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Existing practices in interstate cooperation in lottery, bricks-and-mortar and horse-racing - how tra~sferable are they to iGaming?

By Barbara DeMarco, Vice President, Porzio Governmental Affairs

Much like distance runners assess their strategy of running, sprinting, walking or

a combination of all three when attempting to finish a marathon, New Jersey

regulators have utilized a similar strategy for launching, implementing and

expanding Atlantic City's casino gaming offerings to include I-Gaming. Currently,

regulators are in an all out sprint to launch. If they meet their goal, a collective

sigh of relief will be felt by every entity that is either directly or indirectly

involved, but the race is far from over.

Once New Jersey is up and running its intrastate I-gaming system, the question

will soon arise on how to create an interstate system where two or more states

enter into partnerships. Called compacting, or in New Jersey's case, reciprocal

agreements, these partnerships have yet to be formed. However, many believe

that as soon as New Jersey is up and running states with smaller populations

such as Delaware and Nevada will look toward New Jersey with the hope of

developing these partnerships. The question is: Can it be done or in some cases,

should it be done?

If you use the United States horseracing industry or lottery system as prototypes

for potential I-Gaming agreements between states and/ or nations, the answer is a

resounding "yes." It can be done and not only for increasing the liquidity within a

system or game. It can be done for licensing as well.

For years, United States horseracing interests have utilized an Interstate

Compact for Horse Racing Licensees. The law which has been enacted in many

states, including New Jersey in 2006, "streamlines the licensing process of

participants in live horseracing." (NJ Public Law, 2006, chapter 4).

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The law "establishes uniform requirements among the party states for the

licensing of participants in live racing with pari-mutual wagering and ensures

that all such participants who are licensed pursuant to this compact meet and

maintain a uniform standard of honesty and integrity." In addition, the law is to

"facilitate the growth of a pari-mutuel racing industry in each party state and

nationwide by simplifying the process oflicensing participants in live racing, and

reducing the duplicative and costly process of separate licensing by the regulatory

agency in each state that conducts live racing with pari-mutuel wagering."

In order to form a compact at least four states need to participate. Further, each

of the participating states would be represented on what is called the "Interstate

Compacting Committee." As an interstate entity, the Committee is duly

authorized to request and receive criminal background checks from international,

national and state law enforcement as well as the Federal Bureau of

Investigations (FBI). This interstate entity eliminates each state having to

individually request this information. Rather, they are permitted to share it if

they participate as part of the Committee. After receiving the information, the

Committee can issue one license which is valid in all compacting states.

Given the lengthy, arduous and expensive process associated with receiving an !­

gaming license, the institution of an Interstate Compact for I-Gaming Licensees

may not only expedite the process as more and more states come on-line but

eliminate the duplicative nature of each state going it alone. As one identity

verification software representative told me recently, "I feel as if my company can

get through New Jersey's I-Gaming licensing application and approval process,

we can get through any other state's licensing system."

As it relates to poker, compacting is essential because liquidity is the critical

component to any successful system. Simply put: poker plus liquidity equals

success. Poker minus liquidity equals failure. Poker only works when a central

mass of people are available to play because the rake and fees have tight margins.

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Tables must stay full and players must be able to find the games they want to

play .. As a result, the more players and the more money they have to spend, the

more successful the poker site becomes. States like Nevada with approximately

2.7 million residents or Delaware which has less than 1 million residents will

struggle if operators are restricted to the confines of a single state. This leads

many to believe that one or two poker sites will dominate because the population

isn't big enough to support multiple sites. However, if Nevada's 2. 7 million

people with a median household income of approximately $s3,ooo is combined

with New Jersey's 8.8 million people with a median household income of

approximately $70,000 it changes the game.

To date, no state has entered into a compact or reciprocal agreement with

another state for poker or other games. However, every state that has legalized !­

Gaming has included language in the law to allow such partnerships to occur.

Another form of "new" wagering available to residents of California and New

Jersey is exchange wagering on horseracing. Prior to the United States

Department of Justice opinion of December 24, 2011, horseracing was the only

legal form of betting on-line. Much like poker, horseracing because of its pari­

mutuel nature demands liquidity. Further, operators must provide multiple

choices of races at multiple racetracks to attract and keep patrons. Now take

these factors and add an exchange system to it. Exchange is done over the

internet where one patron bets on a horse and someone or multiple people take

the opposite side of the bet. In order for the system to work there has to be a

match on both ends of the bet. This is why the number of people participating is

so important. The more people the more likely the exchange wagering operator

will be able to match both sides of a bet. In anticipation of this, New Jersey's law,

P.L. 2011, c.15 calls for an "Interstate Exchange Pool." An Interstate Exchange

Pool means an exchange wagering system established within one State or in

another state or foreign nation within which is combined unmatched wagers on

one or more horse races in order to form identically opposing wagers. Pool is

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defined as the total of match wagering in a given market. By allowing an

"Interstate Exchange Pool" exchange wagering operators are much more likely to

match patrons. Without the interstate component, an exchange system relying on

horseracing patrons in a single state is destined to fail because there may not be a

patron to take the other side of a bet. This type of interstate wagering pool is

exactly what poker operators need for a successful system and may be the

prototype for compacting or reciprocal agreements for poker.

Finally, a discussion on the lotteries' multi-state progressive is warranted when

evaluating compacting for multi-state progressive slot machines run on an!­

Gaming system. Currently in the United States there is a Multi State Lottery

Association that regulates both Mega Millions and Powerball lottery jackpots.

Much like the Interstate Compact of Horseracing Licenses, the Multi State

Lottery Association is a consortium of individual state lotteries. The rules and

licensing requirements to participate are the same. In this case, however, the

reason for the Multi State Lottery Association isn't uniform rules or licensing.

Rather, the MSLA is designed to increase the amount of money in a Mega Million

or Powerballjackpot pool. It also has the added benefit of allowing residents of

smaller states to participate in a system that can offer very large jackpots. The

individual states benefit from this interstate system. As jackpots grow larger

more people buy lottery tickets, thereby increasing ticket sales. More ticket sales

translate into more money for both retailers and the state. Even lay people not

involved in gaming realize that as a lottery jackpot increases after multiple weeks

with no winners, more people play trying to catch the dream. The motivator is no

longer just winning but winning an amount a person can only dream about.

Now take the MSLA and visualize a similar system for on-line progressive slot

machines such as Wheel of Fortune or Megabucks. The parallel is almost

identical with the exception of the platform operator acting as the retailer. With a

multi state progressive slot system, as jackpots increase the number of potential

players will increase with it. Again, players will want to catch the dream but

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unlike a paper lottery ticket, they will do it with continuous play. Think about the

implications for this and the amount of money it can produce for the operator

and the State. The amount is staggering.

After many discussions with gaming legislators such as New Jersey's John

Burzichelli, prime sponsor of the New Jersey I-Gaming law and industry experts

such as Jim Quigley of US Gaming Services, the question of whether to compact

or not will rely solely on the size of the state and the type of game in question.

Assemblyman Burzichelli believes that states with large populations may never

compact because they can support multiple operators whereas the smaller ones

will have no choice but to compact because their population size is so limiting.

Others such as Jim Quigley see compacting for poker and multi-state progressive

slot machines only because of the need for large pools of players and money.

Games such as craps, blackjack or roulette really don't require a large pool

because the bet is made against the house directly and doesn't have the pari­

mutuel element. .. Whatever the end result looks like, compacting is a much needed element in

completing the I-Gaming Marathon especially as it relates to licensing, poker and

multi-state progressive slot machines. Whether the reason is the establishment of

uniform licensing standards or ensuring liquidity and "choice" for patrons, it will

undoubtedly provide participating states with that extra push to get them over

that finish line with a winning system.

Barbara DeMarco will be a speaker at the World Regulatory Briefing USA on

October 22-23 in Philadelphia, PA.

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