Stephen Foley: Foreign firms may be on a loser when the online gambling ball starts rolling

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The Independent Online

US Outlook: There are no Puritans in a recession.

The movement to end Prohibition finally became irresistible after the US sank into the Great Depression, and the federal government could no longer afford to give up the billions of dollars in revenue that taxing alcohol could bring. And so it is again, that the ban on online gambling, which religious conservatives thought they had sealed six years ago, is crumbling across the US as state governments look to repair their finances after the Great Recession.

Compared with jacking up existing taxes, or cutting public-sector pay and services, taking a rake from an online poker table looks very tempting to state-level politicians right now. Americans gambled $3bn a year with foreign websites until the enforcement of a 2006 law that explicitly prohibited the taking of bets.

That demand to gamble which those foreign firms, including many listed in London, had been tapping without ever having to pay a penny in US tax has not gone away. The question is how much longer state governors can resist legalising it. Not much longer, according to Richard "Skip" Bronson, a casinos industry veteran who has set up an online gaming company of his own, awaiting the breakthrough. "I was sitting with a governor the other day and he said, 'I want to do it, I'm ready to do it, but can you please get someone else to go first?'"

Naturally, one of the first to go could be Nevada, whose 1931 legalisation of casino gambling is responsible for Las Vegas. It has legislation in the works, but two developments this week suggest this could become something of a race. A bill has just been introduced in the legislature in Mississippi, and a powerful state senate committee backed legalisation in Iowa, too.

The starting gun was in effect fired in December, when the Department of Justice changed its position on whether internet betting breached a 50-year-old law called the Wire Act, governing what can and can't be done over the national phone system. Using the phone lines, and by extension the internet, for non-sports gambling is fine, it said, as long as what happens in Nevada stays in Nevada and what happens in Iowa stays in Iowa. That removed the last of the legal doubts over whether states would be free to go ahead without interference.

Actually, the race got under way earlier than that. The District of Columbia legalised online gambling within its borders last year, but the idea has become tangled up in a controversy over a contract to run the state lottery.

And here is another important point. State politics matter. Working closely with state legislators, and building trust, matters. Getting gambling licences is complex work. The big winners are likely to be the existing casino operators, who already have those relationships and have shown themselves responsible licencees. London-listed online gambling groups, eager to get their toes back in the US, have been seeking partnerships with US casino operators, but as providers of the relatively simple technology required to run an online gaming site, they will be very junior partners.

As for any bigger breakthrough into the US, don't hold your breath. As Skip Bronson's pitch to state governors puts it, only American casino industry veterans and existing licence holders can be trusted with legitimate online gambling, and trusted to bring jobs as well as revenues to the state. The licensing authorities should take a very dim view of firms who once flouted US laws to lure American gamblers to offshore websites, he says, and who can say he won't be persuasive?

The DoJ ruling was a great big Christmas present to shareholders in London-based online gambling firms. They all shot up in value, but the reaction may have been premature. Like I said, state politics matter.