The U.S. amusements industry has always had a complicated relationship with gambling. For most of the mid-20th century, America's puritanical anti-gambling attitudes forced the amusements industry to proclaim loud and long that, "We are not about gambling; we are about innocent fun." From New York to California, that argument helped legalize everything from free pinball replays to cranes, merchandisers and redemption games.
But lo and behold, times have changed. In 2009, gambling isn't the devil anymore; it's a politically popular source of tax revenue. Today, 40 states have casinos. Operators in South Dakota and Montana have enjoyed legal video poker for more than 20 years. Today those are the only two states in America whose governments don't face budget deficits. Coincidence? Lawmakers apparently don't think so. At this writing, 14 states are planning to expand legalized gambling next year, in one form or another.
In most cases, operators won't be involved in these expanded gambling markets, but there are exceptions. The governor of Illinois signed a law this summer to permit operator-run video lottery. Operators in Ohio, Pennsylvania, North Carolina, and perhaps elsewhere are eagerly hoping to follow suit.
Meanwhile in Florida, Georgia, Texas, Minnesota and other states, operators are running "adult redemption" games or "skill games" that appear virtually indistinguishable from slot machines. In some cases these machines are explicitly legal; in other cases, they are merely tolerated. Call them eight-liners, bingos, pull-tabs or whatever you like; to players, such machines promise gambling-type fun, even if the official payoffs are not Las Vegas-sized jackpots.
Where is all this going? It would be easy for the amusements industry to throw up its hands and say, "Well, it's an impossibly complicated mix of technology, politics and capricious court decisions that nobody can predict. So let's just keep muddling along in ad hoc fashion from state to state, year to year, and verdict to verdict."
That would be a huge mistake, in our view. An incredible gambling dilemma confronts the amusements industry, or will soon. It's not only that more and more states are legalizing more and more types of gambling. And it's not just a question of whether or not operators should lobby to participate in expanded gambling with video lottery, or seek to defeat VLTs (and protect "gray" markets).
The real challenge is going to fall on the amusements industry like a ton of bricks in a year -- or two years, or five years -- when today's gigantic illegal online gambling market is suddenly legalized. Full-blown casino-style gambling is already legal on the Internet in Europe and much of the rest of the world. By some estimates, more than 2,000 online casinos are operating worldwide today.
At the moment, U.S. citizens are discouraged from wagering in overseas online casinos by federal laws that prohibit banks from cooperating with these Internet gambling houses. So if you are an American who wants to gamble on the Internet, you have to go to considerable trouble to get around these barriers. But millions of Americans are currently doing just that.
Online gambling could be legalized in California first, or perhaps Florida. It may even be that Uncle Sam will decide to legalize it nationwide first, giving individual states the choice to ban it locally (which might happen in Utah and Hawaii, the only states that don't even have lotteries today -- much less casinos). Most states under federal legalization would probably opt to regulate online casino gambling in accordance with whatever gambling they currently allow in brick-and-mortar casinos in their jurisdictions.
But make no mistake: one way or another, online casino gambling will be widely legalized in America. It's going to happen eventually, because state and/or federal governments will realize (a) bans are impossible to enforce; (b) it's silly to allow extensive gambling on land but not online; and most of all (c) they need the multibillion-dollar tax windfalls that will result.
Legal online casino gambling will become the U.S. amusement industry's biggest competitor in history for leisure dollars. Legal online casinos will be a bigger competitor than home videogames; bigger than movies; bigger than iPods and World of Warcraft put together. If a national, legal, online gambling industry quickly generates $12 billion in annual revenues -- as recently predicted by investment bank Goldman Sachs -- a huge chunk of that money will surely come from the dollars that are currently flowing into jukeboxes, videogames, pool tables, electronic darts and other tavern amusements.
The U.S. amusements industry needs to think about how to survive and compete in that environment. As a first step, industry leaders should make a detailed study of how Europe's amusement industry is living with (or failing to compete with) online gambling.
Next, manufacturers and operators should start developing technologies and state-by-state lobbying campaigns that will make it possible for the amusements industry to provide newly legalized online gambling to adult players in taverns, restaurants, bowling lounges and other traditional 18-and-up locations. Unthinkable? At the moment, perhaps. But if this industry is going to thrive and compete in tomorrow's radically changed landscape, it had better start thinking along some very radical and previously "unthinkable" lines ... and fast.