WEEKLY FEATURE: Happy Together

Two of the three states offering online gambling in the U.S. have come together and signed a pact to combine online poker sites and increase their player pools. Nevada Governor Brian Sandoval (l.) and Delaware Governor Jack Markell announced the pact, which will be the first interstate internet gaming partnership. A date for interstate play to begin was not given, not were any details of how the differing regulations and tax rates would be handled.

Of the three states offering online gambling in the U.S., Nevada and Delaware have been hampered by their overall small state populations and player pools.

So the two states have done something about it by signing a pact to combine their player pools. Under the agreement Nevada and Delaware residents will be able to play at the same online tables.

The pact is the first interstate internet gaming partnership in the U.S.

“We’re standing in a moment of history today,” Nevada Governor Brian Sandoval said at a news conference with Delaware Governor Jack Markell. “We hope the pact will serve as a model for multi-state collaboration and that other states will see the benefits of the agreement and soon decide to join for themselves.”

The deal is the first between two states offering online gambling and was made possible after a 2011 U.S. Department of Justice ruling cleared the way for states to legalize online gambling within their borders. Three states then legalized online gaming—Nevada, Delaware and New Jersey.

The DOJ’s opinion centered on the Unlawful Internet Gambling Enforcement Act of 1961, or UIGEA, which prohibited banks from processing any bets made in prohibited forms of gaming. The DOJ said the law only applies to sports betting and that Internet transactions between states where gaming is legal should be viewed as legal.

Still, the pact between the two states may test that interpretation. The two governors, however, see the partnership as a logical step for a new industry.

 “We began that conversation because we know that Delaware and New Jersey were the only other states that were looking at passing online gaming,” Sandoval said. “We wanted to get ahead of the curve with that, and the conversation began in earnest subsequent to the passage of the bill.”

Nevada began offering online poker early last year and Delaware went online with both poker and casino games in October. Players have to be physically located in each state to play on their online sites.

However, since both states have relatively small populations, online revenue has been relatively small in both Nevada and Delaware. The pact is seen as a necessity by many analysts to increase player pools for sites in both states. Online poker rooms especially need a large player base to operate well.

According to the Delaware Lottery, the state brought in just $145,200 in revenue from online gaming in January, up slightly from the $140,000 won in December, and the $111,000 won in November. Nevada hasn’t yet broken out online poker revenues in the state’s monthly figures, but Union Gaming Group estimated the revenues were between $200,000 and $750,000 each month.Now that a third online poker room in up and running—South Point’s Real Gaming joined Ultimate Poker and Caesars’ WSOP two weeks ago—Nevada will begin breaking out revenue for online poker starting in late March.

The two governors see the agreement as an initiative by states in the face of a lack of action on a federal online gaming law in Congress.

 “I see this as an opportunity for the states to show leadership, and it’s good for gaming, it’s good for business, and it’s good for the economies of our two states,” Sandoval said. “

Players in both states will still log-on to the sites licensed in their state and still have to be within the state’s physical borders. Once logged in, players will be able to play poker against each other at the same virtual tables. It’s unclear if the player’s states will be identified online.

The two states will split revenues based on where the participating players are from. No estimate of how much additional revenue each state would make was given.

It was also not clear when the pact would go live and interstate play would begin.

“It’s up to the providers whether they want to be part of this,” Sandoval said.

The pact is seen as giving a clear a clear incentive advantage to Caesars Entertainment, which operates its WSOP poker site in Nevada. Caesars is partnered with 888 Holdings, which operates all three of Delaware’s online poker sites.

888 Holdings CEO Brian Mattingley told the Las Vegas Review Journal that his company “was delighted” by the agreement between Nevada and Delaware. He said the company is working with Nevada gaming regulators to launch an 888 branded website for online poker.

“This is a very strategic move that provides a much better gaming experience for customers,” Mattingley told the newspaper. “It gives the smaller states much more liquidity and I can only assume the governors will reach out to other states in order to increase the network.”

Caesars and 888 Holdings also operate online poker sites in New Jersey.

Mitch Garber, CEO of Caesars Interactive Entertainment, said the deal is “another case of forward-thinking and an endorsement of the importance of pooled liquidity, especially for lesser-populated states. We knew the states would find a way to collaborate. This will bring more players to the table.”

Sandoval has said discussions with New Jersey—with a population of over 9 million—have started, but no deal appears imminent.

“I think they want to see how this works out for us,” Sandoval said.

There are many thorny issues to be worked out between the two states, however. Nevada has legalized only online poker, while Delaware accepts wagers on the full scope of casino games. There were no details on how Nevada players will be prevented from accessing non-poker games.

Also short on detail was the massive difference in tax rate. The online gaming tax in Nevada is the same as the land-based casino tax—6.75 percent. The same is true in Delaware, but the tax rates are much higher—43.6 percent on slots, and 34 percent on tables. How the taxes will be designated is still a mystery.

More dangerous—for Delaware at least—is the imbalance of bonus money offered by online casinos because of the higher tax rate.

Melissa Blau, an online gaming consultant, told the iGaming Legislative Symposium in Sacramento last week that the deal could favor Nevada.

“Because of its lower tax rate, Nevada online poker rooms can offer more bonuses to players, meaning that they’d be playing with a bankroll made up largely of bonus money,” she explained. “In Delaware, where they offer much lower bonuses, most players will be using real cash, and that real cash could end up in Nevada more often than not.”

Eilers Research gaming analyst Adam Krejcik told investors that Delaware’s current numbers “have been nothing short of a disaster.” He said more and larger states are needed to grow the industry.

“It’s hard to find any silver linings from these initial Delaware results,” Krejcik said. “Moreover, we believe the partnership with Nevada, while symbolically important, is unlikely going to have a major impact on near-term revenue trends.”

As many as 10 other states are said to be considering legalizing online gaming and the two governors said they envision other states joining the pact. Though the agreement between Nevada and Delaware is limited to poker—the only online gaming allowed in Nevada—it could be expanded to other types of games, officials said.

“Today this is an internet poker agreement between Delaware and Nevada,” Markell, Delaware’s governor said. “But we know more games and more states mean more players, which means more revenue for participating states.”