Online poker may never be approved in California unless all benefit

Though it's clearly more difficult than it sounds, online poker in California may be never happen unless every Native American tribe benefits from legalization.

There was some hope that a California poker bill would finally pass after Assemblyman Adam Gray introduced AB2863 in February of this year. The bill addressed all the pertinent issues like geo locating, under age betting, and methods to curtail problem gamblers and more importantly it appeased the horse racing industry by providing them up to $57 million in funding from the profits of poker. The horse racing industry was instrumental in the failure of prior bills.

The bill also provided substantial revenues to the state coffers with a $15 million deposit requirement as license as well as a tax on profits. Originally Gray had a graduated tax between 8% and 15% of gross profits depending on the revenue, but that amount was later amended to a 10% flat tax. The bill passed the Assembly on Governmental Organization (GO) committee in April and then passed the Appropriations committee in June. But at that committee an amendment was put into the bill regarding "bad actors" that seemed to upset the apple cart.

Online Poker in CaliforniaUnder the original bill Gray wanted the regulators to decide who was eligible for a license, but all tribes other than the Morongo and San Manuel Tribes, which have a partnership agreement with PokerStars, cried foul. The other tribes in the state led by the Pechanga Band of Luiseño Indians and Agua Caliente Band of Cahuilla Indians demanded that PokerStars be banned from California forever for offering services to the U.S. after the passage of the UIGEA, but later amended their demands to a 10-year ban which they called a "penalty box". Gray's compromise was a 5-year ban on any "covered persons" as described in the bill but disqualified companies could pay a $20 million fee to wave that 5-year requirement. Gray apparently was concerned that simply banning companies would be unconstitutional, but was willing to cede to that demand as was PokerStars, which saw the $20 million as a cost of doing business. Nevada had a similar rule, banning companies that operated between 2007 and 2011 for 5 years and a permanent ban for any company that operated in the U.S. after that time. The Pechanga tribe called this opportunity to buy their way out of the "penalty box" as outrageous and indicated they would not support it, while other tribes still wanted PokerStars banned indefinitely.

"Companies that have engaged in any form of unlawful or unauthorized internet gaming should be disqualified from licensure," Leland Kinter, chairman of the Yocha Dehe Wintun Nation stated in a news conference after the new amendment was announced.

There was also some question as to whether PokerStars would be able to use prior client lists obtained before leaving the U.S. market, which would give them a further competitive advantage. But the PokerStars alliance also was very upset with the new amendment, since they believed that they would be put in a position where they would be paying a hefty fine and never allowed in the game, similar to what happened when they bailed out the feds by purchasing Full Tilt and paying a fine totalling $731 million. According to Keith Sharp, a lawyer representing the card rooms in the PokerStars coalition, he told that the Pechanga and Agua bands want the ban worded in such a way that it would exclude PokerStars indefinitely. According too Sharp the wording approved by those bands would put a 5-year penalty on covered persons, but no limit on covered assets. So in better words Isiah Scheinberg, who no longer has any part of PokerStars along with other management that ran the show in 2010 would be banned until 2022 but the assets, i.e. the names of, and the games they offered would be ineligible for an indefinite length of time.

"It's pretty clear to us that very craftily it has a ban on Amaya/PokerStars in perpetuity," Sharp told 

The Pechanga, Agua and other Native American tribes have a very powerful lobby and it's clear that without their support the 2/3 vote for approval in the state House and Senate will never happen, so the bill is all but dead. To many in California, the tribes appear to be the bad guys in all of this, but in fairness they have a great deal to lose. The casinos from all the Native American tribes in California bring in almost $9 billion in revenue and while poker likely accounts for very little of that revenue there is no question that online poker will eat into a lot of their business. It's actually the same reason the horse racing industry opposed online poker at first too. They don't offer poker per se at the race tracks, but there is only so much gambling dollars to go around and if people are betting 50% of their gambling budget on online poker then naturally the other forms of gambling will have to decrease by 50%. But more importantly, the tribes all know that when online poker is legalized in California, PokerStars will get most of the action. The name is so well known and their marketing is so strong that it will be difficult for other brands to get a real foothold. Any companies that tried to compete with the company in the late 2000s can attest to that. And even today, with the U.S. excluded, PokerStars far surpasses the clientele and revenues of all other companies. Using data, PokerStars has 168,000 real online players compared to just over 50,000 for all the other brands combined. So there's no reason to expect California to be any different. Other companies like Caesars and MGM will generate some interest but its doubtful they would be able to match PokerStars. With that in mind it's not surprising that the tribes and poker rooms that don't have PokerStars as a partner want them excluded. Think of a city where there are several local cafes all making a fairly good living with local coffee blends and Starbucks wants to open up several franchises in all the good neighborhoods. Obviously the local coffee houses are going to be upset, and if they have the ability to block Starbucks from setting up shop, they will. This is especially true if Starbucks picks out 2 cafes in particular and tells them they will be partners in their revenue for supporting Starbucks, while the other local cafes get nothing.

"Legalized poker here will be a gold mine to all interests."

So what's the solution?

The answer seems to be clear – all tribes have to benefit. It's clearly more difficult than it sounds, but using the analogy above, unless every café benefits equally from the profits that Starbucks generates they will never all agree to supporting the company. The only viable solution is that the gross profits from all poker rooms including PokerStars has to be put into a communal pot and each tribe gets a percentage of that pot – effectively what Gray proposed for the horse racing industry. Similarly, a percentage has to be given to all the land based poker rooms rather than only giving a share to the select few that partnered with PokerStars. Anything short will not satisfy the tribes or the other poker rooms and it's doubtful that online poker will ever become a reality in the state of California. Even then it's not a certainty that all tribes will agree to PokerStars setting up, but it's far more likely once the tribes crunch the numbers and determine whether they will be better off with a share of the profits from online poker or whether they are still better off having it excluded.

The question that also has to be asked is whether Gray and the other Assemblymen are being overly optimistic in their expectations of what poker is going to bring in. $15 million is a hefty fee and if the online poker revenues from New Jersey and Nevada to date are any indication, the billions of dollars in revenue being discussed is just a pipe dream. But a lawyer and gambling advocate from California I spoke to who asked his name not be used for this article feels it may be.

"California is different. Everyone plays poker here and if online poker is legalized the revenue targets will be met or come pretty close to it. California revenues at poker rooms has actually increased in the last few years while the rest of the country saw a decline. Legalized poker here will be a gold mine to all interests."

So what's next?

The bill will not be passed this year, but no doubt a new bill will be introduced in 2017 taking some parts of AB2863 and adding some changes. As long as the changes benefit all tribes, and not just the Morongo and San Manuel tribes, it will certainly fail as well.

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