Thursday, April 25, 2013

U.S. Online Gambling Revenue is WILDLY Overestimated

Well well, less than two weeks after I published my article about the online gambling industry in the U.S. being a "gold rush," we have a study released that shows that the estimates on which the state governments are relying are, like, totally out of whack. Before we get to it, though, a few points I'd like to go over.

One of the more egregiously stupid aspects of the gambling gold rush that I forgot to mention in my magnum opus on the subject is who is providing the numbers for analysis. It's not industry specialists. It's not casino companies, even though they would be just as likely to lie. It's not anyone you would expect.

It's the banks. The very financial institutions that stand to earn buckets of money implementing all of the financial infrastructure necessary and all of the underwriting are the ones producing the studies. Oh yes. They're completely trustworthy.

In my previous article, I said that "gold rush" was an apt term to describe this hullabaloo because like the California Gold Rush, it will be defined by a small number of people earning lots of money while the vast majority of people will be left poorer than they started. It now appears that the ones who will end up on top will be the casino technology companies and the financial companies. In retrospect, I should have guessed that the banks would have been included in the group of winners.

But that's beside the point. This article is about studies, and about studies I shall write! We saw some pretty optimistic numbers in that infographic I posted a few weeks ago, although even that wasn't as optimistic as this recent study. Also noteworthy, the graphic specified numbers for social online gambling, but I still don't know what that means.

But what about these recent studies? So what are the number, eh? What's the 411? Well I'll tell you.

The entire house of cards that is online gambling in the U.S. is built on a study released in January of this year. It was composed by Wells Fargo and predicted that the online gambling market in New Jersey could grow to $1.5 billion within the first five years. The treasurer for New Jersey, Andrew Sidamon-Eristoff, ran with this, stating that the first year revenues for New Jersey's market would be $1.2 billion.

This study is in direct conflict with a study done in 2010 done by the Interactive Media Entertainment and Gaming Association. The iMega, as they refer to themselves, is basically a lobbying group for online casinos. The study was produced to motivate the U.S. to re-open its borders to online gambling, which means that it was already optimistic! Keep that in mind when reading the numbers.

The iMega study estimated between $210 and $260 million in overall revenue, giving $32 to $39 million in tax revenue. Considering that New Jersey's budget deficit is $11 billion, this number doesn't even count as a drop in the bucket. It's more like putting a bucket in a humid room.

The authors of that study claim that the study was being conservative, since it was intended to support the New Jersey initiative, which began back in 2010. They feared an optimistic study would be a hard pill to swallow. Obviously, their usage of the word "conservative" is what the rest of us would call "realistic." Also, can I just say how stupid I find that statement. Fearing that politicians would be unreceptive to an "optimistic" study is like saying a starving dog would be unreceptive to a pork chop.

I understand that iMega is in a difficult position. They want online gambling to expand across the U.S., so they must now support a study that goes against their own study while simultaneously saying that their study still has merit. In service of this goal, they are talking up Wells Fargo by saying that their estimates must also be conservative, because Wells Fargo is conservative.

First, Wells Fargo? Conservative? There wasn't a bank in America that could be called conservative. The old days of stodgy old bankers doing boring stuff with money are looooong dead. Wells Fargo is just like every other bank — a massive complex of aggressive, risky investments designed to generate as much short-term revenue as possible. They're conservative like I'm the Queen. Of maybe just the band Queen. Or maybe the Queen of Hearts.

Second, if iMega's estimates were conservative at $210 million, and Wells Fargo's estimates are conservative at over six times that number, iMega is incompetent. The only way to explain their numbers is that they mixed up the online gambling numbers with those for the snack cake market. The industry can't have it both ways. One study is correct, and the other is wrong. If only we had a way of choosing between the two. Like, say, another study. If only... if only....

Oh right! We have another study. And guess on which side of the argument it falls. That's right Timmy, this study finds a number almost identical to the iMega study of $260 million.

This newest study was released by Gambling Data, an industry research firm. While I think that almost everyone in the industry is lying, an independent research firm is least likely to lie, so their numbers are probably the most trustworthy. That being said, $260 million in taxable revenue would still be very high in my opinion.

I look to some of the best publicly available data — the Spanish study I wrote about some time ago — runs counter to this. In that Spanish study, all of Spain's online gambling industry, which includes revenue from throughout the Eurozone, was only $873 million. Even if these revenues came only from Spain, Spain's population is nearly fifty million. New Jersey's population is nine million  — over five times the population. And remember that lovely chart in my earlier article: Spain gambles quite a bit more per person than the U.S. does.

Based on that Spanish data, what numbers can New Jersey expect? Well, if we divide Spain's revenues by five, we get a number of $174 million. I want to go on the record here and say that I predict that New Jersey's annual online gambling revenue will be around $174 million.

Well, that's enough babbling and ranting. The ultimate point is that the estimate that proponents are parading around is nonsense. Atlantic City generated slightly over $3 billion in profits in 2012. The idea that online gambling that can currently only serve New Jersey residents would generate half of that is just balls-to-the-wall insane.

But then again, this is gambling and politics. Anyone who expected a reasoned, level-headed process is just as nuts.

Tuesday, April 23, 2013

What Is Return to Player (RTP)?

Gambling lingo is some of the most confusing lingo in business. Making matters worse is that with the split between online casinos and physical casinos, the lingo has likewise split. While we could spend hours discussing differences between edges, holds, and takes, it would provide little help to those who actually need help: the customer — the player.

From the player perspective, there are few concepts more important than Return to Player, also known as RTP. You'll hear it discussed ad nauseum in online forums, and if Casinomeister is any indication, many of the people involved don't understand it at all. But in the grand tradition of online dialog, that doesn't stop them from making their thoughts heard.

In its most basic formulation, RTP is the percentage of money put into a machine that is then later returned, unsurprisingly, to players. Whatever is not returned is the profit of the casino. So for example, if a total of $100 is put into a slot machine, if the slot machine has an RTP of 95%, it will return $95 to players.

The 5% not returned is generally referred to as house edge. This is the flipside of the RTP coin. There is some extra complexity involved with determining the true house edge, what with jackpots and other rewards, but this doesn't much concern the player. For the players, all they want to know is how much of what goes in, eventually comes back out.

In discussions online, RTP is usually associated with discussions about variance. This is a surprisingly difficult term to nail down. Chris Colby, president of Galewind, tried this in a thread on Casinomeister. Even with many intelligent contributions, a definitive, quantitative definition remained elusive.

A chart representing a zero variance game
Colloquially, variance is used to describe how often big wins happen in comparison to small wins, or to put it another way, how many times must a player bet before something happens. A high variance slot machine would therefore have very few small wins, but big wins every now and then, thus requiring a player to make many bets before anything happened. This is why variance is so important when determining the "nature" of a slot game.

A game of zero variance and 95% RTP would simply return 95% of whatever you put in, every time. Very boring. Also, impossible to win anything. The goal of a slot player it to hope for some degree of variance, such that other players put money in that they do not get back. This builds up a “pile” of money inside the slot machine that is eventually dumped out in some big win, thus ensuring that 95% of all money is returned. Because remember, when it says that 95% of money put in is returned to player, it doesn't say which player gets the money.

This is the reason why a game's RTP may not be seen until a sufficient number of games have been played. If a game is a high variance game, players could conceivably pump thousands of bets into the game until it produces a big win. Until that big win happens, the game's RTP seems very low. This is also the reason why the only hope to “win” at a slot machine is to go in, bet high over a short period of games, and then walk away. The longer you play, the more likely you are to follow the RTP.

There is a distinction that has bizarrely sprouted up in some forums online whereby people differentiate between theoretical RTP and observed RTP. This is stupid. There is only one RTP and it is a mathematical construct determined by the design of the game. I suspect that this distinction was created by casino reps who were trying to cloud the issue of what RTP is and why it is important.

That's not the only obfuscation that defenders of online casinos will use. Conversations in online message boards, especially those that have representatives of casinos in them, will try to lead you away from RTP entirely, be it theoretical or observed. They will try to get you to focus on variance. They do this because RTP is the most important number for them as well as you. It's the number that affects their profit sheet at the end of the month. That means that any wiggle room in player comprehension of RTP is wiggle room in which they can try to squeeze more profits.

To disarm any statements that these represenatatives may make — yes, variance is important in a game. Different variance models is the reason we have so freaking many different casino games. All of them do the same thing — slowly take away your money — they merely do so in different patterns.

That said, all casino games have good variance. All of them. That's why they are in casinos. If they had awful variance models, no one would play them and they would understandably never be carried by any casinos. As such, you can rest relatively assured that any game you play is going to be a good game. Variance is thus an unimportant variable to consider. All you want to know is the RTP.

Hitherto, I have been discussing slots, but the importance of RTP applies to all games

Some games, like blackjack, have set RTPs based on perfect play. Player strategy has an affect on the RTP since player choices directly affect the way the game transpires. RTP is, if anything, more important for these games since it is here where players who are suitably inclined can reduce the house edge to an absolute sliver. Many online casinos have blackjack RTPs of over 99%.

A baccarat table
Other games are in fact a wide variety of RTPs contained within a single rule structure. Baccarat, for example, is essentially three slot machines in one game. Player, banker, and tie all have set RTPs, and the user can place bets on any of them, but the user cannot affect the outcome of each round of play. The same goes for craps and roulette. The various bets on the table all have set RTPs because the outcome of a round is unaffected by player decisions.

Still other games have artificially variable RTPs. A true variable RTP should change its RTP based on the mechanics of the game's parts. For example, blackjack has a variable RTP because if a player hits, that card is no longer available for the dealer. Many game designers, dishonestly in my opinion, attach a mechanism to the RTP that isn't required by the game.

This mechanism can be found in slots that alter their RTP based on how long a player plays. There is nothing about the design of the slot, such as number of reels, stops, and pay table, that necessitates this. It is a feature that is bolted on to an otherwise complete game. This is sometimes touted as a "feature," it it's actually just a way for a casino to squeeze a bit more cash from you.

Other ways that this variable RTP could be achieved are even more nefarious than the above mentioned method. And these methods can apply to card games like blackjack. Indeed, my associate Lincoln has gone over these strategies in detail (Part 1 & Part 2), calling them, I think appropriately, cheating. They are also incredibly difficult to spot.

For example, let's say that you are playing blackjack. The game decides that you are winning too much money and selectively removes certain cards from the virtual deck, thus reducing your RTP because the mechanics of the game have been altered. If a customer's willful and knowledgable action alters a game's RTP, that is fine. But when RTP is altered secretly or by some arbitary method, it is always bad. In my opinion, even if the the casino lets you know it is happening, as with game time-dependent slots that I mentioned, it is bad.

RTP is a mathematical result that springs forth from the rigid mechanics of the game. The RTP of a slot is determined by the number of stops, the number of reels, and the pay table. The RTP of a card game is based on the pay table and a virtual deck of cards. Anything else is an invitation for funny business on the part of the casino.

This again reinforced the fact that as far as the math of the casino games are concerned, RTP is the most important number there is for you, the player. It doesn't matter what the variance is; it doesn't matter what the design is; you must always seek out games with the highest RTPs. A general rule of thumb that I follow is that anything below 95% is crap. Any companies that refuse to divulge their RTPs are worse than crap. They are scams waiting to happen, if they haven't already.

That's why I play blackjack — sweet, sweet, 99% RTP.

Tuesday, April 16, 2013

Why The Recent Online Gambling Gold Rush Is Mostly Noise

There’s gold in them thar servers!

I n case you slept through history class, the gold rush was a period of time in California in the mid 1800’s when people believed that gold was literally flowing out of the Earth. Hundreds of thousands of people from all over the world poured into the state on a quest to strike it big. Most earned little, many died, still others became dejected and simply left, and a scant few earned fortunes. The foundations of modern California were laid then, made with bricks of blood, sweat, and broken dreams. From this chaos, the term “gold rush” has now come to indicate any mad rush for easy money, usually in a pejorative sense, with little hope for actual reward.

Well, a new gold rush is upon us, one which will likely end just the same as the first. I am of course speaking about online gambling. Texas is the most recent state to make a move toward legalizing Internet casinos, following in the footsteps of New Jersey’s recent, well-publicized efforts to legalize online gambling for a period of ten years. Nevada and Delaware legalized it last year, both with the intention of being first out the gate, to use a gambling phrase. More states are readying initiatives to allow it, with more still beginning to discuss the issue.

The race is on.

As is usually the case when governments attempt something for the first time, they are almost guaranteed to fail. The problem isn’t legal, operational, or even really political. The problem is a shocking lack of business perspective, both from government and from the companies with whom they work.

Basically, states all see online gambling as a lottery. Many states have long since been disabused of the notion that all gambling is a lottery — and thus see physical casinos as different, but persist in seeing online casinos as somehow different. In a sense, I can’t blame them. The sky-high tax revenue from lotteries acts as a powerful motivator for wishful thinking. So, with wishful thoughts well in hand, we have many a legislature charging blindly forward on online gambling plans with their hearts set on sixty percent tax rates.

To be fair, there are some jurisdictions who do not seem to suffer from such a greedy notion, such as Atlantic City and Las Vegas. The problem there is that, instead of being crippled by tax-hungry politicians, these plans are crippled by “managers” who are “in” a “business.”

What I’m trying to say with that flurry of quotes is that businesspeople have a tendency to see themselves in a particular business and that business includes certain heuristics and ideas. Thus, they will try to apply those heuristics to anything that they see as falling within the realm of their business. In the specific case of online casinos, the jurisdictions and corporations will try to shoehorn online casinos into the same regulatory model as real casinos, and this is doomed to fail just the same as those states who try to tax online casinos at some insane level.

Perhaps we shouldn’t be all that surprised by this lack of vision. Afterall, governmental agents aren’t businesspeople. They rely on businesspeople to provide the relevant data for a project. This is the very definition of the blind leading the blind considering that the landed casinos themselves seem to see online gambling as a direct competitor to physical gaming. Everyone seems to think that the two types of casinos are in the same business. It takes one nanosecond of analysis to see that just because motorcycles and cars get you from point A to point B, does not mean that they are the same.

Let’s set aside that analysis for now. I want to instead look at the failures of vision that have already happened that may provide a good augur from which to predict how this current gold rush is going to turn out.

Twin River Casino in Rhode Island isn’t much of a casino. It’s small, unprofitable, and more a spit-shine over the notoriously unsavory Lincoln Park than anything else. It’s notable as a casino without table games, operating in a state that “doesn’t have” gambling, and doing so with what may be the tightest integration between gambling business and government in, well, anywhere. It’s also notable for being less than an hour away from Connecticut’s twin gambling goliaths, Foxwoods and Mohegan Sun.

Twin River is explicitly classified as a lottery in Rhode Island’s tax code, thus explaining why politicians there insisted they didn’t have casinos, and is taxed accordingly.1 Twin River, and the other gambling location in The Ocean State, Newport Grand, have their revenue from video slots taxed at the utterly jaw-dropping rate of 61.69 percent. This massive tax has kept Twin River, and Lincoln Park before it, in a state of almost constant financial instability.2

Foxwoods Casino
Don’t think that Rhode Island is alone. Connecticut collects twenty-five percent of both Foxwoods’ and Mohegan Sun’s slot profits. This equals tens of millions of dollars every month.3 Massachusetts just recently allowed gambling in general, and with it casino taxes of twenty-five percent and slot taxes of fifty-five percent. Travel a bit farther afield and you’ll find similar numbers. Pennsylvania taxes slot revenue in their casinos to the tune of fifty-five percent, generating over a billion dollars in tax revenue every year — the highest in the nation. Macau, the recently-crowned gambling capital of the world, collects a tax of thirty-nine percent.

Between Twin River and Newport Grand, $350 million in taxes are generated — over one-third of all tax revenue for Rhode Island. The state would literally collapse without gambling. And yet, despite this, those in the state continue to say they don’t have casinos and will fight further gambling developments! Indeed, the story of gambling in Rhode Island is a tale told at the intersection of reasonable revenue, greed, ethics, and puritanical zeal —the very same intersection at which the entire country now finds itself.

The state wants and needs insane gambling revenue, and while this is generally compatible with most governments, Rhode Island’s nearly century-long, slow-moving train wreck that is Lincoln Park/Twin River proves that even this isn’t a guaranteed formula. With these data in hand, do you think that an online casino based in Rhode Island would succeed? Or do you think it more likely that it would simply collapse?

Again, this problem is not exclusive to Rhode Island. The intransigence may be a bit more extreme there than other places, but it’s mostly the same. When a heavily-taxed gambling system is exposed to competition, it fails.

Antigua has been much in the news of late. They have taken the United States to the WTO on multiple occasions (and won every time) to fight the UIGEA and its predecessors. They rallied the whole of the Caribbean behind their cause. They have even revealed further cracks in the WTO itself that may cause its very disintegration.

But before all that, Antigua was the first jurisdiction to set up a specific system for managing online casinos. In 1994, they instituted a “free trade zone” where operations could be set up, tax-free, just as the provisions of the WTO were beginning to take effect. This was initially done to manage sports betting, with the first bets taken over the phone. They expanded into online casino gambling and were the first country to accept a real-money bet in 1996.

During this time, online gambling grew exponentially, especially in the U.S. Even though there were dozens upon dozens of other jurisdictions all competing to become popular hosting sites for casinos, Antigua commanded nearly fifty percent of the market. Times were incredibly fat.

In response to increasing corruption and calls for regulation from other countries, Antigua declared that they would be instituting regulations and, crucially, dissolving the free trade zone to allow a new two percent tax on profits. The market responded by slicing Antigua’s market share in half.

Unfortunately, one of the reasons for Antigua’s massive market loss was the regulation itself. In 2000, when the regulations were announced, online gambling was about as scummy as it is now. Legislation and protection was desperately needed. Sadly, with so many jurisdictions willing to provide whatever a casino wanted, when Antigua threatened to put actual teeth behind its regulations, the casinos ran.

The countries to which the casinos moved technically had regulations, but they were and are utterly toothless. Even today, repeated violations of regulations in countries like Gibraltar are met with no response.

Antigua would eventually react by doing what many other jurisdictions would do: putting a cap on tax revenue. In the case of Antigua, this cap was $600,000 per year. Higher than some other jurisdictions, but not high enough that it would drive away casinos. Antigua would also remain lax with its regulations, just as most other jurisdictions, but I remain convinced that it was the capless two percent tax that was the primary driver behind the exodus. It is the reason for the rush of casinos out of the United Kingdom and into Gibraltar: dodging taxes. A tax of two percent was enough to drive dozens of casinos out of the country and into the arms of other countries.

If two percent is enough to repel business, what about three, or six, or as with New Jersey, fifteen percent?

Lucky for us, we have an answer to that question. As I mentioned, the UK suffered a massive loss of online casinos to Gibraltar after the institution of new taxes in 2005. These new taxes raised the effective rate on online casino revenue to, conveniently, fifteen percent. Quite literally every major casino pulled up stakes and departed for other countries, with some, like the Isle of Man, tantalizingly close.

Much like Antigua, the UK has since backed off its taxes. Late last year, George Osborne, Looooord of the Treasury, all but confirmed that the UK is readying a one-third cut to their online gambling tax in an attempt to lure back casinos. This is a significant admission of defeat, if that’s the correct word to describe it. Even still, going from fifteen to ten percent won’t be enough when competing nations are offering rates that are an order of magnitude lower.

I would wager that this will change nothing.

Not all jurisdictions in developed countries are milking casinos like a dairy cow. Nevada’s tax rate, and thus the tax rate of Vegas, is super-low, at 6.75 percent. New Jersey, famous for Atlantic City, charges a scant eight percent. In both cases, though, we find the seeds of poor business sense. For example, in Vegas, just as the city is facing its worst slump in twenty years, they are talking about raising the tax rate to eight percent. The greed that motivates such a decision is the same greed that motivates Rhode Island to charge over sixty percent in taxes. It’s the same greed that motivated the UK in their catastrophic fifteen percent tax.

As I said, though, greed isn’t the only problem here. It may not even be the biggest problem. New Jersey provides perhaps the best example of the manifold misconceptions that now motivate jurisdiction after jurisdiction to charge headlong into the jaws of failure.

They charge eight percent on landed casino profits, and even in their earlier rejected propositions, they were going to charge ten percent on online profits. The governor of New Jersey, the bipedal planetoid Chris Christy, specifically rejected the bill unless the tax revenue was raised to fifteen percent. If anything, they should be charging a lower tax on online revenue. But no. Here, they appear to recognize that online gambling and landed gambling are different, but then reach the opposite conclusion that they should.

I stress that this failure of analysis isn’t unexpected, nor should those in power be exclusively blamed. Afterall, their primary experience with gambling is one that makes the business seem amenable to high taxes. Pennsylvania, Rhode Island, and Macau all have very high tax rates, but it obviously works.4  As such, a jurisdiction is free to tax like crazy. For someone only vaguely informed on the business, this makes perfect sense.

When this faulty perspective is applied to the highly competitive online gambling world, though, it becomes crippling. Just like the casinos contained therein, jurisdictions must compete with one another. With that in mind, Nevada is going to charge $500,000 per year just for the license. Atlantic City hasn’t announced its price yet, but it’s sure to be similar. Compare this to jurisdictions like Curacao which charge $10,000 ANG per year, which works out to about $5,700 USD. And that’s only for the first two years. After that, the license holder can negotiate a lower amount. In short, one one-hundredth the cost.

Let’s take a tour through the tax rates of the countries that are almost completely dominating the online casino industry:
  • Gibraltar, 1%, max. £425,000 GBP
  • Malta, 5%, max. £466,000 GBP
  • Alderney, 0%
  • Antigua, 3%, max $600,000 USD
  • Isle of Man: Between 0.1%-1.5%
There is only one conclusion to be drawn from these numbers: the Western jurisdictions are going to fail.

The primary disconnect, multifaceted as the problem may be, is that just as with so many industries, the big Western gambling jurisdictions don’t seem to grasp that the Internet breaks down barriers. Jurisdictions, be they countries or states, are able to charge the taxes they charge because of natural barriers. Without them, the value of the jurisdiction drops to near zero. That low value is represented in the numbers above.

Again, it’s almost alarming that the casinos and governments don’t seem to grasp this. It’s basic economics. The more competition there is, the lower the price is going to be. A landed casino can only operate within a small area, and are only really competing with those within that area: low competition, high prices. Online casinos must compete with everyone, everywhere, all the time: high competition, low prices.

The root mechanism that drives these valuations, and thus makes the perceptual disconnect so damaging, is what’s known as customer attrition. How fast and how often does a business lose customers, and what variables affect these numbers? For landed operations, there are three variables of greatest importance: location, location, and location. As Frank Fahrenkopf, the president of the American Gaming Association, points out in an interview for The New York Times,
Farhrenkopf [sic] acknowledged that when the market does decide, it can have adverse consequences — in Atlantic City, for example, where casino revenue is down 37 percent since 2006 and the city’s future as a gambling mecca is very much in doubt. Rooms at hotel casinos have been going for as little as $19 a night. At least four casinos have been in bankruptcy, and people are no longer crowding onto buses to head south down the Atlantic City Expressway. “The Pennsylvania casinos are killing Atlantic City,” he said. “That’s where the Philadelphia market used to go, but now they can stay home.”
The moral of the story is that landed casinos attract the population around them. Yes, Las Vegas attracts people in droves from all over the planet, but not because of the casinos. Vegas attracts customers because it’s Vegas. It is a legitimate destination, different from other destinations. But a standard casino just sitting outside of a major city? It’s exactly the same as any casino sitting outside a major city. People just want to go to the closest casino. As such, casinos that are near major cities can survive higher taxes and charges because the value of proximity is higher for gamblers than any savings they might achieve at a lower-taxed casino. Similarly, there is value in being a landed casino within a particular country that may outweigh any taxes incurred.

Online casinos have none of these concerns. Players are exactly the same distance from one casino as from another. Assuming that the experiences are the same (with many using the same products, casinos can be literally identical), players will jump ship with even the slightest motivation, and this behavior has come to very much define the online gambling industry. It’s why we have thousands of online casinos, many owned by the same companies. It’s why so many online casinos open, stay around for a time, then close down only to “open” again with a completely new brand and design. With no inherent “qualitative gravity” attracting players, they are free to wander about like rogue comets, flying into and out of casinos like ADD-afflicted sailors on shore leave.

And you better believe that players take advantage of this! It is very common for players to maintain accounts at dozens of online casinos, play a bit at one, then move on to the next after their favorite game goes “cold.” There is no way for a casino to control for this. A player can enter, not like the feeling, and leave, maintaining a balance just large enough to allow this behavior. Landed casinos, even those that are situated directly adjacent to other casinos, have a degree of protection from this behavior. It is difficult for a person to get up, cash in any money, leave, walk to another casino, and set up camp. In essence, landed casinos have a captive audience, one which is incredibly easy to capture. All the casinos have to do is set up shop as close to their audience as possible, and bam, instant guaranteed casino revenue.

The Internet is a brave new world for an industry accustomed to this situation. The principle of build it and they will come no longer flies. And since the financial and governmental machine built up around this principle is so entrenched, they will need to spend many years facing total failure before their ideas change. It is the race to realize that everyone is wrong that is the real gold rush.

Vegas has the best shot at a functional online gambling industry within U.S. borders. Perhaps because they are working so hard to overcome the drive of gamblers to choose the nearest casino, they are already most emblematic of competitive behavior vis-a-vis a global market. While the overall process of epiphany is going to be slow, Vegas is probably best-positioned to weather this process of awareness.

Vegas taxes are already low,  the environment is filled with options, so the casinos understand proximate competition, and as such, the Return to Player at those businesses is very high: usually ninety-five percent or more. Compare that to Mohegan Sun and Foxwoods, which exist in a high-tax environment with little direct competition, and they have payouts of 91-92 percent. That may seem inconsequential, but for aserious gambler, nothing could be further from the truth. 3-4 percent can be the difference between losing everything in an hour or having a night of fun.5

Moreover, those numbers are more than enough for a seasoned player to detect. One percent? Alright. Most players would probably not detect that. Two percent, I think there are many who would “feel” the difference. Three percent? By then, almost everyone will feel it. The situation will thus be a number of “official,” online, American casinos with poor player returns, and a large number of “unofficial” casinos that are offering good returns. Compare the average Foxwoods slot return of ninety-one percent to the average return of a slot at Pinnacle Casino: 97.5 percent. There is no comparison.

This palpable disparity will cause American gamblers to flee from American casinos, and will cause customers in other countries to look upon American casinos with disdain. In short, total failure. But what, you ask, if the American casinos raise their returns? I doubt that this will happen, at least initially. While landed casinos have guaranteed revenue and can generate it in multiple ways, online casinos revenue is not guaranteed and can only be generated in one way: the way that gets hammered by taxes. With other jurisdictions accustomed to fifty percent tax rates, Vegas will be the only game in town.

At this point, we enter a very strange place. As I discussed in an earlier article, one of the primary goals of American online casinos is to increase liquidity. “Liquidity” is a fancy, casino business term for the amount of money available to be gambled from the population. The logical first step, and the one on every American casino executive’s mind, is to engage gamblers in other states. To further this, states will sign agreements, which will immediately drive all online casinos into the state with the lowest taxes, which will cause the other states to either lower their taxes or renege on their agreement. It would become the U.S. vs. Antigua in miniature. While the possibility of the various American jurisdictions suddenly accepting this situation and lowering their taxes is real, it is fleetingly small. Going from a fifty percent tax down to a one percent tax is something that no one in the U.S. will accept.

There is only one way to forcibly construct a market that is amenable to the desired taxes: protectionist policies. These can come in form of subsidies, tariffs, taxes, or outright bans. I could write an entire book on protectionist polices throughout history — indeed, people have — but I won’t open that can of worms. For the purposes of this article, we have a single, shining example of protectionism: the UIGEA.

I’ve been picking on the U.S. for the UIGEA since I learned of it. It’s a colossal failure — an embarrassment of a law. The U.S. isn’t the only country to attempt such laws, though. The United Kingdom tried something similar in 2011, only to face even greater resistance for violations of trade treaties. Again, Western nations throwing a hissy-fit because laws that were meant to be used for their benefit are, of all the nerve, being used against them! Good heavens! The world doesn’t work that way!

Of course, the world does work that way. The free market is constantly worming itself into economic processes. And while the right-wing myth of the free market isn’t as straightforward as they would like to think, free market principles have an undeniable affect on markets and competition. If protectionist policies slam up against a free market reality too hard, the policies will fail. Again, looking at the UIGEA, all the law did was force major operators out of the U.S. Nearly three-quarters of the gambling activity continued unabated, only it was going to smaller, less scrupulous casinos and bookies.

Will we see protectionist behavior between states? Absolutely yes. The only variable is how far the states go toward increasing “liquidity.” If they actually open their borders to one another, and there’s no guarantee they will even make it to that point, then the protectionist behavior will come when states bicker and fight over tax rates until the agreements collapse. The more likely course of events is the states setting into motion the process of increasing liquidity, and in that process begin to realize what would happen in the diverse market that would result. They would then refuse to open their borders, and the entire quest to increase liquidity would fail before it began.

Either way, failure is the almost guaranteed conclusion.

I described these slowly unfolding events as a gold rush, and it’s about as close to a perfect descriptor as I think I can manage. The hullabaloo that New Jersey’s legislation kicked into high gear is fueled by misinformation and confusion. It is blinding people with visions of riches, and will make a small number of people very wealthy and ruin everyone else. Someone, somewhere is going to make a fortune as the various U.S. states desperately try to catch up to the 21st century. It’s not going to be the casinos, and it’s sure as hell not going to be the states. The only players who stand a chance of earning money are the software companies who will net huge paydays engineering all of the specialized software that is going to be necessary to indulge the state governments.

I know that I keep playing Devil’s advocate in response to my own merciless assaults, but it bears repeating; there are underlying aspects of this that almost make one appreciate the actions of the states and casinos. Most notably, in this case, is the sheer size of the U.S. gambling market. It’s enormous. It is far and away the number-one gambling market on the planet. We may not spend the most per capita, there are many countries ahead of us, but the United States population is fifty percent larger than every country above it combined. As a function of raw dollars, no one gambles like Americans. Currently, landed casinos are the only ones feeding off of this, which is why they worked so hard to block online casinos. They want to protect their chattel.

And indeed, the government wants to protect its money, as well. The last thing the United States needs is yet another industry that does nothing but funnel U.S. money out of the country. Make no mistake, I can very much appreciate that.

I can also appreciate the moral perspective. While I may lampoon and lament the efforts of the American government to regulate online gambling, I am not necessarily against it. I may have been opposed initially, but the corruption in the online gambling world has made me come to believe that strong regulation is in fact critical. But I have stated time and time again that the regulatory region cannot be used as a tax grab. It needs to be financially identical to competitors overseas. It needs to be competitive, but also needs to provide strong regulation. This is the reality of the Internet.

Gambling has changed.

Until the various states and, hopefully, the U.S. on the whole recognize that reality, their efforts to enact online gambling will fail — fail to generate revenue, fail to generate jobs, fail to protect consumers —and fail miserably. It is irritating, certainly, but it is also sad. Because there is a reasonable system to be had in this mess. There is a way for everyone to be happy. It is sad that everyone involved has been blinded by a glistening pile of phantom gold, forever on the horizon.

Indeed, in many ways, calling this a gold rush may not fully capture its nature. A gold rush implies that there is actual gold to be had. In this case, the gold is illusory; it doesn't exist. Perhaps a better description of this is a stampede, hurtling through the desert, in pursuit of a mirage. Eventually, everyone is going to die. All that's left to do, is watch.

1: The games at Twin River are also all classified as Video Lottery Terminals. From the user perspective, the slots are identical, but the way that the game results are determined is different. Thus, they are not actually slots. It’s a strange distinction. The video poker terminals are also VLTs, and this does affect the game; it’s not actually video poker. It all seems too odd, but there is a key difference from the business’ perspective: there is no chance that they will lose money. The payouts are fixed at some percentage and this is what controls the game results. Probability has nothing to do with it.

2: The founder and original owner of Twin River, at the time named Lincoln Downs, shut down and eventually sold the operation in 1976 after saying that the taxes levied by the state made in essentially impossible to turn a profit. It would be bought by Taunton Greyhound, which itself would suffer from financial problems until selling the track after fewer than five years to a duo of investors, who would themselves have trouble turning a profit. After shuttering their second race track, the duo sold the Lincoln track to a joint venture of Wembley Stadum and United Tote Inc. This new corporation would also have a hard time turning a profit, especially in the face of the recently-opened Foxwoods, thus bringing about the era of video slots. This stumbled along for a while, until a bribery scandal forced Wembley to sell itself to another joint venture corporation, which bought all of Wembley’s U.S. tracks for $455 million. This venture invested $220 million into Lincoln Park, rechristening it Twin River in 2007. They then promptly declared bankruptcy in mid-2009, selling the casino to creditors. This ridiculous, self-defeating arrangement would be utterly destroyed in a truly competitive market.

3: Granted, those are not officially taxes, since both casinos operate on Native American tribal land. The money is intended to smooth over any resentment from not having the huge casinos officially be part of the tax base. Tax or not, it is money going from casino to state in an agreement that no one seems willing to break.

4: Their financial situations are currently poor, but that’s not because of competition. It’s because the global economy is in the toilet.

5: This says nothing of other states with lesser-known gambling operations. Some of them allow for slot returns of eighty percent. Few casinos actually go down that low, but some get close, with a number of penny slots dropping to eighty-five percent. 

Saturday, April 6, 2013

Online Gambling Industry Infographic

The player statistics only have a sample size of 500, so that may explain some of the conflict with what I already know. To wit, that the majority of female online gamblers spend most of their time in slots. Moreover, what does this chart mean by social online casinos?

If we assume that the word "social" means little, and this is just about online casinos, then the growth numbers are amazingly optimistic. Even assuming that the American market opens completely, a 100% increase over five years is, frankly, out of the question.

Make sure to click here to see the full size picture. Blogger won't let me post it at full resolution... for some reason. *angry face*

Thursday, April 4, 2013

Antigua’s Line In The Sand

Antigua has offered up what it is calling its final offer to U.S. negotiators. The statement was made by Dominica, currently representing Antigua and the whole of CARICOM at the WTO in Switzerland, on March 26th. This may signal the end of over a decade of arguing and negotiation between the United States an Antigua about the UIGEA. As we’ve covered ad nauseum, this is casting the United States in an awful, if not unsurprising, light.

Obviously, statements of this kind have been bandied back and forth for the entire duration of the conflict. What makes this recent pronouncement different and noteworthy is the added weight behind it. Unlike before, where Antigua was the only nation making noise, this is an official declaration on the part of CARICOM that negotiations are going nowhere. Previously, when it was just Antigua making claims of intransigence, it was a “he said/she said” situation. Now, it is a “he said/they said” situation where the U.S. is being accused of, to use a term that the young folk like, being an asshole. From the report:
Antigua and Barbuda had not seen any substantial progress on the part of the United States to comply with the DSB’s recommendations and rulings nor to reach a settlement with Antigua and Barbuda.
In essence, this is Antigua and CARICOM playing their last card. It is a threat, more or less. It is, ironically, the very same threat that the U.S. gave to Antigua a few months ago, triggering the support of CARICOM. Namely, Antigua is telling the U.S. to back down to avoid “consequences.” Unlike the U.S. to Antigua, though, Antigua can’t threaten injury to America’s reputation since the U.S. already has a horrible reputation. It really can’t get any worse.

Antigua is angling to give further weight to their threat by way of the U.N. The U.N. representative-type-guys stationed in Antigua have made a statement before the broader U.N. saying that they could, and should, endorse Antigua’s case. It must be sanctioned by the General Assembly, which is a process to be sure, but even the possibility is something that the U.S. will want to avoid at all costs. They know that they would lose, and probably lose badly.

The reasons for a near-guaranteed failure are of course manifold, and well-discussed on this website. Perhaps the most significant reason is that the WTO, much like the GATT before it, are tools for American hegemony and the U.S. has been using them as such. Back in the day — and by day, I mean post World War II — the rest of the world was so weak that they just sorta’ rolled over. Today, though, the world is mighty pissed and not so willing to simply go along to get along.

Not only has the U.S. outright ignored the WTO in the Antigua case, they have a long-running habit of doing this in all cases, which is fomenting an undercurrent of toxic anger among its partners. A surprising case goes all the way back to the late 1990’s, where, yet again, a clause was surreptitiously placed into a bill, late at night, to deny copyright recognition to rum being sold out of Cuba.

It’s an odd story, where Cuba sells Havana Club rum, a famous rum. In the U.S., Bacardi sells Havana Club rum that is essentially stealing the trademark from the Cuban/French distiller. The U.S. has refused to recognize the trademark for over a decade, which has, like a cancer, slowly spread throughout the WTO until what is a seemingly esoteric case has managed to piss off almost every other country on the planet.

Considering our history of such bald-faced belligerence and intransigence, it is not surprising that negotiations with Antigua continue to fail. And do not think for a moment that anyone is falling for America’s claims of being the actual wronged party. Nearly every other country in the WTO is siding with Antigua, albeit in an unofficial manner. I would imagine that the only countries that would officially side with the U.S. are its usual partners in international crime, Canada and the U.K. And I know that I rant about this, but I feel that it bears repeating: the U.S. bribed both Canada and the U.K. to stay quiet about the UIGEA and Antigua’s WTO suit!

It is amazing the amount of pressure that Antigua is managing to conjure in its battle with the States. It is also encouraging, because it reveals how much sway a tiny nation can have over a bigger one, and hints that the days of American domination of the global economy are truly at an end. All that we have to do now is, well, wait. More activity has happened in the last three months than the previous five years. Something is in the offing. I just hope that it’s not simply more of the same.