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WrB I Phtadelp')a. PA USA October 22-23. 2013
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Existing practices in interstate cooperation in lottery, bricks-and-mortar and horse-racing - how tra~sferable are they to iGaming?
By Barbara DeMarco, Vice President, Porzio Governmental Affairs
Much like distance runners assess their strategy of running, sprinting, walking or
a combination of all three when attempting to finish a marathon, New Jersey
regulators have utilized a similar strategy for launching, implementing and
expanding Atlantic City's casino gaming offerings to include I-Gaming. Currently,
regulators are in an all out sprint to launch. If they meet their goal, a collective
sigh of relief will be felt by every entity that is either directly or indirectly
involved, but the race is far from over.
Once New Jersey is up and running its intrastate I-gaming system, the question
will soon arise on how to create an interstate system where two or more states
enter into partnerships. Called compacting, or in New Jersey's case, reciprocal
agreements, these partnerships have yet to be formed. However, many believe
that as soon as New Jersey is up and running states with smaller populations
such as Delaware and Nevada will look toward New Jersey with the hope of
developing these partnerships. The question is: Can it be done or in some cases,
should it be done?
If you use the United States horseracing industry or lottery system as prototypes
for potential I-Gaming agreements between states and/ or nations, the answer is a
resounding "yes." It can be done and not only for increasing the liquidity within a
system or game. It can be done for licensing as well.
For years, United States horseracing interests have utilized an Interstate
Compact for Horse Racing Licensees. The law which has been enacted in many
states, including New Jersey in 2006, "streamlines the licensing process of
participants in live horseracing." (NJ Public Law, 2006, chapter 4).
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The law "establishes uniform requirements among the party states for the
licensing of participants in live racing with pari-mutual wagering and ensures
that all such participants who are licensed pursuant to this compact meet and
maintain a uniform standard of honesty and integrity." In addition, the law is to
"facilitate the growth of a pari-mutuel racing industry in each party state and
nationwide by simplifying the process oflicensing participants in live racing, and
reducing the duplicative and costly process of separate licensing by the regulatory
agency in each state that conducts live racing with pari-mutuel wagering."
In order to form a compact at least four states need to participate. Further, each
of the participating states would be represented on what is called the "Interstate
Compacting Committee." As an interstate entity, the Committee is duly
authorized to request and receive criminal background checks from international,
national and state law enforcement as well as the Federal Bureau of
Investigations (FBI). This interstate entity eliminates each state having to
individually request this information. Rather, they are permitted to share it if
they participate as part of the Committee. After receiving the information, the
Committee can issue one license which is valid in all compacting states.
Given the lengthy, arduous and expensive process associated with receiving an !
gaming license, the institution of an Interstate Compact for I-Gaming Licensees
may not only expedite the process as more and more states come on-line but
eliminate the duplicative nature of each state going it alone. As one identity
verification software representative told me recently, "I feel as if my company can
get through New Jersey's I-Gaming licensing application and approval process,
we can get through any other state's licensing system."
As it relates to poker, compacting is essential because liquidity is the critical
component to any successful system. Simply put: poker plus liquidity equals
success. Poker minus liquidity equals failure. Poker only works when a central
mass of people are available to play because the rake and fees have tight margins.
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Tables must stay full and players must be able to find the games they want to
play .. As a result, the more players and the more money they have to spend, the
more successful the poker site becomes. States like Nevada with approximately
2.7 million residents or Delaware which has less than 1 million residents will
struggle if operators are restricted to the confines of a single state. This leads
many to believe that one or two poker sites will dominate because the population
isn't big enough to support multiple sites. However, if Nevada's 2. 7 million
people with a median household income of approximately $s3,ooo is combined
with New Jersey's 8.8 million people with a median household income of
approximately $70,000 it changes the game.
To date, no state has entered into a compact or reciprocal agreement with
another state for poker or other games. However, every state that has legalized !
Gaming has included language in the law to allow such partnerships to occur.
Another form of "new" wagering available to residents of California and New
Jersey is exchange wagering on horseracing. Prior to the United States
Department of Justice opinion of December 24, 2011, horseracing was the only
legal form of betting on-line. Much like poker, horseracing because of its pari
mutuel nature demands liquidity. Further, operators must provide multiple
choices of races at multiple racetracks to attract and keep patrons. Now take
these factors and add an exchange system to it. Exchange is done over the
internet where one patron bets on a horse and someone or multiple people take
the opposite side of the bet. In order for the system to work there has to be a
match on both ends of the bet. This is why the number of people participating is
so important. The more people the more likely the exchange wagering operator
will be able to match both sides of a bet. In anticipation of this, New Jersey's law,
P.L. 2011, c.15 calls for an "Interstate Exchange Pool." An Interstate Exchange
Pool means an exchange wagering system established within one State or in
another state or foreign nation within which is combined unmatched wagers on
one or more horse races in order to form identically opposing wagers. Pool is
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defined as the total of match wagering in a given market. By allowing an
"Interstate Exchange Pool" exchange wagering operators are much more likely to
match patrons. Without the interstate component, an exchange system relying on
horseracing patrons in a single state is destined to fail because there may not be a
patron to take the other side of a bet. This type of interstate wagering pool is
exactly what poker operators need for a successful system and may be the
prototype for compacting or reciprocal agreements for poker.
Finally, a discussion on the lotteries' multi-state progressive is warranted when
evaluating compacting for multi-state progressive slot machines run on an!
Gaming system. Currently in the United States there is a Multi State Lottery
Association that regulates both Mega Millions and Powerball lottery jackpots.
Much like the Interstate Compact of Horseracing Licenses, the Multi State
Lottery Association is a consortium of individual state lotteries. The rules and
licensing requirements to participate are the same. In this case, however, the
reason for the Multi State Lottery Association isn't uniform rules or licensing.
Rather, the MSLA is designed to increase the amount of money in a Mega Million
or Powerballjackpot pool. It also has the added benefit of allowing residents of
smaller states to participate in a system that can offer very large jackpots. The
individual states benefit from this interstate system. As jackpots grow larger
more people buy lottery tickets, thereby increasing ticket sales. More ticket sales
translate into more money for both retailers and the state. Even lay people not
involved in gaming realize that as a lottery jackpot increases after multiple weeks
with no winners, more people play trying to catch the dream. The motivator is no
longer just winning but winning an amount a person can only dream about.
Now take the MSLA and visualize a similar system for on-line progressive slot
machines such as Wheel of Fortune or Megabucks. The parallel is almost
identical with the exception of the platform operator acting as the retailer. With a
multi state progressive slot system, as jackpots increase the number of potential
players will increase with it. Again, players will want to catch the dream but
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unlike a paper lottery ticket, they will do it with continuous play. Think about the
implications for this and the amount of money it can produce for the operator
and the State. The amount is staggering.
After many discussions with gaming legislators such as New Jersey's John
Burzichelli, prime sponsor of the New Jersey I-Gaming law and industry experts
such as Jim Quigley of US Gaming Services, the question of whether to compact
or not will rely solely on the size of the state and the type of game in question.
Assemblyman Burzichelli believes that states with large populations may never
compact because they can support multiple operators whereas the smaller ones
will have no choice but to compact because their population size is so limiting.
Others such as Jim Quigley see compacting for poker and multi-state progressive
slot machines only because of the need for large pools of players and money.
Games such as craps, blackjack or roulette really don't require a large pool
because the bet is made against the house directly and doesn't have the pari
mutuel element. .. Whatever the end result looks like, compacting is a much needed element in
completing the I-Gaming Marathon especially as it relates to licensing, poker and
multi-state progressive slot machines. Whether the reason is the establishment of
uniform licensing standards or ensuring liquidity and "choice" for patrons, it will
undoubtedly provide participating states with that extra push to get them over
that finish line with a winning system.
Barbara DeMarco will be a speaker at the World Regulatory Briefing USA on
October 22-23 in Philadelphia, PA.
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