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 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. 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, Caesars Entertainment, International Game Technology and Shuffle Master to jump onboard.
Analysts say the Justice Department decision is a net positive for MGM, 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 Bwin.party Digital Entertainment 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 nowflows 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.
The National Council on Problem Gambling puts the annual social costs of gambling-related addiction, bankruptcy and crimes at $7 billion.
But Caesars Chairman Gary Loveman said in an interview that momentum will build for federal legislation -- even in a politically charged year -- because Americans can already gamble freely on hundreds of foreign-operated websites, meaning billions of dollars go overseas every year.
Caesars and MGM -- arguably the two biggest names behind the pro camp -- pledged to continue pushing for federal legislation but vowed not to get left out should states begin to break off and do their own thing.
Shuffle Master had already been counting on legalization of some sort in 2012 or soon after. It has a team and hiring plan in place to design a simple-to-use multiplayer gaming platform -- steps it could accelerate quickly, Castle said.
It joins IGT, Bally and other gambling equipment makers applying for Web gaming licenses in Nevada, UBS analyst Robin Farley said.
Americans are buying a service that only non-Americans sell, Loveman argued in an interview. I don't think there are substantive obstacles. There's just the question of momentum.
ON THE BANDWAGON
Nevada has already legalized online poker and is expected to issue licenses next year. The District of Columbia has passed similar legislation.
Consulting firm H2 Gambling Capital projects that Internet betting operators will win more than $35 billion globally from gamblers this year. It estimates that for online poker, just 37 percent of an estimated 2011 total of nearly $5 billion took place within regulated markets.
Industry insiders and analysts say that while the Justice Department memo will apply pressure for federal legislation -- something most industry operators want -- it stops short of opening the floodgates to online gambling.
Las Vegas Sands CEO Sheldon Adelson, for one, has said he is morally opposed to online gambling and does not believe technology has advanced enough to prevent the underage from participating.
Some argue that is why federal legislation and regulation is needed. Should the U.S. Congress drag its heels on passing potentially divisive legislation in a politically charged year, cash-hungry states facing a deficit of $40 billion or more in 2012 are expected to follow Nevada's example and green-light in-state online poker or lotteries.
If there is not a federal bill, then you will see individual states each passing unique sets of rules, Loveman said. It's obviously a far less rational way to proceed, and it runs the risk of not addressing the illegal operators in any way.
Castle also stressed the industry wants more certainty.
It just got accelerated. 2012 is going to be a banner year in many ways -- either it's going to march forward and it happens everywhere, or there's going to be a lot more legislation that muddies the picture more, he said.
I don't think running in half-cocked is going to be rewarded.
EASING INTO IT
With the U.S. appearing to ease its stance, states facing widening budget shortfalls are seen as more open to online gaming as one of a plethora of revenue-enhancing programs.
Industry consultancy Union Gaming said the Justice Department memo could signal an immediate opportunity for so-called wide-area progressive slots. Interstate use could boost earnings for equipment makers like Shuffle Master and IGT by 1 to 2 percent, according to analyst Bill Lerner.
But legalizing online gambling is no magic bullet to fill state coffers. Gabe Petek, senior director of public finance for Standard & Poor's Investors Services, said the resultant revenues will likely not be large enough to address structural problems in budgets, or cover major shortfalls. He estimates 17 states alone need to make up for a combined $40 billion deficit this year.
I just wouldn't think this is going to be an avenue to balance state budgets. It's not going to make the difference in state fiscal situations, he said. It's unlikely to solve the majority of any of their problems, and most states are still forecasting budget gaps for their upcoming fiscal years.
Others caution that the variety of influential interest groups ranged against online gambling mean any windfall is far from certain, or at least will be a long time coming.
Federal prosecutors earlier this year accused the owners of three of the largest Internet poker companies of tricking regulators and banks into processing billions of dollars in illegal gambling proceeds.
That crackdown scuttled the partnership between PokerStars and Wynn Resorts.
There is also a big unknown: a future U.S. president could reverse the Justice Department stance and send the industry back to the drawing board.
Obviously, this is not the desired outcome, as a patchwork of varied state regulatory schemes will create the possibility of under-regulated situations in which consumers (and operators) will be vulnerable, MGM spokesman Alan Feldman said.
That said, should the Congress fail to act and states take matters into their own hands, we would have no choice but to seek opportunities for our company.
(Editing by John Wallace)