Should California Nix the Licensing Fee for Online Poker or Implement a Revenue Sharing Agreement?

Posted By Robert DellaFave on July 22, 2014

So it’s Tuesday, and with each passing day I’m more and more convinced that the Santa Ysabel’s promise of launching a real-money online poker site in California was just a ploy to get lawmakers and industry experts talking about the issues that face the state’s smaller tribes.

Well played, Santa Ysabel. Well played.

Since the Santa Ysabel’s announcement last week, several debates have propped up, most of them revolving around whether the tribe is within their right to generate revenue from an unlicensed site.

To recap:

  • According to the Santa Ysabel, the Indian Gaming Regulatory Act of 1988 categorizes poker as Class II gambling. As such, the tribe’s representatives believe that by generating revenue via online poker, they would not be in violation of the law. However, the Act makes no specific mention of poker, only of non-banked games.
  • The bigger issue is that the IGRA does not define legal parameters for games that are based in tribal lands but played from outside the host’s confines (i.e. servers housed in Santa Ysabel lands but accessible to anyone in California).
  • The parties behind Santa Ysabel’s real-money poker site, namely the Kahnawake Gaming Commission, Financial Payment Network and the Santa Ysabel themselves, would all have their suitability questioned by any legitimate gaming commission. Should sovereign nations have the right to just let anyone, regardless of worthiness, back into the United States?

Underlying these more immediate issues, is one that could affect the landscape of California’s iGaming industry for years to come, and that’s whether or not tribes should be required to pay what will probably amount to a $5 – $10 mm iGaming licensing fee, and if they are, should the tribes that can’t afford it be entitled to a revenue share, similar to the existing Revenue Sharing Trust Fund.

In all likelihood, it’s this debate that the Santa Ysabel hoped to spark when they made their surprise announcement.

And to that end, they have succeeded.

Again, well played.

Breaking the California debate down

Colleague Steve Ruddock nicely sums up the arguments for a new revenue sharing agreement in his recent post, and for the most part I agree.

Steve would then expand upon his argument in an exchange on Twitter.

Let’s break it down:

The concept of a network where small tribes are permitted to leech off larger ones is an interesting proposal, yet could only function if the licensing fee were drastically lowered or removed entirely.

Furthermore, the network model comes with its own share of issues.

First off, those likely to set up shop in CA (PokerStars, FTP, Party and to an extent 888) function primarily as standalone sites. Assuming online poker’s big guns will latch on to the state’s largest tribes and cardrooms, the small tribes will be left scrambling to forge their own network – a network that would probably feature substandard software, poor organization and little free-flowing capital. It wouldn’t stand a chance, and could actually cost the tribes more money than their real-money poker offering would generate.

Admittedly, that’s a pessimistic outlook, but it’s also a likely one.

More rooms DOES NOT equate to equivalent revenue.

By fracturing an online poker community, each individual site has less power to offer more attractive promotions, better tournament guarantees and more cash-game / SNG playing options. In turn, would-be players looking for value may opt out entirely.

Look at it this way, does anyone really think that the combined revenue of Party / Borgata, WSOP and 888 in New Jersey would exceed that of PokerStars if Stars were the only operator in the state? No shot.

Regarding Steve’s point, it would certainly be easier just to give the smaller tribes a kickback. The odds of a solitary small tribe, even if it were part of a network, generating more revenue from online poker than any reasonable stipend would provide them is so minuscule that it can be discounted.

That, and they wouldn’t have to work to earn their share.

That, and it allows tribes like the Santa Ysabel to reliability pay off their existing debts.

That, and it’s better for the poker community.

And so on.

I’m hard pressed to believe that any small tribe would have the resources to launch much of a marketing campaign. One needn’t look much further than New Jersey to see what good a half-baked marketing roll-out does for traffic.

Compounding matters further, it’s already been proven that there’s little demographic overlap between b&m casino patrons and online gamblers. If smaller tribes attempt to market their b&m casinos through advertising its online poker site, they’ll end up broke and scratching their heads.

Again, Steve is right:

“if a revenue model is implemented everyone benefits, with the only downside being that smaller tribes have their destiny taken out of their hands.”

But maybe there’s a way around that…

An alternative approach?

What our new friend PokerXanadu is suggesting is that we keep the proposed $5 – $10 mm licensing fee in place, toss in a revenue sharing model for smaller tribes and allow them to operate real-money poker sites.

That’s sounds like a fair compromise, except that for such a system to work the unlicensed tribes would have to be subject to the same regulatory confines as the licensed ones. Otherwise, some of them would run afoul, greeting every shady partner with a wink and a handshake, much like the Santa Ysabel.

And again, would these rooms actually be able to turn a profit?

In business, for every potential upside there is a downside. The downside potential of a heavily marketed poker skin that fails miserably would be hefty enough to consume the tribe’s revenue share and more.

What about nixing the licensing fee entirely? That way, tribes would be free to pursue their own iGaming interests without having to first prove that they could ante up at least $5 mm.

Alright, sounds great, but if given the choice of aligning with the Pechanga or Joe’s Tribe who is Party or 888 going to prefer? They’re going to preference tribes with strong b&m casino interests and more importantly, money.

Any tribe that currently receives a revenue share can only host a maximum of 350 gaming machines – hardly enough to entice online gaming’s big guns.

On the plus side, sans a licensing fee, the mid-sized operations would have more money to spend on marketing, promotions and welcome bonuses. And let’s face it, if PokerStars is part of the scene, its competition will need all the help it can get.

The answer for Cali iGaming is…?

So to conclude, while on paper ditching the licensing fee appears to help smaller tribes, it would benefit the 888’s and Party’s of the world significantly more (at the expense of the state). By contrast, a revenue sharing program would allow smaller tribes to build value and eliminate debt.

And despite my points to the contrary, I’m generally in favor of sites being allowed to conduct their own operations, in so long as the conditions in which they are permitted to do so are air tight. Just don’t say I didn’t warn you if your operation fails.

 

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Robert DellaFave

Robert DellaFave writes for a variety of online gaming sites and is also working on programming a poker simulation creative enough to beat the best. Follow Robert on Twitter @DivergentGames and on Google+

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