Land-based to Online

#70 © Copyright 2011, I. Nelson Rose, Encino, California.  All rights reserved worldwide.  Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, www.GamblingAndTheLaw.com.

Land-based to Online

The question is not if, but when:  What will happen when the biggest land-based gaming companies start competing for real on the Internet?

We already know the answer, from looking at what has happened in every other industry.  There is a natural progression, starting with any new invention.  It does not matter if it is automobiles at the dawn of the 20th century; radio, movies and television from the 1920s to the 1960s; or computers, more recently.  And it makes no difference if the invention is a “true” patented contraption, like the camera or the photocopier, or merely an idea whose time has come, like casinos on land or poker on the Internet.

Inventors and entrepreneurs are the first to grab onto any breakthrough.  The first efforts of these garage inventors are not always the most graceful.  For example, the first computerized bingo machines were raw cathode-ray tubes with wires.  I was sure I would get electrocuted if I touched it.

Once the invention is shown to not actually kill people, partnerships and small companies, commonly called mom-and-pop operators, hop onboard.  These small start-ups grab a large share of the market, because the big boys have not yet caught on.

If the idea is a good one, and the execution is competent, these small companies start making money and growing.  But, soon, corporations, with greater access to capital for expansion and marketing, begin to dominate the business.  Sole proprietorships and partnerships are consigned to niche markets.

At some point the business finally attract the attention of large international companies.  They have the means to buy up their competitors.  It’s called consolidation, but what it really means is, if the law allows, conglomerates will take over just about everything, leaving only crumbs for smaller, local operators.

Land-based gaming has already gone through its waves of consolidation.  There are 30 major casinos on the Las Vegas Strip.  Most are owned by only two companies:  MGM Resorts International (more than a dozen casinos) and Caesars Entertainment (nearly as many).  It’s a long way to the next level of ownership.  The Las Vegas Sands (“LVS”) and Wynn Resorts each own two casinos on the Strip.  Only a few are independent, if you can call it that, when, for example, it is a bank that got stuck with a casino:  Deutsche Bank, which ended up with the Cosmopolitan.

Internet gambling is following the pattern.  Mergers and acquisitions (M&As) first gave Party Gaming the World Poker Tour and then created the giant, awkwardly named bwin.party digital entertainment.  Eventually, there will be only a few dominant online gaming companies in the world.

Who the survivors will be is not only unknown, but unknowable, due to the uncertainties created by shifting laws and even faster changing technology.

Caesars Entertainment, formerly Harrah’s, would be the largest Internet gambling company in the world, if only it did not have to worry about keeping its Nevada license.  The company bought Binion’s Horseshoe in 2004 just to get the World Series of Poker brandname; it also kept the Horseshoe brand, but sold the actual hotel and casino.  Caesars created a subsidiary, Caesars Interactive Entertainment, headquartered in Montreal, combining both its poker and online activities.  It chose as its first CEO Mitch Garber, former CEO of Party Gaming.  But it can’t take interstate bets from Americans, and it can’t buy up existing operators who do.

Predictions are also difficult, since some of the biggest potential players either did not exit ten years ago, or don’t exist today.  Technology creates stock bubbles, which can lead to strange combinations, like AOL and Warner Bros.  I would not be surprised to see M&As involving Facebook and Google, perhaps buying bwin.party or Caesars.

Powerful individuals throw in another variable, when they control giant companies.  It will be entirely up to Sheldon Adelson and Steve Wynn to decide whether their multinational landbased casino companies, LVS and Wynn, are going to get into the field of online gaming, or not.

Of course, having one person in absolute control can cause problems beyond missing opportunities.  LVS was hit with civil suits and criminal investigations, all involving allegations of wrongdoing by Adelson.  Meanwhile, Steve Wynn’s announcement of his company’s earnings was lost in the uproar caused by his knocking Obama as a socialist, while praising the government of China – that’s the Communist government of the People’s Republic of China.

The land-based operators are gearing up for when they can take Internet bets from Americans.  The easiest way to instantly gain expertise is to buy it.  International Game Technology, one of the largest manufacturers of slot machines, paid about $115 million for Entraction Holding AB of Stockholm, Sweden.  The M&A was textbook:  Entraction has one of the world’s largest online poker networks and is one of the leading suppliers to the industry.  Most importantly, it had never taken bets from the U.S., and will thus not cause IGT any problems with its dozens of regulators.

Caesars is more aggressive.  Its eagerness to buy expertise can be seen in its recent acquisition of Playtika.  Globes reported the one-year-old startup’s cashflow is only $1.2 million a year, and it is losing money.  Yet, Caesars paid an astonishing $40 million, or more, for 51%.

This follows Caesars’ partnership with 888 Holdings.  In March, both the Nevada Gambling Control Board and the Nevada Gaming Commission declared 888 suitable.  This was a significant departure from Nevada regulators’ former position, that any company that had taken bets from the U.S. was violating the law.  Now 888 is considering applying for a Nevada license and planning a strategic partnership with Caesars to operate online poker, once the law allows.

Wynn took this trend to the limit, by announcing he was going to work with PokerStars to set up PokerStarsWynn.com.  It was a gutsy move, since, unlike 888, PokerStars was still taking bets from the U.S.  How gutsy was seen a few days later, when the federal DoJ indicted PokerStars’ principals.              Naturally, Wynn cancelled his plans.

The large land-based operators understand how important it will be, to be the first online with 100% legal poker targeted at Americans.  This means not only getting all regulatory approvals.  The operation has to have no glitches, since players can move to a new poker room with the click of a mouse.

If laws are changed to clearly allow U.S. betting, the eventual winners will be the land-based gaming companies, or whatever conglomerate owns them at the time.  The reason is simple:  Success on the Internet is almost entirely due to marketing.  There is nothing magical about the words Party Poker that would guarantee that it would end up with 40% of the world market, before it pulled out of the U.S.  Why did Party Poker succeed, while so many other online poker companies went under?  It was among the first, it had technology that worked, and it bought the rights to have its name in the middle of every table on the televised World Series of Poker.

Could even a pre-Black Friday PokerStars have competed with the brandnames and loyalty of a Caesars Palace or Harrah’s?  The land-based gaming companies have player data bases with millions of names.  They can offer players a lot more than free T-shirts.  And, if they can’t win, they can raise corporate money to simply buy off their competitors.

But land-based operators, particularly casinos, have one enormous disadvantage:  They have all the expenses connected with massive real estate holdings and tens of thousands of employees.  Online casinos are cheaper to set up and cost less to maintain, even including the costs of acquiring and keeping patrons.

The big money understands that Internet gambling is simply a better investment, if it is legal.  If the land-based operators can’t beat their online rivals, they can buy them.

So, welcome to the future world of mgm.bwin.party and Zynga-Caesars-888.

END

© 2011, I. Nelson Rose.  Prof. Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry.  His latest books, Internet Gaming Law (1st and 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.