Could Online Poker Help Avert the Fiscal Cliff?

As you listen day after day about the pending fiscal cliff, consider that there's one easy revenue source that the federal government could add to any bill. Republicans don't want to raise taxes, but right now online gaming isn't taxed because it's only sort of legal, so a revenue opportunity is slipping away from the government. This would be an easy revenue addition for the government and clarify a confusing issue for poker operators, players, and states.

Where we are
As it stands, the White House and Department of Justice's stance on online poker is that it's legal if the state allows it. But few states are really clarifying whether online poker is legal or what they're going to do about it. Nevada has begun licensing gaming companies, and other states have made some inroads, but it's a free-for-all right now.

Almost across the board, gaming companies want federal regulation. MGM Resorts (NYSE: MGM  ) , Caesars Entertainment (NASDAQ: CZR  ) , and Wynn Resorts (NASDAQ: WYNN  ) have all backed some sort of federal ruling. The only holdout is Sheldon Adelson of Las Vegas Sands (NYSE: LVS  ) who has vehemently opposed online gaming. Those in favor are already moving forward.

Online gaming is here
Nevada has already started licensing companies for online poker. Boyd Gaming (NYSE: BYD  ) and MGM Resorts have been approved and will launch a site when Bwin.party is approved and their joint venture can take shape.

SHFL Entertainment (NASDAQ: SHFL  ) , Station Casinos, the Golden Nugget, and many others have also been approved for a poker license in Nevada. Wynn has also applied, so there's strong momentum.

It won't be long before New Jersey, California, Iowa, and others join the fray as well, and that's when pressure on the feds will really ramp up.

A decision can come quickly
When online gaming basically died in 2006, it happened without much attention from the industry or the media. The Unlawful Internet Gambling Enforcement Act was tucked into the SAFE Port Act that was actually about homeland security. The industry has operated in a legal gray area since then.

Right now we have multiple bills that would regulate online poker floating around the halls of Congress, and it's not inconceivable that one of these could be slipped into a more comprehensive budget plan relating to the fiscal cliff. A few billion dollars of revenue over 10 years from online gaming may not make a deal possible, but it could help bridge the gap when details are being negotiated.

I don't have any inside information that this will happen, but it seems too easy to not be considered. In the meantime, states will continue to expand online poker, and pressure will mount on the feds to regulate it on a national level.

Winners from online poker
If online poker does become regulated on a national level, the winners will likely be MGM and Caesars. Both have huge debt loads that could be lessened by a low capital investment like online poker, which has huge upside. MGM's partner Boyd Gaming may actually be the surprise winner here. The company's partnership with MGM allows for a much larger audience than Boyd could generate itself. I've projected in the past that its 10% stake could increase the company's EBITDA by one-third fairly easily.

Foolish bottom line
This isn't a "buy" sign for companies like Caesars, MGM, or Boyd, but it could be a reason for optimism. Investors should still be focusing on Macau while keeping a close eye on the developments in online poker in the U.S.

For a company with exposure to both Macau and the potential of online poker, you can check out Wynn Resorts. I've created a comprehensive report on the stock that covers the company's opportunities and risks going forward. Click here to find out more.


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  • Report this Comment On November 29, 2012, at 3:28 AM, memoandstitch wrote:

    ^-- Nice one, spammer.

    There is no way the government can regulate online gambling, not before they can regulate dark pools and high frequency trading.

  • Report this Comment On November 30, 2012, at 4:19 PM, Senescent wrote:

    Interesting article Travis. Your insights on the key internet players are accurate. I don't think online gaming will be enough to save Caesars and its overpaid nincompoop "genius" boss from a lethal debt load.

    I agree that it can help keep Boyd afloat. Realistically, taxes from internet gambling would just be a drop in the bucket and could only fix a fiscal molehill. I'd welcome regulated online gaming if the funds were guaranteed secure and there was sophisticated comprehensive monitoring to detect cheating and collusion.

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