Sides drawn in online
gaming battle

May 30, 2006 3:31 AM

For the past 10 years, the debate over Internet gambling has raged, sometimes heatedly, over whether it should be banned or legalized in the U.S.

And, although it appears the issue is coming to a head, it’s virtually impossible to call which side has the upper hand.

On the one hand, a determined group of conservative Congressmen have pushed through the Judiciary Committee legislation that would, in effect, outlaw most forms of Internet gambling by barring U.S. banks from processing transactions involving online gaming.

Much of the impetus for a ban on online gambling has been fueled by the Abramoff scandal, which uncovered a web of fraud and conspiracy to corrupt public officials on behalf of gaming clients that included tribal casinos and online lotteries.

Even though it’s possible the bill would be approved by the full House by the end of the year, few observers give it a chance to pass in the U.S. Senate, which has yet to consider a companion measure.

Then there’s the Senate, where a group of gaming supporters are pushing for legislation that will create a federal commission to examine the feasibility of regulating and taxing Internet gambling in the U.S.

of gaming supporters are pushing for legislation that will create a federal commission to examine the feasibility of regulating and taxing Internet gambling in the U.S.

Two of gaming’s top players — Harrah’s and MGM Mirage — have contributed heavily to congressional candidates, including Nevada Senators John Ensign and Harry Reid, who say the proposal has a chance of clearing the Senate this year.

"The argument the industry is making is, if it is being done offshore, why not bring it in to the U.S. so it can be regulated," Sen. Ensign said. "It doesn’t look like you can ban it."

Sen. Reid, a former member of the Nevada Gaming Commission, has said in the past that he opposes outright legalization of online gaming, but he’s willing to go along with the gaming operators’ plan for a commission to look at the issue.

"If somebody wants to study it, they can study it," Reid said.

Harrah’s and MGM Mirage won’t comment publicly on the issue, but their lobbyist, the American Gaming Association (AGA), came out in support of a federal study earlier this year.

AGA President Frank Fahrenkopf said the "big boys" such as MGM and Harrah’s would like to get into the online gaming business, if Congress eventually decides to legalize it.

He added that a Congressional study of online gambling could determine if regulation and taxation would reduce the risk of fraud and abuse on the Internet while increasing government revenue.

Interestingly, in the AGA’s 2006 State of the States report released last month, concerns over the trustworthiness of Internet gaming operators were cited, along with players’ concerns over the possibility of being cheated while gambling online.

Obviously, organizations involved in online gaming don’t want a ban and many of these groups are determined and well-financed.

A new cadre of millionaire poker players, for instance, has recently formed a coalition — the Poker Players Alliance — to fight the House legislation.

The PPA is also pushing for laws that would legalize and regulate the business. "They’ve passed legislation in the U.K. to regulate (online) gambling, and we should take a cue from the British," said PPA President Michael Bolcerek.

Also adding to the gap between banning online gambling and regulating it is Wall Street’s love affair with Internet casinos.

Blue-chip investment houses such as Goldman Sachs, Merrill Lynch and Fidelity now hold millions of dollars in shares of online casinos and off-shore sports books, which are publicly traded on the London Stock Exchange and headquartered in places like Antigua, Gibraltar and Costa Rica.

Among the most popular Internet gaming companies with these investment houses are SportingBet, BetOnSports and PartyGaming.

For their part, the investment houses say they know there are legal risks involved in investing in offshore casinos, but the risks are outweighed by benefits of owning shares in growing, highly profitable businesses.

"Our analysis shows the gain from these stocks outweighs the very small risk of owning them," said a spokesman for one major investment house, who would not agree to be identified.

The bottom line, according to casino industry executives, is that the opportunity for profit may be too good for the investment houses to pass up. The Internet gaming business is expected to increase from $12 billion this year to $20 billion by 2010.

"There is no other leisure business in the world with the same potential for growth and shareholder returns as online gaming," said David Carruthers, chief executive of BetOnSports. "We’re running a business legitimately and responsibly ”¦ similar to KFC, Ford, Coca-Cola, IBM or any other global brand."

Now, if he can only convince the U.S. House of Representatives.

The "wild card" in the debate was played a few weeks ago by Stanford Law Professor Lawrence Lessig, who predicted the U.S. would eventually regulate online gambling, in part, because of a new technology that would allow governments to establish "virtual" or cyber borders.

Those borders would restrict online gamers from traveling to locations that were prohibited by the host country.

He said the technology is about five years away.