I’m All In: The Online Poker Industry

Introduction

Since the first online hand was dealt on January 1^st, 1998, the online poker business has exploded in popularity. [1]  “Research from Christiansen Capital Advisors says online poker revenues have grown from $82.7 million in 2001 to $2.4 billion in 2005.”[2]  Poker Stars, Full Tilt Poker, and Titan Poker represent the three largest poker sites, and alone these three sites serve more than fifty thousand cash players a month.[3]  In the past three months, the numbers of cash players on these three poker sites has increased 6-10%. [4]  On these, and on the hundreds of other poker sites, U.S. players generate an estimated $85 million in revenues monthly for these sites. [5]  From 2004 to 2007, the online poker industry recorded a 72% growth rate.[6]

Why Is Online Poker Becoming So Popular?

The success of the online poker industry can be attributed to a number of factors.  First of all, traditional live poker in casinos and card rooms can be intimidating for a novice, and is often located hundreds of miles away from prospective players.[7]  Online poker, on the other hand, can be played from the comfort of your home.  Also, the opportunity costs of running a poker room in a casino are very high because poker tables take up space which can be used for slot machines, which is the true cash cow for casinos.[8]  The overhead costs of online poker are dramatically cheaper because administrators can add as many tables as they want without affecting overall profits. [9] For example, a casino would never offer a poker table with stakes as low as $.01 because the costs of paying the dealers salary alone would outweigh the potential profit made on the table.  Online poker, on the other hand, can offer these low stakes tables for players to gamble on because the overhead costs are minimal, and even though the profits are small per table, they are collecting profits from hundreds of tables at a time.  Also, online poker allows players to play at a number of tables at a time, which is physically impossible to do at a casino.[10]  Players like this because they can increase the amount of hands they play per hour.  This is an advantage for the poker sites also because the more hands being played means they make more money they make.   

Finally, televised poker created an explosion in the popularity of online poker.  “Thanks to the never ending broadcasts of celebrity and professional poker tournaments, poker is now the third most-watched televised sport on cable TV, behind only car racing and football.”[11]  A turning point in the online poker industry came in 2003 when Chris Moneymaker, who won his way into the World Series of Poker through an online poker tournament after wagering only $39, went on to win the Main Event.[12]  Overnight, millions of weekend poker players realized that with a little practice, which online poker rooms could provide, they too could strike it rich.  The next year, the 2004 World Series of Poker featured three times as many players as the 2003 Main Event. [13]  Online poker became more than just a fad in 2004 when Greg Raymer went on to win the Main Event after winning his entry in an online tournament also.  In fact, four of the top ten finishers in 2004 were players from PokerStars.com.[14]

How Do Online Pokers Sites Make Money?

One way online poker sites make money is through a rake.[15]  The rake is an amount of money collected from real money pots.  The amount of the rake is normally calculated as a percentage of the pot, and is normally around 3-5%.[16]  This also provides online poker with an advantage over live poker in casinos because the time taken to shuffle the cards, deal the cards, count the chips, make payouts, etc., takes time away from actual game play.  The average rate of play in casinos is thirty hands per hour, compared to the ninety to one hundred hands per hour in online play.[17]  By playing more hands per hour, online poker increase the rake they receive per hour.

Online sites can also make money by charging players an entry fee as opposed to a rake.  Rakes are generally used in cash games where players are free to sit at a table and come and go as they please.  Entry fees on the other hand are used for tournaments, where all the players enter at the beginning and play until one is left standing.  Rather than take a percentage from every pot, the site takes a percentage from the tournament entry fee.[18]

Finally, poker sites invest the real money players deposit in their online accounts.  Because these sites do not have to pay interest on the money players deposit in their accounts, this is considered a significant source of revenue. [19]

Legality of Online Poker

The legality of online poker has been questionable since its inception.  Online poker sites try to avoid possible legal issues by offshoring. [20]  They set up their main operations in places like Gibraltar or the U.K. protectorate the Isle of Man.  Also, online gaming sites like Full Tilt Poker and Poker Stars can be seen advertising on TV because they only advertise the practice and learning poker aspect of free play, and allow the customer to discover the real money wagering on their own. [21]  Early on in the history of online poker, the federal government claimed that online poker violated the 1961 Wire Act, but even officials at the Justice Department claimed that federal prosecutors were more interested in fighting terrorism and drugs. [22]  “That makes playing or hosting poker games on the web a little like going a few miles over the speed limit.  It’s technically illegal, but everyone does it and you probably won’t get in trouble.”[23]  Even large companies like Goldman Sachs, Fidelity, and Blue Ridge Capital, wanted to get into the successful online gambling industry, and represent three of the top five institutional investors in the U.K. based sports-wagering site SportingBet.com, which trades on the London exchange.[24]

Despite this widespread acceptance and apparent legitimacy, everything changed when Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006, with compliance required by December 1^st, 2009.  The bill doesn’t make internet gambling itself illegal, rather, it makes certain type of financial transactions required to conduct an online gambling website illegal. [25]  The reason for the ambiguity in the Act is a result of the fact that the Act does not contain a definition of “unlawful internet gambling”.  [26]  “Also, the Act’s background discussion points out that the Act itself did not determine the difference between illegal and legal gambling and that it was not intended to alter, limit, or extend any State or Federal law prohibiting or regulating gambling.”[27]  Rather than define illegal gambling and deal with the problems of conflicting State and Federal laws, the Act, “focuses on preventing unlawful internet gambling business from befitting from the payment system by denying them the opportunity to open bank accounts from which to receive payments.” [28]  Defined as “designated payment systems”, the UIGEA covers any system that that facilitates money transfers that the US government determines to be used by illegal gambling sites.[29]

Despite the UIEGA , sites like PokerStars have publically announced that it will ignore the Act and continue operations as usual, claiming that the law applies to games of chance, and that poker is a game of skill and therefore not regulated.[30]

Recently, the U.S. Attorney for the Southern District of New York seized $34 million belonging to 27,000 online poker players, but because of the ambiguity of the UIGEA and the feeling among many that online gambling should be regulated and taxed, it is possible that the seizing of these assets will backfire and a court decision will actually support internet poker.  [31]

In response to the passing of the UIGEA, Rep. Barney Franks, Chairman of the Financial Services Committee, unveiled The Internet Gambling Regulation, Consumer Protection, and Enforcement Act of 2009. [32] “This Act would establish a federal regulatory and enforcement framework under which Internet gambling operators could obtain licenses authorizing them to accept bets and wagers from individuals in the United States.”[33]

The confusing aspects of the UIEGA, due to conflicting State and Federal law, and the proposed legislation which would permit internet poker, mean that the legal battle over internet gambling has yet to play out.

Conclusion

The popularity of online poker exploded in the US in response to seemingly average people winning millions of dollars on national TV.  These people were not card sharks playing in casinos, they were regular people playing poker in their free time.  But as the exposure and popularity of online poker increased, it became a target of the federal government.   Although legislation has been proposed that would allow online gambling, and large sites like PokerStars claim they will continue to offer their services, the December 1^st deadline by which these sites must comply with the UIEGA is approaching, and the history of online poker remains to be seen.