSEX, SDB Global, Island Casino, Winners Way and Real Casino. Jay Cohen decided to fight the charges on the grounds that he believed WSEX was operating in a jurisdiction where it was legal to accept wagers, while others in the same boat either pleaded guilty or ran. Furthermore, the Interactive Gaming Council was willing to take up lobbying efforts for those charged. It was the consensus of almost everyone in the industry that if the sportsbooks and casinos (poker rooms really didn't exist at the time) that existed had pooled their resources and presented a united front that there was a good chance things would have turned out differently. The IGC could have represented the offshore industry as a lobby group and petitioned bettors much the way the Poker Player's Alliance and iMEGA does now. And some high profile lawyers could have taken up the case on behalf of the industry. Instead the companies left Jay to his own accord and refused to even publicly state that they were operating legally. In his book, Steve Budin stated he only voluntarily gave up because he knew that SDB Global was illegal, although many suggested his real reasons were far different.

Without the united front and lobby groups, it was pretty much impossible for Jay to win his case and offshore gambling companies to be taken seriously by politicians. After all, in an election year was there more to be gained by backing some offshore bookmakers or a group like Focus on the Family? When some sportsbooks and poker groups did get together years later it was far too late.

2. The "taunting" of the Department of Justice and the rush to go public.

In hindsight it shouldn't be surprising that many gambling companies wanted to get a public offering given the dot com boom at the time. If ridiculous concepts like pets.com or produce.com could generate multi millions with an IPO then certainly an online company with a legitimate product could generate more. Nevertheless, with the uncertainty surrounding what could happen in the U.S. it was probably best to wait for a better climate before going public. Nonetheless, that didn't stop the likes of BetOnSports, Party Gaming, 888 Gaming, Betcorp (WWTS), Neteller and others from pursuing their public offering on the AIM or the Australian stock exchange. With the companies now in the spotlight given their public offerings, they became targets of the DOJ. Worse yet, the companies almost started challenging the U.S. on its laws in order to sell their U.S. facing product. For example, in Neteller's 2004 prospectus they acknowledged that the U.S. was a trouble point and even suggested that what they were doing may be illegal. Not surprisingly when the U.S. charged the Neteller founders, Lefebvre and Lawrence, in 2007, they used that part of the prospectus to show criminal intent.

Furthermore, a director at BetonSports and House of Lords member, Lord Glentoran spouted off at the U.S. early in 2006, essentially telling the government that they are idiots. In a speech to the House of Lords, Glentoran stated the following:

"Something like over 75 per cent of betting today takes place on the internet.....Not even the Americans have managed to control the internet in any tiny way. Our company gets 70 per cent of its revenue from North America: from sports betting on North American football league, baseball, hockey and college sport. In North America it is illegal to use the telephone wires to bet. There is something called the Wire Act, from 1969 or thereabouts. The Americans have been trying for a long time to enforce their regulations against such use and they have totally and absolutely failed."

Of course what Glentoran stated was true (save for the fact the Wire Act was passed in 1961), but his comments (along with some other remarks by David Carruthers at BetonSports) put him on the radar of the U.S. Department of Justice. And as soon as Carruthers could be prosecuted (when his plane touched down in Dallas), he was arrested on the spot.

Marc Blandford from Sportingbet also suggested the U.S. couldn't touch him because he wasn't American, and several other sportsbook and poker operators seemed to follow his beliefs. One would have thought that given the sensitivity of the issue, and the way the DOJ treated Jay Cohen, that these companies would have stayed low key. But instead their egos convinced them to challenge the United States government to their own detriment.

As for the rush to go public, many solid companies like WWTS, Party Poker and others were all forced to leave the U.S. market or sell to outside interests once the UIGEA passed because they couldn't openly violate a law and trade on the stock market. Without question, if WWTS had stayed private they would probably still be operating. And Party Poker would be as successful as Full Tilt Poker and Poker Stars are today as private entities.

3. The undemocratic actions of the U.S. government and courts

This arguably is the biggest issue that killed growth in the industry and could be an article on its own. However, what is important to note is that the U.S. government made online gambling its cause du jour and proceeded to implement every dirty trick and tactic to ensure that the pro online gambling cause never was given a fair chance.

The first undemocratic action was at the trial of Jay Cohen. Jay asked for a trial of his peers and instead, essentially, ended up with a trial by judge. By all accounts, from the beginning the judge dismissed testimony by the defense and propped up testimony by the prosecution. As well, in the summation to the jury the judge informed the jury members to ignore all the testimony by the defense as it wasn't relevant. According to Jay Cohen, after the trial a juror came up to him and said, "We wanted to acquit you, but we felt the judge gave us no choice."

The second undemocratic action was concerning the WTO. Antigua and the U.S. presented its case to the governing body, which by international rules has the final decision as to whether the U.S. was obligated to live up to commitments it made in the area of gambling services. The WTO sided with Antigua and then reconfirmed it at the appellate level. Instead of abiding by the decision, (as the U.S. demanded other countries do on many other occasions when the U.S. defeated them at the WTO courts), the U.S. simply stated the WTO was wrong and refused to budge. Eventually they decided to simply renege on their agreement and rewrite it, but in the process continued to arrest offshore operators for doing something which international courts stated wasn't illegal.

The third undemocratic action was the way the UIGEA was passed. Versions of the bill had been introduced in the Senate on numerous occasions and failed each time. In fact, only two months prior to October 2006 the bill was voted down. Realizing it couldn't pass on its own merit, Bill Frist attached the bill to an anti-terrorism bill that was guaranteed to pass. By doing so he stopped any debate on the bill and essentially rammed through legislation that had no other way of passing by democratic means.

Of course there were numerous other examples of undemocratic actions, such as the arrest of the Neteller founder Stephen Lefebvre outside of the United States (as well as Gary Kaplan); the confiscating of money from Neteller customers and the corresponding "hostage taking" of the customers who were forced to apply for their money back with the warning to customers that next time they won't be so nice; the coercion of the "Sporting News" and PayPal to provide "extortion" money to the government for advertising something that wasn't illegal, etc. However, the bottom line is that the actions of the U.S. government and courts convinced gambling operators that despite claiming to be a democracy and a country that lives up to international law, no gambling operators would be given due process if they tried to enter the U.S. market. Consequently, new companies which considered catering to the U.S. market backed out, and some established companies like Pinnacle Sports instead simply left to try their hand with the Canadian, European and Asian markets.

Part II to follow tomorrow.

06-24-2009
Hartley Henderson
MajorWager.com
henderson@majorwager.com

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