FANTINI’S FINANCE: Government Oversight

No matter where casinos operate they all have one overriding fear: government interference. But when it comes at the federal level, there are unknown implications. That’s what happened last week when the U.S. Department of Justice reversed a 2011 DOJ ruling that throws online gambling and sports betting into question.

FANTINI’S FINANCE: Government Oversight

With the exception of Nevada, investments in gaming companies carry one overriding risk—the government.

That point was brought home again when the U.S. Department of Justice threw a wrench into the proliferation of online gaming by reversing course and saying the 1961 Wire Act bars all interstate gambling on the Internet, not just sports betting.

Stocks sold off after the revelation of the two-month-old opinion, but then bounced back somewhat when investors settled down and realized intrastate gambling is not affected, though the opinion created a number of unanswered questions.

More on the DOJ decision in a moment. For now, it’s important to point out that governments wreaking havoc with gaming is not rare. Take a look at the UK. The reduction in the maximum bet on gaming machines in sports betting shops has slammed several stocks.

Earlier, Britain imposed a 15 percent tax on Internet revenues of online operators licensed in foreign jurisdictions; and Britain might not be done as the UK Gaming Commission heads into a review of the industry.

Or take Italy. Higher taxes and a mandatory reduction in award-with-prize machines have hit some stocks hard.

Or consider China and Macau. There are varying degrees of apprehension over the renewal of the six Macau gaming concessions and whether the government will put the licenses out to bid to other operators. And there are always questions about how the national Chinese government might interfere for any number of reasons, including a tit-for-tat punishment of the three US concession holders as part of the trade conflict with the United States.

Meanwhile, concession holders keep investing billions of dollars in Macau to keep to the promise of redeveloping the city into a tourism mecca, not just a gambling town, hoping to appease the government, excited about the still great untapped potential of the Mainland China market, and with fingers discretely crossed that concessions will be renewed under terms similar to today’s.

All of this has got to affect the value of gaming stocks compared to other industries.

In the U.S., the legislative environment in state capitals generally has become friendlier in recent years. Instead of overly strict rules slapped on suspicious newcomers, legislators more often are easing up to help protect companies that now are established employers and big tax payers. Louisiana is an example of a state comprehensively reviewing its gaming industry with an eye towards making it more competitive.

But threats still exist, such as Illinois perhaps approving expansion that could oversaturate their markets, or states legalizing slot routes, creating convenience gambling competition to casinos.

Back to the DOJ and the Wire Act. While changing politics is always a risk, as might be bearing out with the DOJ of a more conservative presidential administration, politics can also work the other way.

Unlike the long years in which the Wire Act was interpreted and the DOJ now proposes, many states today have thriving gambling operations. With the demise of the federal ban on sports betting, many other states are eager to expand into sports betting, including online and mobile wagering.

That creates a situation where many members of Congress now have home-state gaming interests to protect, moving the politics towards maintaining the status quo.

The case is also being made that the world of 1961 was technologically far different, and we can’t go back before the internet connected everyone. In fact, new legislation might be more likely to modernize the law than impose an archaic ban.

Finally, the reality is that mobile and online gaming is growing intrastate so the risks to businesses with online ambitions is limited even if the DOJ opinion sticks.