The Reid Bill

Obviously I’ve been closely following discussions of the “Reid Bill” that would pave the way for licensing of US-based online poker operations following a “blackout period” during which it would be unlawful to offer such games to American players. I have no inside knowledge of the issue myself, but I believe I am well-qualified to sort through the conflicting opinions on this legislation and reach the following tentative conclusions:

Prospects Are Bleak

The online poker language is not in the tax cuts bill that is going to the floor for a vote. Reid is talking about trying to attach it to something else, but this seriously hurts its prospects for passage. Many on 2+2 are relieved by that, but I am not so sure it is good news. The picture of an unregulated future painted by both the Poker Players Alliance (PPA) and others in the know is rather bleak.

The Status Quo is Bad and Getting Worse

This is the major point that the bill’s detractors largely fail to acknowledge. Things are not just fine as they are now. It may seem that way, especially if you are a small stakes player who hasn’t dealt with moving large sums of money, but the sites that still serve US players face major hurdles in doing so.

The Department of Justice, in shutting down the payment processors that move money back and forth between online poker sites and American players, has greatly increased the cost of doing business for the sites. Not only must they continue to find new and ever more shady (and presumably expensive, given the risks they are running) processors, but they must also eat the costs every time the DOJ seizes funds from a processor. Every time you hear about a processor getting shut down and tens of thousands of dollars seized, that is players’ money that the sites, to date, have always reimbursed in the interest of keeping business flowing. There may come a time when a site decides it is no longer worth it to keep reimbursing these funds and will simply send an e-mail to affected players: “Your withdrawal of $XXX has been seized by the US Department of Justice. If you wish to dispute this seizure, you can file Form DJ-889-7b in triplicate with the DOJ within 30 days of this notice. Thanks for playing at Cereus!”

If you aren’t aware of these payment processor complications, it’s because you have always dealt in small (<$2500) transactions and/or because the sites do their best to insulate you from these difficulties. No matter how bad things get for them and how much money they are putting up on your behalf, their incentive is still to convey the sense that all is well and you can continue to play worry-free. They are shouldering the risk themselves, and while they are certainly being well-compensated for that, there will eventually come a point at which the cost of doing business is simply too high.

So far, it’s only been money at risk, and the sites are making enough of that. Should the DOJ start indicting the individuals believed to own these sites, those individuals may lose their will to fight in a hurry. This is a particular risk for Full Tilt Poker, with its purported owners living high-profile lives in the United States.

My point is that there probably will not be much warning beyond what we’ve already seen. The sites have no incentive to hint at the complications they currently face, as this would only cost them business. Think Netteller. Everything will be fine until one day it isn’t.

Professional Poker Players Have No Bargaining Power

The PPA has done an admirable job of marshalling what influence it has. Some politicians are more honest about this than others, but the unpleasant reality is that nobody gives a shit whether you can make a living playing online poker. We are not in a position to dictate the terms under which online poker is licensed and regulated in the United States.

Those decisions will be made by interests and lobbies far more powerful than we. Whatever happens with online poker in the long-term will be the result of negotiation between social conservatives who generally oppose gaming and major US-based gaming organizations such as Harrah’s. Foreign sites like Poker Stars and Full Tilt Poker do not get a seat at the table, and those of us whose who earn a living at the virtual tables don’t either.

The influence of gaming companies, especially in Reid’s state of Nevada, is immense. They literally are the economy of that state, employing a tremendous proportion of the population and generating much of the state’s revenue. We are not in a position to dictate anything to them. The best we can hope to do is capitalize on the ways in which our interests align.

This Bill is the Best We Are Going to Get

Democrats lost a lot of ground in the mid-term elections, including control of the Senate House Finance Committee and the House of Representatives. This bill is far from ideal for the professional player, but there is no reason to think that we are in a position to hold out for something better. Even individual Republicans who themselves have no ideological objection to gaming still have trouble supporting it for fear of alienating socially conservative constituents. If this bill fails, then we will have to hope that Democrats rally in 2012 and bother to revist this issue, and even if all of that happens, they are still going to be beholden to the US-based gaming industry, which is still going to insist on preferential treatment.

Even to talk about our “holding out” for something better is naive, because the truth is that our consent isn’t needed or wanted. We aren’t in a position to block this legislation even if we wanted to. Whether we professionals like it or not is immaterial.

As an academic matter, should we like it? The “blackout period” is unfortunate but not unworkable. I sympathize with the many pros are not able to absorb 15 months’ of vastly diminished income, but in the long run it’s a price worth paying for licensed online poker that can be advertised on US television, funded by US banks, etc.

Is the “blackout period” a deal-breaker? Perhaps not. It seems that Senator Kyl, not the gaming companies, is the source of this provision (though he still opposes even this version of the bill). He is a powerful adversary and not an easy one to move, but there are powerful and monied interests on the other side of this issue as well. The best we can hope for is a last-minute compromise on this point, but even if it can’t be achieved, the impression I get is that a bill containing blackout language will be better than no bill at all.

Other provisions, such as the size of the tax on revenues, are generally considered to be more than reasonable. Considering how hard governments rake their lotteries, we may even be getting off easy on this point. Given the opportunity, would we want to trade the blackout period for far higher taxation? I wouldn’t think so, which is all the more reason to prefer this bill.

The prohibition on non-US players, once a US-based market gets up and running, is the part I find most puzzling. I suppose keeping everything domestic makes matters much simpler, but it also forfeits billions of dollars in potential revenue. From the perspective of the US government, revenue from non-citizens is far more valuable than revenue from citizens, and if anything about the bill changes in the next few years, I would expect it to be this.

What Can We Do About It?

At the legislative level, very little. Pardon my cynicism, but the major decisions will be made by interests far stronger than us. We may have some room at the margins to haggle with details (according to the PPA, they were able to do away with pernalites for players on illegal sites that appeared in an early draft of the bill), but we simply don’t have the influence to fight the US gaming industry on their core interests, which unfortunately do include getting a leg-up on their foreign competition.

There is speculation that, should this legislation pass, it may be possible to play on second-tier sites such as Bodog and Cereus during the blackout period. I would advise you to be very careful if you do so. The long-term prospects of these sites will not be good in a world where they must compete, without access to the US market, against not just Poker Stars and Full Tilt but also gaming giants like Harrah’s.

Their incentive will likely be to make what short-term profits they can before being driven out of business by some combination of the DOJ and their competition. When they decide to close up shop, it will likely be without warning, and they may well take your money down with them. This wouldn’t even have to entail outright theft, though I wouldn’t put that past them, either. An unexpected occurrence such as a major crackdown on their payment processors could render them suddenly illiquid. If you believe that Cereus keeps player deposits in a separate account that is not used for operating expenses, I have some real estate to sell you in Florida….

If you are a professional poker player in the United States, this legislation should be a wake-up call for you whether it passes or not. You need substantial savings. You need a back-up plan. You need to know where your money is and how safe it is there. Poker Stars and Full Tilt Poker are huge companies with solid long-term prospects that are not entirely dependent on the US market. Even if they stop serving US players, and even in the absence of legislation this is a realistic possiblity, especially for FTP, they are not likely to abscond with your money. The same cannot be said for smaller sites, especially those with a history of putting short-term profits above honest dealings with their customers.

There are no guarantees. As poker players, we ought to be accustomed to managing risk and making decisions with imperfect information. For my money, this legislation is the best bet we have. The next year or two may well be lean years for us, but if the eventual licensing and regulation of online poker in the US is handled well (this is also not a guarantee), then such a bill will be very good for us in the long-term.

In the absence of legislation, things will continue as usual for a few months, maybe even few years, but they will get very bad in the not-too-distant future. I fear that should that happen, we will all look back wistfully at this window of opportunity and regret that the “Reid Bill” didn’t pass. By then, we may be forced to settle for much worse legislation or even a worst-case scenario where the DOJ aggressively shuts down online poker sites serving US customers, seizes funds, and actively prosecutes players themselves.

Edit: Changed “Senate” to “House” with regard to which Finance Committee the Dems lose in January.

21 thoughts on “The Reid Bill

  1. Right on the money. Agree w everything except the last sentence.
    Re: the last sentece – Why wouldn’t we expect that theres atleast a 50/50 chance that the Dems would do well in 2012? And revive such a bill in the future. Why would you think its all downhill from here. I do realize its 2 years away and thats a long time in online-poker-years.

    • Meh, I’m not much of a politics junkie, and it will depend on a lot of factors, but right now I think things will get worse for Democrats before they get better. Even if they do get back in control, there is no guarantee that they’ll get around to pushing online poker. As “Local Rock” argues above, they’ve had four years of virtual inaction on the subject. Two years is indeed a long time, and this is very much a “bird in the hand” situation.

  2. Thanks for your thoughtful write-up. As I indicated in a comment a few days ago, I stopped playing online poker about 2 years ago. I was thinking about getting back into it maybe 10 hours per week, but I guess now may be the worst time to do that, huh? 🙁

    I agreed with what you said except this part:

    “The prohibition on non-US players, once a US-based market gets up and running, is the part I find most puzzling. I suppose keeping everything domestic makes matters much simpler, but it also forfeits billions of dollars in potential revenue. From the perspective of the US government, revenue from non-citizens is far more valuable than revenue from citizens, and if anything about the bill changes in the next few years, I would expect it to be this.”

    Having had some experience with government bureaucracies, there is a saying that comes to mind: “Your suggestion makes sense! That’s why we won’t do it.” Haha. (Actually, this applies to non-government bureaucracies, too. Never underestimate the Congressional ability to pass things that don’t make sense. Or leave things that don’t make sense.

  3. This is a great article, which should really be read by anyone who has an interest in the future of online poker, or thinks they have an opinion about the proposed legislation. For internet guys in general, a year and half seems like a lifetime, but the truth is that we can all find a way to scrape by if the blackout does in fact occur.

  4. Congratulations on a more level headed consideration of this than most in the poker world.

    But, what might be the reason for presuming Democrats would be likely to support this in the future? What do you imagine has been the reason their has been no legislation brought to the floor of either house throughout 2010, and 2009, and 2008, and 2007? They have had unchallenged domination of the federal legislative branch, controlling both houses by historic margins for four years. An overwhelming majority of Democrats, as well as Republicans, in both Houses originally supported a more restrictive version of UIGEA in a “clean” floor vote unattached to any other legislative vehicle:

    http://www.govtrack.us/congress/vote.xpd?vote=h2006-363

    Virtually all of them continue to do so.

    Speaker Pelosi has stated legalization would happen “over my (her) dead body.” I suggest you read the official position of the Democratic Caucus in the Congressional Record, delivered on the floor of the House to open the debate on H.R. 4411 by Rep. Hooley of Oregon supporting the banning of online gambling on July 11, 2006. That was not the opinion of an individual; she was designated to deliver the position of her party. It continues to be the position of the majority of her party. I do not think there is any sensible reason to think that position is about to change.

    The commonplace notion in the online poker subculture that Democrats must somehow really be for them is a fantasy.

    • I suppose my opinion, based largely on what the PPA and others presumably in the loop have said, is that while it’s tough to get any politician behind the idea of online poker, Republicans are somewhat more predisposed to oppose it. It’s definitely not a given that a Democratic majority necessarily will translate into a push for online poker. A LOT of cultivation is required on the part of those most interested in the subject. But historically Dems have been more receptive to such overtures than have Republicans, who tend to have a much more socially conservative base to appease. Basically I’d expect any politician to be default against online poker in the same way that I’d expect expect them to be “tough on crime”. But on both issues, Dems are generally somewhat more willing to come around from these default positions when persuaded/lobbied.

  5. I am pesimist and I like it your point “Prospects Are Bleak”.
    I do not like your optimism Andrew about “Democrats”.
    Democrats are 100% behind shutting down Wikileaks ,absurd accusation of rape and spy charges.

    • Although I personally have some preference for Dems over Republicans, I’m not a member of either party. That claim was only meant to reflect the fact that while Democrats as a whole haven’t been enthusiastic about gaming, the primary opposition has come from Republicans, and the main proponents have been Democrats.

  6. I, for one, don’t buy the doom-and-gloom crowd’s line. Ever since the Washington state ban and the UIGEA bill got passed in 2006, they’ve been saying the same thing. But so far the DOJ has only seized and shut down processors who’ve gotten caught dealing with sports-books, as nothing in Federal law — even the UIGEA — really deals with poker. If the sites were having problems, they’d come out and say so. Instead we’re supposed to believe that, as their U.S. business model collapses are around them, they main sites are content to make anonymous leaks to the exact same fearmongers who’ve been claiming that the sky is falling for 4 years running. That’s awfully convenient, don’t you think?

    • From what I’ve seen and heard, checks are taking longer to issue and bouncing more often. My assumption is that sites put a high priority on keeping withdrawals as cheap, simple, and fast as possible for players. Understandably, casual players are pretty freaked out when they try to withdraw and the check doesn’t clear. The fact that sites are presumably willing to invest heavily in payment processing and nevertheless can’t keep it running smoothly is very troubling, IMO.

      • ::shrug:: FTP is operating at their usually level of competence in processing cash-outs. Don’t take away my ability to play on Stars just because Full Tilt doesn’t have its act together

  7. To answer Conan, the DOJ has cracked down on payment processors
    Who deal with just poker sites. Try googling Goldwater Bank here
    In Arizona to see how they got hit.

      • The fact that Stars & FTP threw in their support for the Reid bill should be all the sign you need that their future is getting bleak.

        Additionally, entities within Poker Stars have been quoted on 2+2 acknowledging processor problems and how uncertain their future will be without legislation.

        If the DOJ doesn’t kill the status quo, intrastate poker will. Those of us that live in CA, NJ, and FL have intrastate poker legislation to sweat in 2011. It will likely include high rake, harsh player penalties for playing on non-state sites(jail time and $$), and small player pools.

        Great thoughts above Andrew. If you haven’t already done this, it would be cool if you posted this somewhere on 2+2. I’m sure awareness of the legislation issue has risen drastically in the past 2 weeks. We still don’t hear enough pros talking about it though.

          • Just because they haven’t made a public statement doesn’t mean they don’t have position. I doubt the PPA would be backing it if it didn’t have Stars’ approval.

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