States Betting on Big Year for Online Gambling
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January 9, 2012

Louis Castle has been preparing for this moment for months. Even before the Justice Department effectively gave the green light for states to legalize online gambling, the Shuffle Master, Inc. (SHFL) chief strategy officer had assembled a design team for a multiplayer gaming platform, kicked off a hiring plan, and made preparations to launch the company’s maiden interactive division this year.

“Come February, you'll see a lot of activity in Nevada around legal online gaming. Some people will jump, we’ll certainly be ready,” said Castle, who joined Shuffle Master in October from Zynga (ZNGA). “The question is which companies will want to go first.

“It’s just got accelerated. 2012 is going to be a banner year in many ways.” Castle and Shuffle Master aren’t alone. The door for legal Internet wagering in the world’s largest economy just opened a crack, and casino operators, suppliers and vendors are eager for a piece of the $35 billion global market.

Reversing a five-decade-old policy and energizing an industry struggling to revive growth, the Justice Department declared just days before Christmas that only online betting on sporting contests is unlawful. Industry executives and experts say the policy statement in theory allows states to unilaterally legalize some forms of online gambling in 2012, from lotteries and progressive slots to poker. That will accelerate efforts by the likes of MGM Resorts (MGM), Caesars Entertainment (CZR), International Game Technology (IGT) and Shuffle Master to jump onboard.

Analysts say the Justice Department decision is a net positive for MGM, Wynn (WYNN) and other major U.S. gaming industry operators with deep customer databases, offering those gamblers an additional venue to play. Plans include partnering with companies already operating offshore gambling sites, many based in the UK. MGM and Boyd Gaming have joined with online poker company Digital Entertainment (BPTY) to operate in the United States. Wynn had a partnership with PokerStars, but the deal was scuttled after U.S. prosecutors charged the online company in April with violating U.S. laws.

Nevada and the District of Columbia are far ahead in legalizing Web poker, but analysts say other cash-hungry states from Iowa to California could move very quickly and Americans could log on to the first U.S. gambling sites as early as this year. Some states have long pushed for lotteries to go online, arguing that it will draw new players and get them to spend more. The National Association of Convenience Stores has protested – loudly – that this could wallop small businesses who depend on the foot traffic generated by selling lottery tickets.

But it is poker that the major corporations are eyeing. Industry executives estimate the $5 billion to $6 billion U.S. poker market – virtually all of which now flows overseas – could balloon to $10 billion annually. Sterne Agee analyst David Bain said U.S. Web poker could yield an initial $1.5 billion in operating earnings annually, with the pie growing over time.

“In my opinion, 2012 is going to be known as the year the online gaming industry in America was really born. I’m sure at least two states are going to join Nevada in approving online gaming,” said U.S. Digital Gaming Chairman Richard Bronson. “The Justice Department essentially opens the frontier to new settlements. Now states can go ahead and approve online gaming with the certainty of it being legal in our country, which is a far cry from the multitude of illegal operators who have been poaching American players for years.”

Wall Street cheered the Justice Department memo, sending shares of MGM and Wynn Resorts up by 3 to 5 percent the day the news broke.

Gambling and Its Evils?
The biggest advocates of online poker – the game that will kick off what they hope is widespread Internet gambling on everything from blackjack to roulette – are forming ranks against opponents warning of social ills, addiction and the difficulties of shutting out minors or verifying location in an era of ever-increasing smartphone and tablet Internet access.