Online Poker a Good Investment? Breaking Down the Moody’s Report

Michael Jones : May 1st, 2011

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A recent report by Moody’s Investors Service, a credit rating agency that does research on a variety of businesses and industries, tackled the subject of online poker. We break down some of the key parts of the report below.

You can read the entire report here, or visit Moody’s website here.

The report paints what amounts to be a rosy picture for online poker — at least compared with the events of the past month that have seen PokerStars, Full Tilt Poker and the Cereus network faced with domain seizures and indictments in the United States. The report theorizes that the actions by the Department of Justice will actually help push forward regulatory efforts.

Here’s a look at some of the key points addressed in the Moody’s report:

Poker legal everywhere in the U.S.?

Here’s a passage from the report regarding the prospects of federal regulation:

But we still believe online poker will eventually become legal in the U.S. and that states may move more quickly now. Now that the DOJ has shut down three of the most popular poker web sites, online U.S. poker players, estimated to be in the millions, will be looking for somewhere else to play. … We believe online poker has the best chance of widespread legalization. Of all the types of traditional casino games, poker is considered the most accepted form of gambling in part because it is a game of skill, not chance. … The tax revenue and potential job growth that could be generated should continue to spur momentum for the legalization of online gambling.

In recent years, legislation has made little progress at the federal level. A bill introduced last year by Rep. Barney Frank made it through a committee vote, but it never came to a full vote in either house of Congress. And a bill introduced in December by Sen. Harry Reid went nowhere.

A new bill (HR 1174), identical to Frank’s bill from last year, is now in Congress, but hasn’t gotten past the introductory phase. If Moody’s forecast is right, this year or in coming years, we should see some progress on the Frank bill, an amended Frank bill, or a new bill that makes a carve out for online poker like the Reid legislation. This would obviously be the best-case scenario for U.S. players. State-by-state legislation would create intrastate markets — where players only play against players from their own state. A federal law would allow all U.S. players to play against each other, creating a much larger player pool and a more viable online poker industry in the U.S.

The bill won’t go anywhere without Republican support, however. But we got a sense of a change in the right’s stance last week, when it was learned that Sen. Jon Kyl, once one of online poker’s biggest opponents, may now support a carve out in the law for poker. Read more about that here.

U.S. casinos to benefit?

The report says brick and mortar casinos in the U.S. stand to benefit from regulation:

The action by the DOJ to shut down the web sites run by PokerStars, Full Tilt, and Absolute Pokermay make it easier for U.S. land-based operators to gain a stronger position in the market if onlinepoker is legalized. This is especially true if large, U.S. land-based companies are able to team up with existing European online poker companies that have already developed brands. We believe Caesars has a competitive advantage over other U.S. companies because of its well-known WSOP brand and its tie up with 888. If online poker is legalized, Caesars is likely tocapture solid market share given the popularity of its WSOP brand, its partnership with 888, and its agreement with third parties for use of the WSOP brand on online gaming web sites in Italy and France.

The report by Moody’s also came as Caesars’ CEO addressed the subject of online poker regulation (story here).

It seems very likely that land-based casinos would benefit from federal regulation, as they would be in the best position to apply for licenses and get online poker sites up and running. How things would shake out at the state level seems far less clear. As the report mentions, Washington, D.C., is moving forward with plans to regulate online poker, and it appears the District’s lottery will be in charge of the online poker operation, if it happens. And, certainly, if legislation passes in Nevada, the casinos there will all be in line for licensing.

How regulation and licensing will work in other states remains to be seen, however. While it’s possible, or even likely, that casinos will get involved jurisdiction by jurisdiction, it’s also not clear how each individual state will move forward with online poker regulation, and who they’ll give licenses to.

In the case of a federal law, however, we’re sure Moody’s is spot on. It goes on to mention some now-defunct relationships — between Wynn Resorts and PokerStars, and Station Casinos and Full Tilt — as a model. But it notes that casinos could team up with larger non-U.S.-facing sites like Party Poker.

There’s money to be made

Moody’s breaks down in broad strokes the kind of money that is out there to be made by companies getting into online poker in a theoretical regulated U.S. market:

Additionally, according to Poker Players Research Ltd., online poker attracts a younger demographicthan the traditional casino patron. Therefore, legalization of online poker may actually increase poker demand. U.S. companies that can quickly launch online poker sites and gain even a small share of the $6 billion market would be able to increase earningsbefore interest, taxes, depreciation, and amortization. Even just a 20% EBITDA margin on a 5% market share would boost an operator’s EBITDA by $60 million.

The United States and its gaming interests have never gotten a piece of the poker market. And it seems unlikely, given recent events, that those interests simply want to give up on that potential profit. It’s clear that U.S. casinos have changed their tune, at least in regards to online poker. While casinos, before last year, had been silent on the issue, everything from the Reid bill (Reid is from Nevada) to the public statements and moves by casinos points to that fact. How committed the U.S. gaming interests are to spurring federal regulation will be seen in coming months, or years, in the form of lobbying efforts.

Overall, Moody’s report seems to be cautiously bullish on the prospects for online poker in the United States. But their report is just a best guess based on current market trends. But if they’re right, online poker in the United States isn’t dead yet.

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