Wednesday, December 08, 2010

Scratching my head

I think that Harry Reid's bill is unlikely to pass in any form anytime soon. But the possibility of something that would so totally transform the online poker world (as laid out nicely by Grange95 here) going from faint rumor to enactment and a genuine online poker blackout in the space of a week or two is endlessly intriguing, and I find myself ruminating about it frequently. In the process, I keep coming up with things that are just completely baffling. F'r instance:

What's up with the PPA?

On Wednesday the Poker Players Alliance released a press statement about the Reid bill. The most notable thing about it was that it said, well, basically nothing. It was like a lot of college papers I have had the displeasure of reading--lots of words, little or no content. There was certainly no hint of either support or opposition to Reid's proposal. (And, oddly, the press release is not listed in the "press release" section of the PPA web site. Why?)

Then suddenly today the PPA's Twitter account sent this message: "Help! Call the Capitol Switchboard & ask for your Sen. Tell your Sen 2 support the online bill. (202)224-3121 Call both your Sens!" The same message is now repeated as a banner across the PPA web site home page.

How did the PPA get from apparent neutrality to desperately seeking support for the bill in 24 hours? What went on behind the scenes? There has been no updated press release, so we have no way of knowing what exactly the PPA suddenly finds so attractive about this bill, or why it wasn't attractive a day earlier.

This issue again brings up the weird apparent conflict of interest between the PPA's most prominent board members and its membership, as thoroughly laid out here. Suppose there were a bill proposed that would forever prohibit PokerStars and Full Tilt and Bodog and UB, etc., from operating in the U.S., but instantly opened up equally attractive options from other providers with full legality and no other down side. One would think that most PPA members would say, in effect, "Well, Stars and FTP, sucks to be you, and we'll miss you, but we're all for it." But would that be reflected in the official response by the PPA, when it has prominent owners/employees of the major sites directing things?

Why is FTP apparently in favor of this dog?

Today I saw Tweets from Andy Bloch and Adam Schoenfeld--both Full Tilt pros--soliciting support for Reid's bill. I don't know that they consulted their corporate overlords before speaking (or tweeting), but it's hard to imagine that they got some sort of message from Howard Lederer saying "We can't support this bill--it will kill us," then went ahead and sent out the messages that they did. On the other hand, I haven't seen a groundswell of public support from representatives of any of the major online sites yet.

But I can't figure out why any current site would see anything good here. Sure, in the end they might get full legalization, and that might bring otherwise too-leery customers to their doors. But first they have to sit in the penalty box for a few years. Then they could apply for a license. But they'd have to get it through a state licensing body, and it's not hard to imagine the Nevada and New Jersey B&M casino industry leaning on the state legislature and/or gaming control board to pass a law and/or rule saying that no entity formerly offering poker before federal licensing would be eligible, and BANG, they're out forever. If F-Train's preliminary reading of the second leaked version of the bill is correct, mergers and acquisitions would also be effectively barred as ways around this dilemma.

Even if they eventually got licensed, they would then be facing new competition who had had a few years' head start. They would have to set up servers in the U.S. and segregate U.S. players from the pool of the rest of the world. And, of course, who knows how many states would opt out, and prevent large swaths of the country from participating at all? On top of that, they would have to set up means of tax collection, distribution, and reporting. Games would be less profitable to players (and thus presumably less attractive) because of the federal 20% rake on top of what the site owners already take--and I'm assuming, though I do not know, that the bill allows states to skim some off the top, too.

Even without running a single calculation, I simply cannot believe that all of this works out to a +EV answer for the current big sites, as compared to just letting sleeping dogs lie. As I have expressed endlessly before, I'm convinced that federal licensing and regulation like this will be horrible for the long-term health of the online poker industry. But the specifics of the Reid proposal look bad not just for the field as a whole, but very specifically for the current site operators.

It seems likely to me that insiders at Tilt, Stars, etc., had pre-election advance knowledge that Reid had something in the pipeline, and that was what prompted their last-minute political support. Did they know how apparently toxic it was to their interests? If not, then Reid is a world-class turncoat. If they did know what was up, then I have to ask again what I did a month ago: What am I missing?

I responded to Bloch's Tweet with this: "Full Tilt is OK with pulling out of US market for 2-3 years, then using US-based servers and segregating US players from others?" To Schoenfeld, I was a little more direct: "So you want a 20% rake to the feds, plus whatever the state decides to take, on top of the current rake? Funny--I don't." Unsurprisingly, neither man responded.

Would any sites and/or players go rogue?

The legal consequences of a site continuing to operate sans license after enactment of the bill would be grave: Civil fines up to a million dollars a day, plus surrendering 50% of their take, plus getting put on the UIGEA blacklist, meaning that U.S. financial institutions could not do business with them, presumably making it much more difficult to move money to and from the sites. Oh, and a five-year prison term, too, in case that wasn't enough. Basically, if you liked the UIGEA, you'll love the Reid bill.

How would such penalties actually play out, when arrayed against a business entity whose only U.S. presence is electrons zipping across the ether? I don't know. I don't understand either the law or the enforcement tools that the DOJ might have at its disposal enough to make an intelligent guess.

On the one hand, it all sounds pretty drastic. On the other hand, as others have pointed out, there are hundreds of online casinos operating in the U.S. right now, including big ones offering the most clearly forbidden form of gambling of them all, the sports bet. (We're looking at you, Bodog.) There are occasional dustups, but the feds haven't landed any killer blows; no poker site that chose to continue U.S. operations after passage of the UIGEA has been shut down because of law enforcement. Maybe they haven't been trying very hard, and with sufficient motivation and new weapons provided by Harry Reid (and his puppetmasters, Harrah's and MGM) could make life very, very unpleasant for overseas site owners. I sure wouldn't want to be one of the part owners of FTP sitting in Vegas under such circumstances. "Hi, my name is Damocles, and this is my sword." (Google it.)

So maybe one or two rebellious sites would defy the feds and continue offering their games. Bodog sure seems like the most probable candidate for such a role--but who knows?

Is there a workaround? Take Washington state as a current example. FTP and Stars are using two means to exclude players from real-money games. (By the way, I assume that the sites would be able to continue offering free play during the blackout period, which would at least sort of keep their names before the public.) You can't play if either your IP address registers as being located in Washington, or if the physical address you provided when you signed up is there. It is, however, an open secret that when some online sites temporarily barred Nevada residents, some very well known pro players continued having access (hint: at least one name rhymes with "Drunson"). I have little doubt that some enterprising and determined Washington residents are still playing right now, by means of technological subterfuge.

If current operators withdrew to play by the rules, I wonder if businesses would crop up in some relaxed jurisdiction somewhere in the world that would offer to help keep U.S. players in the game. They could provide a mailing address or P.O. box, a foreign bank account, and IP address rerouting to make it appear as if the player were physically located in, say, Fiji. A player could deposit and withdraw through this third party, which would make its profit by keeping a small percentage of such funds transfers. As far as a U.S. player's bank was concerned, they'd be processing a check to or from some obscure business, rather than interacting directly with a gambling site.

Maybe there are anti-money-laundering international treaties that would quickly shut down such entities. Or maybe they would prosper like mushrooms in manure. Or maybe the online sites, fearful of doing anything to upset the legal powers that be in the U.S. would work hard to sniff out such businesses and refuse to do transactions with them. After all, one would think that there would be large numbers of players all claiming the same address, even if with different box numbers. Or maybe not--maybe they would just make up physical addresses so that no checks ever needed to be mailed to or from them, and make all transactions purely electronic, though I would think there would still be enough similarity for a large number of players that the sites could easily figure it out. I don't know. I'm just thinking out loud here.

I don't know the answers to these or several other questions that I'm too tired to add in here, but my Spidey sense is all tingly. This whole thing stinks to high heaven, if you ask me, and not just for the generic reasons have caused me to long oppose federal involvement in the whole arena. I just cannot see any long-term good for players coming out of this proposal, and I remain completely baffled at how anybody concludes that it would be good for poker.

But as Dennis Miller famously ends his rants, "Of course, that's just my opinion, I could be wrong."

Incidentally, there was this coverage in the Sun today (though, predictably, they got some important things about current law completely wrong). Also some interesting observations from some of the Nevada people/entities that would presumably be involved in licensing here.


Conan776 said...

My cliffs

F-Train said...

One point -- the 20% licensing fee is split but the feds and the states. Can't remember exactly how it's split but I think it's 14% to the feds and 6% to the licensing state.

Anonymous said...

"Of the 20%, 6% goes to the federal government, 7% is allocated to the states based on the location of the players at the time of play, 7% goes to the state where the site is licensed." So no worries about >20% tax.

Do you remember how soft the games were in 2003-2005? If this bill passes, the games would be softer than that.

Local Rock said...

Has Harry The Weasel got even one other member of congress on board with him to suddenly launch into this double reverse Harrah/MGM backflip with a twisting pirouette legislative dismount? If so, I haven't heard from them yet.

Local Rock said...

I conclude the PPA folks must keep a pair of kneepads on hand in case they have the honor of being summoned by Sen. Reid's office?

Brian said...

This whole thing is obv a giant CF. Problem is the status quo is untenable as a long-term solution. Individuals on the inside have stated that the shelf life of the current environment is no more than 2-4 years. Now they may be wrong but I do think the sites are having a more and more difficult time dealing with the roadblocks presented them. If I knew with some degree of certainty that future legislation was on course I think I would pass on this current version. I also am wary of much gov't involvement.

SO while this law (and I do believe it to be a virtual certainty) has some major warts it is the best we can expect. I think if this doesn't pass the environment changes with the new congress and beyond that who the heck knows.

Long-term this thing should be +EV for the US players. There will assuredly be some bumps in the road but having the stigma of on-line poker removed is a very promising development.

Anonymous said...

I'm with you. This legislation passing would be horrible for the online poker sites. Maybe they know something that we don't, but I doubt it. I don't know how they could ever recover from this.

THETA Poker said...

Just in case you haven't seen it yet, Andrew Brokos recently posted his thoughts from the other viewpoint: