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Issue Date: Vol. 49, No.9, September 2009, Posted On: 9/28/2009


Operators Face Gains, Losses Amid Gambling Wave Engulfing Nation


Marcus Webb
Amusement operator, vending, legalized gambling, gaming, video lottery, VLT, video poker, coin-op news, coin-operated machines, gaming news, gambling trends, Amusement and Music Operators Association, skill with prize, SWP, Illinois Coin Machine Operators Association, Ohio Coin Machine Operators Association, Pennsylvania Amusement and Music Machine Association, PAMMA, gray-area poker, gray-area gambling, jukebox, lottery, eight-liners

Amusement and music operators could be among the biggest winners -- or, paradoxically, among the biggest losers -- if a new era of legalized gambling materializes as predicted across America over the next two years. In states where lawmakers may approve operator-run video pokers (as just happened in Illinois), the industry faces the prospect of a multibillion-dollar shot in the arm. But if operators are shut out of newly legalized gambling markets, the amusements industry could find that billions of dollars once spent on music and games are suddenly and irretrievably siphoned away.

At least 14 states are already committed to expanding their gambling markets by next year, The Wall Street Journal noted in a recent report ... a number that many observers expect to increase in the coming months. But as many as 50% of amusement machine operating companies in a given state would go out of business if operators were excluded from a newly legalized video poker market, a respected state operator association spokesman testified to lawmakers last spring.

Accordingly, U.S. operators have good reasons to be torn between hope and fear, as far as gambling is concerned. They hope that more states launch new VLT markets with operator participation. Yet they fear new casinos may become legal and so offer formidable competition for amusement dollars in several more states, or nationwide over the Internet.

Both hopes and fears are well founded in the current climate. The reason why a new wave of legalized gambling is sweeping the nation comes down to a simple mix of politics and economics. With painful budget deficits afflicting both the U.S. federal government and 48 of the 50 state governments, lawmakers in state capitals and in Congress are increasingly turning to revenues from legalized gambling as a potential alternative to tax hikes.

Only Montana and North Dakota -- two states that legalized operator-run video lottery back in the 1980s -- expect to have balanced budgets next year, a fact that is not lost on lawmakers in other states.

 

AMOA: AWARE OF THE TREND

The new president of the Amusement and Music Operators Association is well aware of the growing trend toward legalized gambling.

"All state governments today are desperate for revenue," said Gary Brewer of Brewer Amusement Co. (McMinnville, TN). "Sales tax collections and property taxes, anything that funds public programs, are seeing lower revenues.

"The job of state officials is to find revenues and many, perhaps most, states now have constitutional amendments that require balanced budgets," Brewer continued. "As a result, many states are looking at some form of expanded gambling. Most states already have some form of legal gambling to begin with."

The gambling industry's chief spokesman offered a similar assessment. "Historically, in down economic times, legislators, governors and voters look more closely at new gambling options," said Frank Fahrenkopf Jr., president and chief executive officer of the American Gaming Association, the gambling industry's national trade group.

 

WHAT CAN GO RIGHT: ILLINOIS

Illinois provides a dramatic illustration of what can go right for operators in an environment where public money is short, but taxes are already too high. Facing a $9 billion budget deficit, the state desperately needed new revenues. But the legislature preferred to tax a newly expanded gambling market rather than impose higher taxes on citizens across the board.

For years, an estimated 65,000 gray-area pokers have operated in Illinois with no significant tax revenues going to the state. The Illinois Coin Machine Operators Association has worked for 20 years to legalize operator-run VLTs, arguing that regulation would benefit the industry while taxes would benefit the public. This year, the state government finally agreed to tap this resource.

On July 13, Gov. Pat Quinn signed the Video Gaming Act, which is expected to create a multibillion-dollar VLT market starting in the latter half of 2010. According to ICMOA, the new market is expected to support 40,000 or more networked devices.

ICMOA members are still toasting their victory, and for good reason. University of Illinois professor John Kindt, an expert on state-sponsored gambling, said annual revenues from video poker games average around $100,000 per machine.

Encouraged by the Illinois VLT victory, operators in Pennsylvania, Ohio and North Carolina are among those actively pursuing similar opportunities in their respective states.

 

VIRTUAL CASINOS

Yet operators potentially stand to lose billions of dollars if certain other new gambling markets are legalized -- and if those markets begin absorbing significant amounts of the money that Americans now spend on amusements.

The amusement industry's largest potential competitor is legalized gambling on the Internet. Online gaming could soon become a multibillion-dollar reality both within certain states and also nationwide.

On May 6, Rep. Barney Frank (D-Mass.) introduced HR 2267 in the U.S. House of Representatives. If passed, the bill would legalize and tax online wagers on live remote poker games. It would also legalize, regulate and tax full-blown virtual casinos online.

The combined U.S. market for online poker and Internet casinos could quickly create a $12 billion industry, according to estimates by leading investment bank Goldman Sachs. At press time, Frank's bill had 54 cosponsors and was scheduled for its first hearings in September.

Officials at Sachs recently predicted that online gambling would be legalized nationwide by Congress, if only because the federal government is eager to realize the enormous potential tax revenues from this activity. Certainly the U.S. is under terrific pressure to find new revenue sources. The Obama Administration announced Aug. 21 that the U.S. faces a trillion-dollar deficit over the next decade, yet the President ran on a platform of not raising taxes for middle-class Americans.

In addition to the pressing need for more federal tax dollars, the U.S. government is under increasing pressure from the international community to legalize online gambling. Two years ago, the World Trade Organization court ruled that the U.S. ban on Internet gambling violates its obligations under international trade agreements. This summer, the European Commission came to the same conclusion.

Basically, then, America's trading partners say it is blatantly unfair -- and illegal -- for the U.S. to permit casino gambling in brick-and-mortar facilities in 40 states, while preventing overseas companies from competing in the market online.

If America truly believes in free trade (and if it intends to honor its treaty obligations to most favored nations like the United Kingdom, Canada, France, Germany and others) then the U.S. must open its doors for Internet casino competition, say those nations.

While the Obama administration has issued no statements on this specific issue, the President campaigned vigorously last year on a platform of greater consultation and respect for world opinion and international law. These sentiments have been repeated often since Barack Obama took office last January.

 

ONLINE ACTIVITY

The threat of Internet gambling as a competitor to traditional amusements is not confined to national legislation; this possibility also exists at the state level. Several states, confronting huge budget deficits of their own, may race to legalize online wagering for their respective citizens even before Congress acts.

Experts say a proposed bill to legalize Internet gambling in California, for example, could create a $2 billion market. California faces a $26 billion state budget deficit. Forces are also working to legalize online wagering in Florida, where the state's deficit is $2.3 billion.

No one can say how much the legalization of online gambling might cost the amusements industry. But operators in states where gambling is legalized without operator participation say the results are invariably devastating. Vast sums are siphoned away from existing jukeboxes, pool tables, countertops and other traditional amusement machines as Americans spend their leisure dollars on forms of entertainment that offer the prospect of a financial reward.

It's also unclear exactly how much money Americans currently spend on illegal Internet gambling. Estimates range from $4 billion (according to sources like the Sacramento Bee newspaper) to $100 billion (according to a spokesman for a pro-legalization group called the Safe and Secure Gambling Initiative).

 

SLOTS AND VLTs FIND FAVOR

Even without the prospect of legalized Internet gambling, operators face the possibility that they could be shut out of newly created gambling markets in several states.

For example, Ohio is expected to have a $7.3 billion budget deficit in fiscal year 2010-2011. To help offset the red ink, Gov. Ted Strickland signed an executive order on July 10 allowing seven racetracks around the state to install up to 17,500 slot machines, labeled "video lottery terminals," regulated by the state lottery. These slots are expected to raise $933 million in tax revenues over Ohio's next two-year budget cycle. Amusement operators are concerned that the machines will offer an unwelcome new form of competition to traditional amusements.

As Strickland negotiated with lawmakers over the slots proposal, the Ohio Coin Machine Operators Association had hoped to see a slots bill passed that could be expanded to include legalization of operator-run video poker in liquor-licensed locations. OCMA members were disappointed when Strickland and lawmakers struck a deal that did not include them.

As an alternative, the state association is now supporting an expected bill by Rep. Joe Koziura (D-Lorain) that will allow VLTs in 10,000 liquor-licensed establishments statewide. OCMA's friends in the Legislature have quietly told association leaders that the issue is far from closed.

But then, lawmakers traditionally find it in their interests to encourage special-interest groups to believe their favorite legislation stands a good chance of passage, regardless of how realistic this belief may be. The higher the lobbying group's hopes, the more lobbying money will be spent -- and the more campaign contributions will go to lawmakers.

 

PENNSYLVANIA POKER

A stronger prospect for operator-run VLTs is found in Pennsylvania. On July 17, the House Gaming Oversight Committee approved HB 1317, which provides for operator participation in a new video lottery market. The state, facing a deficit as high as $1 billion, would get a projected $550 million a year by legalizing video poker in bars.

The bill is supported by Gov. Ed Rendell, who originally proposed VLTs as a scholarship-funding measure. More recently, in light of the state's severe budget shortfall, Rendell said he would sign a VLT bill even if tax revenues generated by legal video poker are not dedicated exclusively to education.

Under current terms of the proposed bill, the state would receive 55% of VLT profits, swept weekly from an electronic account set up by operators. Locations and operators would each get 22.5% of profits. John Milliron of the Pennsylvania Amusement and Music Machine Association said in midsummer that it was not possible to predict when HB 1317 might be passed.

 

OPENING PANDORA'S BOX

Meanwhile, the legal fallout from the debate over Pennsylvania's VLT bill shows why seeking to legalize an existing gray market can mean opening Pandora's Box: both positive and negative forces may be unleashed.

For example, it was PAMMA's Milliron who testified to Pennsylvania lawmakers last spring that half the state's operators would go bust if the Keystone State excluded amusement professionals from any new poker market. But a legal video poker market without operator participation was exactly what Gov. Rendell had originally proposed. The good news is that in the following weeks, PAMMA succeeded in getting operators written into the bill.

However, negative repercussions also resulted from shining a spotlight on video poker. Some Pennsylvania lawmakers were informed -- apparently for the first time -- that the state's poker market supports an estimated 17,000 unlicensed machines, or more. They were not happy to learn this.

In June, State Rep. Curt Schroder (R-Chester), who chairs the House Gaming Oversight Committee, asked the FBI to target what he said is widespread tax evasion by participants in the state's "gray" poker market. Schroder also requested enforcement action against gray pokers by U.S. attorney general Eric Holder, Pennsylvania's three U.S. Attorneys; Pennsylvania attorney general Tom Corbett; and the state revenue secretary.

Schroder gave the amusements industry a terrible black eye in the press, telling newspapers: "This scheme has become a highly developed criminal syndicate. These video machine vendors are committing tax evasion and fraud on a massive scale."

 

GRAY MARKET CONFUSION

Pennsylvania is hardly the only state where questionable cash payoffs occur on video pokers, of course. But in many states, the law remains unclear about exactly what is legal. In some states, the law appears to change from year to year, or even from month to month.

The result is that operators continue to find themselves caught in the cross-currents between market pressures to offer the form of entertainment that millions of their customers clearly prefer, and legal sanctions that punish forms of fun that might or might not be legal ... depending on which attorney general renders an opinion, or which judge hears the case.

In North Carolina, where the deficit is $4 billion, State Rep. Earl Jones (D-Guilford Co.) has called for state lawmakers to legalize operator-run online video poker machines with cash prizes. Amusement-only pokers were legal in the state until 2007, when they were outlawed following years of police complaints that illegal payoffs were impossible to eliminate.

Jones estimated that his yet-to-be-introduced bill could raise $500 million in annual revenues from a legal poker market, and that it has a 50-50 chance of passing.

Jones's bill is strongly supported by a state operator association called the Entertainment Group of North Carolina. Like operators in Illinois and Pennsylvania, these amusement industry pros much prefer to run video gaming equipment under the sanction of the state.

More intriguingly, several court rulings in North Carolina have called into question whether the state's ban on operator-run VLTs is constitutional, and have also opened the door for cash prizes on sweepstakes-style games.

One North Carolina judge stated that it violates basic U.S. law to permit Native Americans to run gaming equipment on reservation casinos in the state, while forbidding ordinary citizens to do likewise beyond the reservation's borders. Two judges have ruled that the state's ban on video pokers does not apply to sweepstakes games that offer cash prizes.

As a result, Chase Brooks, an Alamance County operator and spokesman for the North Carolina Entertainment Group, said this summer that "tens of thousands" of sweepstakes-type videogames will soon be up and running statewide. However, Brooks stressed that operators would still rather work under a legal structure of government regulation, state oversight and taxation as embodied in the Jones bill.

 

OHIO: YES, NO, MAYBE

Operators in Ohio also face changing laws and ongoing legal reversals. In fact, Buckeye State operators have more to contend with than the prospect of 17,500 slot machines at racetracks. They also have been whipsawed -- most recently -- by conflicting court rulings about the legality of awarding larger cash prizes for slot-type videogames. Such games are permitted on an amusement basis as "skill games" under state law.

In the fall of 2007, the state legislature passed a new skill games law that limited prizes in skill games to noncash items worth $10 or less. But on July 16 of this year, the Franklin County Court of Appeals struck down the $10 limit. As a result, many OCMA members began awarding prizes or vouchers worth more than $10 in merchandise for a single winning play.

Ohio Attorney General Richard Cordray filed a quick appeal, hoping the Ohio Supreme Court will uphold the $10 limit. While waiting for the high court to decide whether to take the case, he also persuaded the Tenth District Court to block the July 16 ruling from taking effect. At presstime, Ohio operators are back to offering prizes of $10 or less.

 

RAIDS IN ALABAMA, TEXAS

Alabama operators have seen plenty of gray in gray-area gaming this year. On March 19, state police seized 101 electronic bingo games during a 3 a.m. raid on an entertainment establishment near Birmingham. The state troopers closed the venue for good measure, claiming the seized machines were illegal slots.

Just a few days later, a judge ruled the bingos were legal devices, ordered them returned, and said the center could reopen -- at least until a trial definitively settles the legal status of the devices.

Texas operators, too, have spent years struggling with unclear laws that govern the operation of slot-type devices. The machines called "eight-liners" are permissible under state law, as long as small merchandise prizes are awarded.

Until August, the most high-profile operator of eight-liners was Aces Wired (Dallas). The company manufactured a unique piece that awarded a proprietary debit card to winning players. Aces Wired said this arrangement complied with state law.

However, the Texas attorney general said it was the same as awarding cash, and therefore illegal. State lawmen raided four Aces Wired eight-liner gamerooms around the state last year, and indicted the company's executives and staff on illegal gambling charges. Aces Wired arguably won its first trial earlier this year, when the jury pointedly did not find the company guilty of illegal gambling.

But in August, the chief executive officer agreed to a plea bargain to settle remaining charges in the outstanding cases. Company founder Gordon Graves pled guilty to running an illegal gambling operation, and agreed to forfeit more than $1 million in assets, in return for state officials dropping charges against his employees, whom he described as innocent victims who had acted in good faith.

NEW TYPES OF SKILL GAMES

Traditional eight-liners and bingos may be at the center of confusion in many states, but a new generation of skill game -- with cash prizes -- has begun to emerge in the past year or two. What's new and different about this new generation of equipment is that it comes with ingenious legal rationales and, in some cases, approval letters from government officials.

Florida-based Skill4Cash offers online amusement devices for public venues that dispense $1 coins as cash prizes. Machines are called Skill4Cash, Play4Cash, and Play4Tournament; the game menu includes such titles as WordCube and Solitaire, and a Deal or No Deal game is coming soon, the company announced. Units are running in California, and were set to roll out this year in New York and Texas. The manufacturer hopes eventually to roll out the machines on a nationwide basis.

Skill4Cash officials said its devices are engineered to comply with state laws governing cash payouts. Game outcomes result entirely from player skill; no element of chance is involved.

In a similar vein, Pace-O-Matic Inc., based in Georgia, has obtained approvals from government authorities in New York for its Moxie Mania Empire Edition skill games, which also pay out cash prizes. Pace officials also offer a variety of videogames with slot-type gameplay that it classifies as redemption skill games for Georgia, South Carolina and several other states. Pace said the company is "committed to developing … products that are fully compliant with local and state laws." The company's website says Pace will produce legal opinion letters on request.

 

DOLLARS, COMPLEXITY INCREASE

A past-president of AMOA, Wally Bohrer of Hastings Distributing (Oconomowoc, WI), said back in 1988 that Americans preferred what he called "risk-reward" entertainment such as video lottery games. What's more, he said, U.S. operators should aggressively pursue their fair share of this market.

Today, much has changed since Bohrer led the national operator group. But all the changes add up to a far more complex and challenging market. Since that original wave of operator enthusiasm for VLTs, a handful of state operator associations have gained legal gambling markets in their states; other state associations have tried and failed.

Still other operators and states have seen video pokers first legalized, then outlawed. Meanwhile, virtually all operators from coast to coast have struggled with shifting tides of legal opinion, increasingly sophisticated technology (both online and offline), and the seemingly unstoppable rise of taxation on gambling and amusements alike.

Most of all, U.S. operators have seen legalized gambling in its various forms -- casinos, racetrack gambling, state lotteries and online wagering -- explode to a volume that is simply staggering. According to recent report by PricewaterhouseCoopers, current legal U.S. gambling revenue (in all states, including lottery sales) stands at about $57.5 billion. Gambling revenues are expected to reach $79.6 billion by 2011.

The current AMOA president takes a far more cautious stand on operator involvement with gambling than his predecessor did 21 years ago.

"I would say it has to be a personal decision," said Gary Brewer, "whether the operator in a state with a new market for legal gambling wants to continue in traditional amusements, or include it in the portfolio."

But Brewer added: "If we understand that more gaming is coming, then we need to be proactive to make sure it's operator-run."

As the current generation of operators seeks to carve out its role in the world of legalized gambling -- or to hold back the spread of legal gambling -- the issue remains one of the most complex and important facing the amusements industry.


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