Poker Website Is a Legal Gamble
American players drive the $2.4-billion online poker market, but the profits they generate flow overseas to the foreign companies that dominate the business.
Now, Los Angeles-based WPT Enterprises Inc., whose televised World Poker Tour helped touch off the poker craze, wants a piece of that pot -- and to get it the company has ventured into uncharted legal territory. From its Wilshire Boulevard offices across from the Los Angeles County Museum of Art, WPT has quietly launched an overseas gambling website that it believes will flourish even though the rules of the game are stacked against it.
WPT bars U.S. citizens, an estimated 80% of its potential customer base, from its Europe-based WPTonline.com poker site. The company has no desire to rile the Justice Department, which considers it illegal to accept online bets from U.S. residents on sports and casino games other than horse racing.
Even with that precaution, however, WPT appears to be taking a “calculated risk,” said David S. Levine, residential fellow at Stanford Law School’s Center for Internet and Society. “All of the law in this area is pretty unsettled,” Levine said. “If you’re engaged in this activity, you’re really making a bet yourself as to what the law is and what authorities will do.”
So far, the Justice Department has not brought any cases against online poker players or the companies that take their money. A Justice Department spokesman in Washington declined to comment on WPT but said companies couldn’t presume that what they were doing was legal just because their customers weren’t U.S. citizens.
“Existing state and federal statutes cover many forms of Internet gambling,” said the spokesman, Paul Bresson. “It is the position of the Department of Justice that online gambling activity occurs both where the gambling business is located and where the bettor is located.”
Scholars call online gambling law murky, however, because most of the relevant federal statutes, including the 1961 Wire Communications Act, were written long before the Internet era.
Bill Thompson, professor of public administration at the University of Nevada, Las Vegas, and author of “Gambling in America: An Encyclopedia,” said the Wire Act was written to combat sports betting over the phone. That makes it unclear whether any company -- U.S. or foreign -- could be prosecuted for casino-type games.
He said he knew of only three people who had been convicted of Wire Act violations related to Internet gambling, and in each case the focus was on sports wagering.
Even if casino games are covered, Thompson said, the law still might not apply to poker, which he considers a game of skill rather than of chance.
WPT asserts that its operations are legal under the Wire Act because online poker is permitted in the Channel Islands -- British dependencies in the English Channel, where its online operation is based -- and in countries such as Britain, where its customers live.
“The Justice Department has done nothing but muddy the waters,” said WPT Chief Executive Steve Lipscomb. “We’re out here trying to play by the rules, and now they’re rattling sabers but giving no guidance about what we’re supposed to do.”
Some companies have bowed to pressure from regulators.
Major U.S. credit card companies and EBay Inc.'s PayPal service have stopped letting U.S. customers transfer money for online wagering.
Many broadcasters stopped accepting advertising for online wagering after the U.S. attorney’s office in Missouri subpoenaed media companies two years ago. No charges have been brought, but the move had a chilling effect on broadcasters, spurring many to stop taking ads for wagering, said Mark Balestra, an analyst at gambling research firm River City Group in St. Charles, Mo.
Where one door has closed, however, others have opened. Companies including Neteller, an online money-transfer company based on the Isle of Man, a British dependency in the Irish Sea, have stepped in to handle money-transfer services.
And poker companies have responded to advertising bans by setting up play-for-free sites with ".net” rather than ".com” addresses. That way, the companies can safely advertise such “educational” sites as PartyPoker.net and ParadisePoker.net, which drive traffic to the parallel ".com” sites where the games are for money.
Aaron Kanter in Elk Grove, Calif., parlayed a $50 buy-in at PartyPoker.com into $2 million this summer when, by playing on the website, he won his way into the World Series of Poker in Las Vegas and took fourth place in that event, the richest casino tournament.
At home, Kanter, who recently ditched a real estate career to play poker full time, competes in as many as four games at once on his 23-inch computer monitor. “Any more than that, it’s hard to pay attention,” he said.
Freight train conductor Scott Buller, 49, of Lincoln, Neb., enjoys the freedom of the Web game, in which you can play in your pajamas through the wee hours of the night.
“In the cold of Nebraska, when there’s nothing else to do and it’s storming out, I’ve done that many times,” said Buller, who says he earns as much at PartyPoker.com as he does in his regular job, operating the 240-mile Lincoln-to-McCook, Neb., run for Burlington Northern Santa Fe Railway.
Legal experts disagree over whether online poker players could be prosecuted under U.S. law. Stanford’s Levine calls it a risk, but others contend that the laws are aimed at operators and that prosecution of players would be time-consuming and impractical.
By using its software to block U.S. players, WPT Enterprises has put itself at a competitive disadvantage -- an estimated 4 out of 5 online poker players are based here. Still, Lipscomb believes that the venture will succeed, in part because the World Poker Tour’s global name recognition can lure plenty of foreign players to its site.
“It’s a fantastic extension of our brand, and it should become the biggest revenue stream we have,” said Lipscomb, a former TV documentary maker. “In essence, you’re able to create a huge casino without having to build a billion-dollar property.”
In the poker industry, more money is being made through online wagering than anywhere else, including broadcasting and traditional casinos, River City Group said. Like Las Vegas casinos, poker sites collect a “rake,” or roughly 4% of every pot.
“Because the house makes its money from commission, making money in poker is all about volume,” River City’s Balestra said. “Virtual poker rooms can accommodate many more players than terrestrial poker rooms.”
Legalization would clearly be a boon for WPT, a majority of which is owned by casino operator Lakes Entertainment Inc. of Minnetonka, Minn. The company has not shown a profit for the last five quarters, which Lipscomb blames in part on a dispute with the Travel Channel that has kept its new poker show, the Professional Poker Tour, off the air. The first season has been produced, Lipscomb said, but it sits “like fresh bread in the truck” as lawyers wrangle over the broadcast rights.
Tony Cabot, a Las Vegas attorney who specializes in gambling law, said that legalization might happen state by state, as it has with lotteries and with off-track wagering on horse racing, which is legal in more than a dozen states.
“Half the people on Capitol Hill probably play poker on Saturday night,” he said. “It’s an American institution, and at some point it will become legal.”
WPT helped start the poker phenomenon in March 2003, when the World Poker Tour debuted on the Travel Channel.
Poker games like Texas Hold ‘Em had always been hard to follow on TV, but WPT got viewers involved in the action by creating graphics that revealed the players’ hole cards and their odds of winning. The series is among the most popular poker shows despite growing competition.
WPT’s shares hit a 52-week low of $5.94 on Tuesday, dragged down in part by fears that the global poker craze had peaked, and closed at $6.96 on Friday, down 64 cents. The company went public in August 2004 at $8 a share.
The stock has been on a wild ride since July 8, when it rocketed 49% to a record $26.50 as investors reacted to a sketchy takeover offer from a group fronted by poker legend Doyle “Texas Dolly” Brunson.
One analyst likened the $29-a-share bid to “getting a napkin with an offer scribbled on it through your fax machine.” WPT called the law firm whose letterhead was on the offer, but the firm said the next day that it no longer represented the Brunson group. WPT’s board let the bid expire July 12, but the episode raised eyebrows among investors. The stock’s price gradually dropped to well below where it had been before the offer.
David Bain, managing director at Merriman Curhan Ford & Co., a securities firm in Los Angeles, expects WPT’s strategy of negotiating exclusive advertising deals for the website with the poker tour’s broadcast partners to pay off in 2006, when the revenue from these deals ramps up.
Since the site’s first commercials started airing in early November on Britain’s ITV4, its traffic has surged, he said, with as many as 400 players during Europe’s evening hours. That’s a pittance next to industry leader PartyPoker.com’s 80,000 players at prime time, but a promising beginning for WPT considering its later start online.
Lipscomb said WPT would be “very pleased with 1,000 to 2,000 concurrent users” in 12 to 18 months, a target Bain called conservative.
Bain expects WPT, which went public in 2004, to swing to a profit of 37 cents a share next year. WPT’s revenue now comes mostly from producing the TV show and selling its overseas rights, as well as licensing products such as clothing and electronic games.
Other analysts see WPT’s stock as no bargain. Ivan Feinseth of New York investment advisory firm Matrix USA said he wondered why anyone would own the stock.
Pointing to the company’s unprofitable track record, he said WPT’s believers reminded him of a Warren E. Buffett investing maxim.
“There’s a patsy in every poker game,” Feinseth said, paraphrasing the billionaire, “and if you don’t know who the patsy is, you can assume it’s you.”