Panel gearing up for online gaming

David Strow

Tuesday, July 3, 2001 | 11:08 a.m.

On Sunday Nevada's much-discussed Internet gambling bill formally went into effect.

For Nevada's casinos, the date is little more than a technicality, since they can't open Internet casinos until the Nevada Gaming Commission grants its blessing to such ventures. The commission will begin the task of studying the issue on July 31, when it conducts its first hearing on Internet gambling in Las Vegas.

But one of the leading experts on Internet gambling says the commission cannot afford to wait and study the issue for long.

"We can't just sit back and say, 'Let's take two to four years to look at this issue' ... because any advantage (Nevada gaming companies) may have may be lost to a competitor that's already established their brand," said Tony Cabot, attorney with Las Vegas firm Lionel Sawyer & Collins. "I hope they act within 18 to 24 months, because when we get out of that time period, we give up too much of an advantage to Great Britain, Australia and any other jurisdiction that gets into this."

But if Nevada does move quickly, Cabot said, the rewards could be massive. Internet gambling is now a $3 billion industry and could double by 2003, by some estimates.

With the rise of interactive television, which could seamlessly blend online casino gambling with television shows, "I think in 10 years, the revenues from Internet gambling will equal the revenues from the land-based casinos," Cabot said. Those revenues totaled more than $22 billion in 1998, he said.

"The Internet is not just personal computers. That is not the future of the Internet," Cabot said.

By 2005, it is estimated 91 percent of the households in the United States will have access to the Internet, Cabot said. Of that 91 percent, 73 percent will have access to the Internet through an interactive television.

The economic advantages for Nevada casinos in this gambling gold rush could be enormous, Cabot believes. It now costs about $200 million to establish a strong brand on the Internet, he said, but Nevada gaming companies would find that unnecessary with their existing strong brands. Internet casinos also typically spend $200 to $500 acquiring a customer, but again, Nevada casinos could avoid that cost with their huge customer data bases.

Cabot believes these factors could add up to Nevada casinos capturing 50 percent to 75 percent of the Internet gambling market. Two factors would be key -- one, player trust, and two, brand recognition.

"People know if they're playing at Caesars or Mirage, the games are fair and honest and they'll get paid if they win," Cabot said. "Everyone in the world knows Caesars Palace."

But other companies with just as powerful brand names could prove tough competitors.

"Our competitors are as likely to come out of the entertainment industry as they are from the gambling industry," Cabot said.

One example of this new attitude, Cabot said, is the shift of Disney. Long considered the ultimate family-friendly entertainment brand, Disney has for years shied from ventures with the gaming industry, and only recently agreed to open its first big venture on the Strip -- ESPNZone, a restaurant that will open a the New York-New York this summer.

But in May Disney announced it was financially backing "Skillgames," an Internet game site that allows customers to play trivia games, puzzles and sports games for prizes as high as $1 million. Disney will tie the site in with its stable of brands, including ESPN and ABC.

What makes the site different from other contest sites, however, is that visitors must pay to play the games -- which Disney insists is legal in at least 47 states.

"The difference between Disney and Nevada (casinos) is that Disney offers skill games, not games of chance," Cabot said.

The legality of games of chance on the Internet, however, isn't as clear.

One issue is the application of the federal "Wire Act" to Internet gambling. Cabot holds that the act applies solely to sports wagering; the Department of Justice argues it applies to all Internet casino games.

Earlier this year a federal judge in Louisiana made a ruling similar to Cabot's position. Several credit card issuers, including Visa and MasterCard, were accused in a class-action lawsuit of aiding violations of the Wire Act by allowing their credit cards to be used to gamble on Internet casinos. In March the federal judge dismissed the claims, saying the Wire Act didn't apply.

The case is now on appeal to the Fifth Circuit Court of Appeals in New Orleans, and Cabot expects a decision could be issued as early as nine months from now.

"If the Fifth Circuit agrees with the District Court, it goes a long way toward resolving this issue," Cabot said. Though that Circuit Court's decision isn't binding on Nevada -- which is located in another judicial circuit -- a decision by the Fifth Circuit would set a strong precedent, Cabot said.

No matter who prevails, Cabot expects the case to be appealed to the U.S. Supreme Court, though he said he doubted the high court would review the case.

A more direct legal attack against Internet gambling would be the return of the "Kyl Bill," named after its primary sponsor, Sen. Jon Kyl, R-Ariz. That bill would have made gambling on the Internet specifically illegal under federal law.

Kyl introduced the bill in 1999, and it passed the Senate unanimously. At the time, it had the support of the most of the gaming industry, including the American Gaming Association.

But the bill bogged down in the House, as negotiations were launched with special interests to include various exemptions in the bill, including exemptions for lotteries and Indian gaming. The process took too long, and the bill died without going to a vote.

So far, Kyl hasn't re-introduced that bill. But there's still 18 months to go in the current Congress.

"Anything can happen in Congress, and it usually does," said former Sen. Richard Bryan, who joined Lionel Sawyer after retiring from the Senate early this year. "It is my sense that the momentum that carried it through the Senate in 1999 has waned considerably. The climate has changed."

In 1999 the gaming industry was pretty much united against Internet gambling, Bryan noted. Now, in 2001, gaming companies' positions on Internet gambling are "fragmented," he said. And a similar bill, one that would make it illegal to use credit cards to gamble on the Internet, has languished in the House Judiciary Committee after its introduction by Rep. James Leach, R-Iowa.

"If you're trying to put odds on this, I think it's less likely than in (1999) that this (a bill banning Internet gambling) will reach the president's desk (for his signature in this Congress)," Bryan said.

Bryan himself is reflective of the new attitude of many in Nevada toward Internet gambling. In 1999, Bryan was a co-sponsor of the Kyl Bill.

"I said in 1999 I thought that was really the last chance to get that legislation enacted," Bryan said. "I kind of liked the old days when Nevada had an exclusive franchise (on gambling), but that's not reality. We have to deal with the world in which we live.

"There's a new economic climate out there, and Nevada has to be competitive. If this is going to happen, the question is, 'Should Nevada be a player?' "