Prepare now for the challenges and opportunities of iGaming
TRIBAL NATIONS QUARTERLY |
Internet gaming, often referred to as iGaming, and sometimes as online gaming, is expected to be a game changer for operators in the United States. Long established in other countries, this popular activity has gained the support of state legislatures that are hungry for additional tax dollars. Nevada, New Jersey and Delaware have all approved some form of iGaming within their borders. Nevada Governor Brian Sandoval recently signed legislation that enables him to form compacts with other states that have legalized iGaming, thus ushering in the possibility of interstate gaming.
Many questions still remain at the federal level, and tribes are actively watching federal and state legislation to evaluate the impact of legislation on their ability to control any iGaming they may wish to operate.
In addition to being a direct source of new revenue, iGaming is expected to create significant opportunities for operators of land-based casinos to draw additional traffic to their existing properties. For example, operators may market their land-based casinos on their iGaming websites, or tie promotional activities between their iGaming and land-based operations.
iGaming creates not only opportunities, however, but new challenges. Summarized below are a few of the issues casino operators should consider as this new gaming area continues to develop.
Liquidity and sufficient customer base
One of the keys to successful online gaming, particularly for poker, is having a large group of players available around the clock to play against one another, and having enough activity to generate large potential pots. Successful operation also depends upon having a continuing ability to attract new players and extend the life cycle of existing players who have many gaming options from which to choose. From a business standpoint, this is one of the most crucial factors in making the decision as to when, or even whether, to invest in online gaming.
Observers of Nevada's legislative and regulatory activity question whether Nevada's system of intrastate gaming can be successful given that state's comparatively small population. It is not surprising therefore that Governor Sandoval saw the value in working with the legislature to amend Nevada's statutes to explicitly allow for the formation of compacts with other states.
Comprehensive regulation at the federal level is thought by many to be the key to allowing full-blown interstate gaming and avoiding a patchwork quilt of state legislation that would make interstate gaming unduly complex.
Until there is additional clarity in the legal landscape, potential operators will need to carefully consider their ability to draw play from within their respective jurisdictions.
Some operators are opting to use social (play for free) gaming sites to generate customer traffic, improve brand loyalty, and prepare for eventual wagering. These social gaming sites are not subject to the same requirements and limitations as wagering sites.
Meeting regulatory requirements
States authorizing online gaming are expected to require the existing gaming regulators to adopt extensive regulatory requirements governing everything from design and operation of the computer system, to internal controls used by the operators, website content, tax reporting and a host of other issues. Nevada, for example, adopted regulations (primarily Nevada Gaming Commission Regulation 5A), technical standards for the design of the iGaming system, and minimum internal control standards for the operators. Legislation requires the licensing of operators, system manufacturers and service providers (such as providers of payment processing services).
While commercial operators will clearly be subject to the jurisdiction of state regulators, it is not clear what authority the states would have with respect to tribal operators. In an ideal case, tribal governments would determine these matters for themselves and be free to establish regulations and licensing schemes that match their own perceptions of risk.
Securing the systems and ensuring proper operation
All computer systems have significant risks, and iGaming systems have some unique risks that should be addressed. In order to register patrons to play, operators are required to collect significant amounts of personally identifiable information to establish identity, age and player address for purposes of establishing whether the individual may lawfully engage in iGaming. Those who obtain and process the information may be liable for security breaches that result in patron data being disclosed or disseminated. Like any online merchant, successful business operations depend on the site being up and running 24/7. Operators of iGaming have an additional burden because they must meet regulatory requirements to ensure system integrity and promptly handle customer requests for withdrawal of funds on deposit. Best practices suggest that any iGaming system be subject to vulnerability assessment and testing on a regular basis.
Prior to an iGaming system being placed in use, it must be tested in a laboratory setting (generally this is done by an independent testing lab approved by state regulators). Once an initial system certification has been completed, the regulators may perform additional testing before authorizing the operator to go live with the system. There are likely to be extensive field trial procedures once the system goes live, with a requirement that records of the trial procedures be kept and provided to the regulators before the system gains a final stamp of approval. Extensive system documentation is crucial for obtaining regulatory approvals and is an important permanent record.
What to do now
- Evaluate the costs and benefits of iGaming, giving particular consideration to the value it may add to existing land-based operations.
- Consider the effects of iGaming on your existing customer base. Even if you do not move forward with iGaming, the existence of iGaming will likely have an impact on customer traffic at your properties. Take steps to build customer loyalty.
- Stay aware of current developments in state and federal legislation.
- Seek appropriate partnerships with system manufacturers and service providers that can help you be successful. Perform due diligence before signing any agreements. Ensure that your partners are using best practices and that they will be around for many years to come. Ask for copies of regulatory approvals and system documentation.
Please watch for future iGaming articles. For further information on this topic, please contact Dwayne Eto.