An Introduction to Internet Gambling

Thank you for that kind introduction and for the invitation to be back with you again this year.  For those of you who don’t know me, my name is Judy Patterson, and I’m the senior vice president and executive director of the American Gaming Association.  I’m here today to talk about quite a different topic than I did last year, but I think it’s one you’re no doubt all interested in.  As you no doubt know, Internet gaming has become a hot topic in the media and on Capitol Hill of late, and I hope to shed some light for you today on what we at the AGA have learned about this pastime that continues to gain popularity.

Before I begin, I’d like to briefly tell you about the AGA and what we do, and give you an overview of some new economic impact data on the industry.  The AGA was formed eleven years ago as the national trade association representing leading U.S. casino operators and equipment manufacturers on federal legislative and regulatory issues. We serve as the national voice for the industry, and our mission is to help people better understand gaming-entertainment by bringing the facts to the public, to elected officials and to the media.  We also work to address national issues like problem gambling and develop industrywide programs to deal with these critical issues.

Each year we conduct our State of the States survey, which provides in-depth statistics on the national and state economic impact of the commercial and racetrack casinos in the U.S. The report also includes public opinion polling data on various aspects of casino gaming, as well as polls tracking emerging trends in our industry.  Essentially, State of the States gives us a snapshot of the current and potential future state of our industry. With the release of our 8th annual State of the States last month, I can tell you that this year’s picture is one we all should be putting up on the mantle.

2005 heralded a year of strong growth for our industry, despite significant hardships brought about by Hurricanes Katrina and Rita. In 2005, the 455 commercial casinos in 11 states achieved a new milestone, generating gross gaming revenues surpassing $30 billion for the first time.  In addition, individual gaming markets also witnessed landmark success, with Las Vegas revenues surpassing $6 billion and Atlantic City revenues climbing above $5 billion for the first time.  Nationwide, commercial casinos employed more than 354,000 people with wages totaling more than $12.6 billion.  And state and local tax contributions made by commercial casinos grew as well, totaling $4.92 billion.

The nation’s racetrack casinos, a burgeoning sector of the industry for the past few years, also echoed this continued growth, with every racetrack casino state experiencing a healthy increase in gross gaming revenues last year.  This growth was mostly because 2005 was the first full year of operations for racetrack casinos in New York, and marked the advent of racetrack casinos in Maine and Oklahoma.  Employing more than 17,000 people, the 29 racinos in nine states generated $3.12 billion in gross gaming revenues and distributed $1.28 billion in direct gaming taxes to state and local governments last year. So, as you can see, the 2005 gaming industry snapshot is one we all can be proud of.

Before I go any further I’d like to conduct a quick exercise with you.  I’m going to read off a list of characteristics, and I’d like you all to think about the type of person that might fit this description.
• Male
• Under the age of 40
• College-educated
• Annual household income of more than $60,000
• Uses the Internet to conduct a variety of daily tasks

Sounds like a smart young guy who’s steadily working his way up through the ranks, right? Well that may be, but it may surprise you to know that this also is the profile of the average U.S. Internet gambler. As I mentioned earlier, we strive to use State of the States to track trends in the industry, and with the significant attention Internet gaming has received in the media and back in Washington, it seems that everyone is interested in the activity and those who engage in it.

To get a better idea of the prevalence of Internet gaming in the U.S. and exactly who is participating in the activity, the AGA commissioned Peter D. Hart Research Associates to conduct a special poll of Internet gamblers for this year’s State of the States report.  That poll, which surveyed 552 Internet gamblers, is where the profile I just described comes from.

The survey found that while the number of Americans who gamble online still is relatively small, at 4 percent of the U.S. adult population, it is growing.

A full 38 percent of the online gamblers surveyed said they just started the activity within the last year, and 70 percent said they began only within the last two years. And as you may have gathered from the profile I described, online gamblers as a group are younger, more highly educated and have larger annual household incomes than both the general public and the patrons of bricks-and-mortar casinos.

Our survey also found that online gamblers are extremely Internet savvy in their general day-to-day lives,
with a huge majority of them going online to do everything from get driving directions, purchase airline tickets, manage their bank and credit card accounts, and more.  I’m sure most of us would agree that the Internet has made many of these activities more convenient, and in fact, our survey respondents felt the same way about online gambling, with nearly half (48 percent) citing convenience as the biggest reason they engage in the activity.

You may be wondering what games these people like to play when they gamble online.  According to the survey, 80 percent of respondents played poker for money online last year, and 78 percent said they played casino games. Of those games, blackjack was the most popular. Despite its growing popularity, Internet gambling remains a source of confusion and, in a significant number of cases, one of apprehension as well. As you can see, according to the survey, more than half the online gamblers surveyed report they are at least somewhat concerned that online casinos find ways to cheat players, and just under half believe other players who gamble online find ways to cheat.

This apprehension is perhaps fueled by the confusion surrounding current laws applying to Internet gaming.  Internet gambling currently is illegal in the United States under the Wire Act of 1961, according to the U.S. Justice Department.  Yet the survey found that fewer than one in five (19 percent) of online gamblers realize – or are willing to admit – that the activity currently is illegal in the U.S.  While a bit higher, the percent of all Americans who think Internet gambling is illegal is still only 38 percent.  It seems that the complex legislative and regulatory environment surrounding this issue has all Americans confused.

Some members of the U.S. House of Representatives have sought to clear up this confusion and directly address online gambling during the current legislative session.  As you may know, the House Judiciary Committee last week passed two bills aiming to clarify and make more specific the current laws regarding Internet gambling.

The first bill, passed 25-11 and sponsored by Representative Bob Goodlatte of Virginia, would amend the Wire Act to explicitly prohibit online gambling and would ban the electronic transmission of funds to pay for gambling bets, give law enforcement agencies the authority to block such money transfers and increase penalties for violation of the law.  The second bill, sponsored by Representative Jim Leach of Iowa and passed by a voice vote, would prohibit credit cards and checks from being used to make Internet gambling payments.

Interestingly, both of these bills include a carve-out for INTRA-state online wagering.  Passage by the Judiciary Committee means that both bills are now cleared to go to the House floor.  It’s our understanding at the AGA that the House leadership has communicated to Goodlatte and Leach that they must now work together to combine their two bills so that only one bill will be brought to the House floor for vote.  Once that happens, per the current Congressional calendar, Internet legislation is scheduled to be discussed on the House floor during the week of June 12.  It is expected that a consensus bill will pass the House before the July 4th recess and then be sent to the Senate Judiciary Committee, where another set of hearings will begin.  It remains to be seen whether there will be time left in this session of Congress to pass the bill in the Senate before the final recess.

In addition to these Congressional actions, the AGA also has sought to shed some light in this legislative and regulatory gray area with the recent release of a new white paper on Internet gambling that serves as the latest installment of our 10th Anniversary Research Series. The paper was written by David Stewart, an attorney at Ropes and Gray, LLP, in Washington, D.C., and it provides an overview of the existing online gambling market, explores current U.S. policies, analyzes proposed legislation and its possible impact, and ultimately suggests that a Congressional study commission is needed to properly address the issue.

In the paper, Stewart points out that the online gambling industry currently is thriving, due in large part to participation from U.S. bettors. U.S. residents alone went online to bet more than $4 billion at off-shore, non-U.S. entities in 2005, Stewart says, and the rate of Internet gaming among U.S. residents is growing at a rate of more than 20 percent a year.  And, says Stewart, by driving all Internet gaming business to foreign entities, the current system also ensures that no jobs are created for American workers, no returns are earned by American companies, and no tax revenues are paid to American governments. Additionally, the paper explains that a number of foreign nations, including Great Britain, are in the process of legalizing, licensing, regulating and taxing Internet gaming operators.

Stewart notes the current policy of prohibition permits a high volume of Internet gaming while imposing no regulatory policies to protect gamblers.  And while he writes that recent legislative proposals to curb online gambling would take an important step in protecting U.S. customers from the potential hazards of the current illegal, offshore, unregulated online gaming market, he asserts that these measures alone will not solve the problem.  Instead, Stewart advocates the creation of a one-year Congressional study commission to evaluate the impacts of Internet gaming in the U.S.

This suggestion mirrors the AGA’s newly modified position on Internet gambling.  While we remain neutral on the current bills advocated by Representatives Goodlatte and Leach, and past bills introduced by Senator Jon Kyl of Arizona, the AGA board of directors now strongly supports the creation of a one-year Congressional study commission that would evaluate the impacts of online gambling.

The fact is that millions of Americans currently gamble online, and they will continue to do so.  This reality is perhaps what led Rep. Jon Porter of Nevada to last week introduce a new bill to establish a commission to study the proper response of the U.S. to the growth of Internet gambling.  Introduced May 24, HR 5474 has 43 cosponsors and was referred to the House Committee on the Judiciary.  The AGA supports this bill.  While the bill is not expected to pass this session, its introduction lays the groundwork for it to be reintroduced in future Congresses.  

Whether created through the Porter bill or through other means, the AGA board thinks a comprehensive study commission should consider policy issues ranging from how best to protect children and problem gamblers to whether Internet gambling can be effectively legalized and regulated in the United States rather than leaving bettors to fend for themselves on illegal, unregulated offshore sites.  The study also should include consideration of recent WTO rulings indicating the United States’ position on Internet gaming may be in violation of international trade obligations.

The purpose of the commission should be to evaluate whether legalization, regulation and taxation – on a state-option basis – may be a more viable option than a complete ban on Internet gambling, and then report back to Congress its recommendations on the best way to deal with the issue.

Most online gaming companies have said they would welcome legalization, regulation and taxation in the U.S., and that they would come here if that did come to pass.  However, some poorly regulated, offshore sites would remain.  So it’s important to note that, regardless of whether a study commission bill passes or whether Internet gambling were to be legalized on a state-option basis here in the U.S., the AGA believes legislation similar to the Leach bill would still be necessary to protect online gamblers from these poorly regulated offshore sites.

The discussion surrounding Internet gaming will no doubt be long and complicated, but it is important to clarify and establish regulations that serve the country’s – and its consumers’ – best interests.  My boss, Frank Fahrenkopf, has said that the first step to controlling online gaming is to understand it,
and we at the AGA think a Congressional study commission is the mechanism for that understanding.  It is only through careful consideration of all the issues involved in this debate that we can determine the best way to protect the millions of Americans gambling online.

As you can see, there is much more to learn about Internet gaming, and I hope all of you have found this presentation to be a step in the right direction.  Thank you for your time.  I’ve brought copies of both our State of the States report and the Internet Gambling white paper, so please feel free to take copies of each of these documents as you leave.  I’ll also be happy to take any of your questions at the end of the presentation.