Legal Internet gambling may help big casino firms, hurt small ones

By Liz Benston

Monday, Sept. 6, 2010 | 2:01 a.m.

Although major U.S. casino companies see a potential gold mine in legalizing Internet gambling, some operators of small, neighborhood casinos in Nevada — which make up most of the properties in the world’s largest concentration of gambling halls — see problems.

One of them is Greg Lee, whose family owns the Eureka casinos in Las Vegas and Mesquite.

Neither Lee nor any other casino operator knows for sure what will happen if online gambling is regulated in the United States, but he is not bullish about the prospect of competing with bigger brand names for poker or other kinds of gambling online.

Bricks-and-mortar casinos survive by virtue of having convenient locations and relationships with customers, while online retailing is a monopolistic world where those with the biggest brands and most customers crowd out smaller competitors, Lee said.

“Online, the money flows to the companies with the dominant (economies of) scale,” he said. “It’s hard for me to see how this would benefit my business.”

In the more than decadelong debate on Internet gambling in Congress, the loudest proponents for legalization have been foreign-based gambling websites and their supporters, including countless celebrity and no-name poker players who have flocked online in recent years. A few U.S. casino companies that have much to gain from Web versions of their casinos have joined the effort.

The American Gaming Association threw its support behind the prospect this year — provided that it included tough licensing requirements and other means of oversight. The association remains neutral on the legalization bill being shepherded by Rep. Barney Frank, D-Mass., through the House of Representatives. An outspoken social liberal, Frank, chairman of the House Financial Services Committee, has championed legalization, arguing that prohibition is ineffective, oppressive and financially disadvantageous to American companies and the U.S. government.

Most U.S. casinos aren’t members of the association, nor do they have lobbyists in Washington, weighing in on the debate. The Tribal Alliance of Sovereign Indian Nations, 14 California tribes that operate major casinos, opposes Internet gambling on the grounds that casinos granted exclusive rights to operate in their respective regions for the benefit of tribal members will suffer at the hands of new competition. Los Angeles’ Commerce Casino, which operates the nation’s largest poker room, also opposes legalized online wagering.

The Nevada Resort Association, which represents larger casinos at the state level, has not taken a position — reflecting a disagreement that exists not only among large and small operators but among officials who work within these same properties. And yet, the Culinary Union in Las Vegas supports online poker, siding with the majority view held by the leaders of its union-organized casinos that Web poker rooms will protect and create Nevada jobs.

Concerns that Internet gambling will cut into casino profits or hurt jobs have yielded careful responses from Nevada Sen. Harry Reid, who holds the keys to Internet gambling legislation in the Senate.

Reid supports the legalization of Internet poker, a position that is more palatable for casinos that view widespread Internet gambling as greater competition. That support comes with one major caveat: Reid has said he will oppose any online gambling legislation that fails to protect Nevada jobs.

It’s anyone’s guess how that would materialize, as the current legislation contains no such guarantees, nor any restriction on outsourcing jobs to foreign shores.

Harrah’s Entertainment, one of the two largest operators of Las Vegas casinos, is an outspoken supporter of gambling online.

Last year, Harrah’s Entertainment commissioned a study by McKinsey & Co. that concluded that Internet gambling could triple the U.S. gambling market rather than cannibalize it, resulting in more profit for American casinos as a whole.

The study based that conclusion on the growth of casino poker in the wake of Internet poker rooms, European-based Internet gambling companies that have grown post-regulation, as well as U.S. retail chains that boosted overall sales after launching Internet stores.

Businesses that have not adapted to the Internet have died, while those that have leveraged online sales have multiplied profit, said Jan Jones, Harrah’s senior vice president of communications and government relations. The company owns the World Series of Poker, arguably the biggest poker brand, yet Harrah’s has not been able to fully capitalize on its popularity with online poker players because of the federal ban on Internet gambling.

With the casino gambling market slowing down in the United States, Internet poker presents a golden opportunity for casinos that largely cater to older Americans to capture younger customers — people who typically spend more on entertainment even though they have less time for leisure activities than older consumers, the study said.

Not only are Internet casinos relatively cheap to develop — a few million dollars relative to the hundreds of millions required for land-based casinos — many sites employ thousands of workers who are needed to manage player accounts, Jones said.

“This is a new industry that would come to Nevada,” she said. “This would help us protect jobs and create new jobs.”

Reid is expected to push for a requirement that Internet gambling jobs be located in the United States and other provisions that would ensure Nevada casinos get “maximum benefit” from congressional legislation, Jones said. Nevada’s Gaming Control Board could take the lead in licensing and regulating Internet gambling operators across the country, for example.

Even small casinos, Jones said, could get a piece of the action by licensing software from third parties and joining Internet gambling portals.

Many executives think there is little crossover between the person who plays poker online and the customer who visits a casino to play video poker or enjoy other forms of entertainment. That’s according to Billy Vassiliadis, CEO of R&R Partners, which does advertising and consulting work for the gaming industry.

Smaller operators are probably at little risk of losing jobs to Internet poker rooms unless they have significant poker operations, like the bigger casinos, added American Gaming Association CEO Frank Fahrenkopf.

Still, neighborhood casinos that lack the resources to develop a big online presence have every right to be concerned about a future where Internet gambling sites will be more numerous and more heavily advertised than they are today, said Bill Eadington, director of UNR’s Institute for the Study of Gambling and Commercial Gaming.

“Internet technology is only going to favor a few large organizations relative to the entire industry, not unlike Microsoft, Google and Yahoo relative to other software and Internet provider companies,” Eadington said.

Smaller operators should be figuring out how to make technology work for them, he said.

Lee views Internet gambling as an opportunity for the big boys, not his Eureka casinos.

Not that anyone is asking for his input.

“This makes sense for the bigger players. As a small business, we’re completely left out of the loop. Nobody is really interested in our perspective.”