In almost every family, society, social group, or group of companies comprising an industrial sector it is possible to find one or two that go against the flow. They usually do so as a matter of principle that they want to impart unto others. In the case of the online gambling industry, PokerStars is the company that has chosen to go against the flow.
PokerStars is the world’s second largest online gambling company, after Partygaming plc (LSE:PRTY), and is controlled by Israel’s Scheinberg family. Whereas Partygaming, 888 Holding plc (LSE:888) and other leading companies in the sector decided to accept bitter reality and closed their doors to US customers last Friday, PokerStars decided to fight the new US law, and allow its US customers to play poker on its website.
PokerStars believes that poker is game of skill, not a game of chance, so the new law does not apply. The Unlawful Internet Gambling Enforcement Act, which came into effect last Friday morning, makes it illegal for US residents to pay for online gambling, whether betting on various competitions, sporting events, lotteries, and games of chance. How does the law define a game of chance and a game of skill? It does not, which is why PokerStars decided to exploit this small loophole and not bar access to its website to bets by US residents.
Last Wednesday, PokerStars notified its subscribers by e-mail, saying, “PokerStars has received extensive expert advice from within and outside the US, which concluded that these provisions do not alter the US legal situation with respect to online poker. Furthermore it is important to emphasize that the Act does not in any way prohibit you from playing online poker.
“Therefore, our business continues as before - open to players worldwide including the US. You may play on our site as you did prior to the Act.
“PokerStars believes that poker is a game of skill enjoyed by millions of players, and we remain committed to providing you a safe and fun environment in which to play. We value your loyalty to PokerStars, and look forward to continuing to serve you with the best online poker experience, as we have for the past five years, six billion hands, and 40 million tournaments.”
PokerStars’ action raises the question, how dare the industry leader act differently from its peers? The answer, or at least one of the answers, lies in the company’s status. PokerStars, unlink PartyGaming, Sportingbet plc (AIM:SBT), 888 Holding, and Empire Online Ltd. (AIM: EOL), is a private company, and its sole obligation is to its private shareholders - the Scheinberg family and senior company executives - whereas the concept “public shareholders” is absent from the company’s lexicon.
PokerStars nevertheless not just another poker website among the almost 2,000 existing websites. The company is the largest competitor of PartyGaming, and its actions could affect the entire industry. PartyGaming CEO Mitch Garber could not but respond to his competitor’s actions. “Now that public companies are out of the US I think it's very brave of private company operators to think that they're not going to be next to be indicted, arrested and pursued,” he said at the three-day European I-Gaming Congress & Expo in Barcelona last week, attended by representatives of most of the online gambling industry. Garber added that people overestimated their ability to comply with the law. He presumably directed his comment towards PokerStars’ management and shareholders.
Garber, to be precise, was especially angry at PokerStars. “They should share in the legal and lobbying burden borne by the industry’s public companies. Public companies such as PartyGaming built the industry, and fended off previous attempts by the US government to ban their activity. These companies have financed every factor in the industry until now. Today, all of us, without exception, should take responsibility,” he said.
Garber warned that he would “fight very aggressively” against the private companies. He was not the only man to lambaste PokerStars. The Royal Bank of Scotland plc (NYSE; LSE: RBS) will reportedly sever its ties with the company. On Friday, the bank said it would do whatever necessary to comply with the new US law. In other words, if PokerStars continues to accept bets from US residents, RBS could cease doing business with the company.
Presumably, RBS will not be the only entity to reconsider it relationship with PokerStars and other online gambling companies. Although PokerStars told its US customers that it would continue to allow them to place bets on its websites, under the new law, US credit card companies, banks, and other financial institutions may not process payments for online gambling made by US residents. In other words, the American gambler can play poker on the company’s websites, but there is no assurance that a financial institution will transfer the payment for the bet to the company.
Besides the fact that PokerStars is a private company, the decision to continue operating in the US is due to the fact that it utterly dependent on the US market. In contrast to PartyGaming and 888 Holding, who also run casino games and bingo, and in the case of PartyGaming, sports betting as well, PokerStars only operates poker sites, which is considered the most popular game by US bettors. PartyGaming’s exposure rate to the US is 77%, and PokerStars’ rate is presumably even higher.
As mentioned, PokerStars’ basic argument is that poker is a game of skill, not a game of chance, so the new US law does not apply to it. Those making this argument claim that, in contrast to casino games, which are played against the house, everyone sitting at the poker table has the same statistical chance of winning. Therefore, level of skill, expertise and experience distinguishes the players.
Some people also argue that poker players have abilities like bridge or chess players, and that luck can only affect a game in the short term. These people argue that in the long run, expertise and skill separates the winners from the losers. Other people argue, however, that both luck and skill are equal factors in poker.
Whether or not poker is a game of chance or of skill, it will be interesting to closely monitor the new game of poker between PokerStars and the US government. Whether the company surrenders and withdraws its decision, or if it can exploit the perceived legal loophole to continue operating in the US market will depend on at least as much luck as its customers need.
Published by Globes [online], Israel business news - www.globes.co.il - on October 18, 2006
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