Online Poker to Provide Big Wind for Casino Sails
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 2006, sneaky Republicans tacked a clause onto a national security bill, in an effort to pander to their right wing, religious base, that essentially made online poker illegal.
This sent the law abiding companies like Party Poker, scurrying away from the U.S. market, swelling the players ranks and bank accounts of poker rooms willing to operate a legal "grey" area. Five years later, the Attorney General of New York struck out at these companies, seizing their domains, and accusing them of fraud in a slam dunk case.
Of the three major poker rooms that were still serving the U.S. market, only Poker Stars survived the onslaught, being the only company with the funds at hand to pay off the balances of U.S. players, while Full Tilt, Ultimate Bet, and Absolute Poker collapsed, due to a combination of being improperly run, misuse of what were supposed to be segregated players' funds, and outright dishonesty.
Today Poker Stars announced that it was purchasing the assets and liabilities of Full Tilt Poker for $731 million, including a $547 million dollar fine that will likely be used to pay out U.S. players who still had balances with Full Tilt.
So why did PokerStars do this, out of the goodness of their hearts? Hah hah. No, first they are bolstering their image amongst snake bitten online players as the "honest" place to play, and essentially announced that they predict the legalization of online poker within the United States. Already Nevada and Delaware have passed legislation legalizing it, and states like California are considering doing so as well.
I am here to tell you, unequivocally, it’s not a matter of if this takes place, so much as when. As poker is allowed in physical card rooms around the nation and defined by law as "a game of skill," eventually politicians are going to come to their senses, and legalized the online version of it, regulate it, and bolster state and national coffers through taxation of the providers, and the 7% of players who actually win (yes, 7%.)
Two questions might arise for investors-
1. Why don’t US casino companies open their own online poker rooms?
2. How much of an affect will this have on the pocketbooks of big US casino companies?
Answering question one: Despite their dominant physical presence, it would be very difficult to retain active players in their stand-alone online rooms, as new players would almost immediately bolt for greener pastures (ie- rooms with more active players.) Also, the casinos lack the software expertise, policing of internet players, and online brand recognition.
2. The legalization of online poker would of have an immediately positive effect on casino profits and margins. (though the numbers would be small relative to overall revenues, they would almost certainly pick up steam as months passed)
It would give gaming companies a tremendously profitable revenue stream, as the entire casino player database would be employed to recruit customers.
The advantage here would go to casino companies with the greatest number of players passing through its doors- MGM (NYSE: MGM), Caesars (NASDAQ: CZR), and Boyd Gaming, all of whom have casinos throughout the United States, while Wynn (NASDAQ: WYNN) and Las Vegas Sands own fewer properties.
Secondly, the legalization of online poker, could possibly be a steppingstone to broader online gambling legalization. It's certainly not something I would wish on the U.S. consumer, but the probability of this rises from minuscule to low, which should be reflected in the stock prices positively.
Look for the online poker rooms to pursue new deals with land-based casinos before applying for online licenses. Bwin.Party (Party Poker) has already teamed with MGM Resorts, while 888 has a contract with Caesars Entertainment Corp. Wynn had partnered with Poker Stars, but that deal dissolved after last year’s crackdown. Look for news regarding that partnership to spring up anew shortly.
So if you’re an investor in these gaming companies, make sure to keep a careful eye out for the legal developments as they take place. Despite the fact that I believe casinos will have tough times ahead as the U.S. economy deteriorates, I see the development of poker legalization as a foregone conclusion, and a wind behind the sails of these mammoth ships.
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