Internet gambling scores its biggest win

New Jersey on Tuesday became the biggest state yet to allow regulated online gambling, establishing a template that proponents hope other states will follow for a business that federal authorities long treated as a criminal enterprise.

The new law allows Atlantic City's casinos to run websites that take bets on games such as blackjack, slots and poker. It also could help legitimize online-gambling companies whose executives the U.S. Justice Department once targeted for offering the same kind of Internet wagers.

The law, passed by the legislature and signed Tuesday by Gov. Chris Christie, for now requires bettors to be physically present in the state, which industry executives and regulators believe can be verified with technology that tracks a user's location. But bets could conceivably be placed from any device with an Internet connection.

New Jersey's move marks a significant turning point in the debate over online gambling in the U.S., which has been raging for more than a decade. But while it could encourage similar measures in other states, big hurdles remain to widespread acceptance of such gambling.

Until a year ago, the federal government considered such gambling illegal and targeted online-gambling companies and their partners with criminal and civil lawsuits. But in 2011 the Justice Department reversed itself, prompting many states to consider legalizing online gambling and lottery directors to start selling tickets online.

That process has picked up steam in statehouses and executives' offices this year since an effort stalled in Congress to pass a law allowing online poker. The first regulated online-gambling networks in the U.S. are expected to be up and running this year in Nevada and Delaware.

Among the businesses eyeing legal online gambling are casinos, Indian tribes, lottery-technology firms, social videogame companies and even foreign-based gambling operators that previously were charged by the Justice Department with illegally taking online bets in the U.S.

Their road is likely to be a bumpy one, given the controversial nature of gambling and the variety of competing interests involved, say people involved in the process. In recent years states including California, Iowa and Mississippi have considered legalizing online poker or other forms of online gambling, but those efforts have been stalled by critics' concerns about an uptick in gambling addiction or other social ills, as well as infighting among gambling interests.

Though industry forecasts vary widely, H2 Gambling Capital, which tracks online-gambling markets, estimates that online gambling in New Jersey will generate revenue of $410 million the first year, growing to $590 million after a few years.

The bigger opportunity could come from interstate gambling if more states legalize online wagering, but a variety of business and legal complications make that prospect hazy.

The New Jersey law allows the state's gambling regulators to find other ways to expand the pool of potential bettors beyond state borders, such as agreements — known as compacts — with other states.

In Nevada, where companies are about to set up in-state poker networks, Gov. Brian Sandoval last week rushed to sign a bill allowing the state to enter agreements with other states to pool poker networks.

"We have been at the forefront of online gaming here in Nevada," Mr. Sandoval said in video remarks to executives and government officials gathered last week at an online-gambling conference in Las Vegas. "With New Jersey [about to pass online gambling], the need for Nevada to act quickly has become even more important."

Such agreements, modeled after lottery compacts that create pooled drawings for games such as Powerball or Mega Millions, could be particularly useful for smaller states operating online poker by giving them access to more players.

Nevada and New Jersey may try to become regulatory hubs for other regions, officials and industry watchers say, allowing their licensed companies to have an advantage in other jurisdictions while sharing the revenues with other states.

Yet while simple in theory, creating interstate networks is likely to be tough since gambling is regulated state by state in varying ways, say people working on the issue. A state's gambling interests would be unlikely to want their state government to enter into deals that would put them at a disadvantage to interests in other states.

"Unless the states are willing to compromise and work together, you can see a lot of practical problems," Thomas Goldstein, an attorney who represents online-poker companies, said on a panel at an online-gambling conference last week.

"The size of the market will depend critically on what types of interstate relationships New Jersey is able to strike," Gary Loveman, chief executive of Caesars Entertainment Corp., told analysts Monday.

Many other uncertainties remain as a regulated industry takes shape, such as how much legal online-gambling might cut into the conventional casino business, whether there will be a significant spike in gambling addiction as Internet gambling becomes more accessible, and whether geo-location, age-verification, antimoney-laundering and other monitoring systems will prove adequate.

Another key question will be whether companies with the most expertise and, in many cases, brand recognition in online gambling will participate in the newly legal market.

The most controversial company is PokerStars, which recently disclosed that it had agreed to purchase a casino in Atlantic City and had applied for a gambling license with New Jersey regulators. The company took poker bets in the U.S. until 2011 and built up an enormous following of eager poker players, contending that its actions were legal.

In 2011 the U.S. government sued PokerStars and indicted its founder, who has ceded operations to his son. The company has settled the civil suit. It continues to deny wrongdoing, says PokerStars attorney Jeff Ifrah.

Still, rivals see the company having an unfair advantage if New Jersey regulators grant it a license. In Nevada last week the governor signed a bill that would make it more difficult for the company to get a license in the state.

The move to online gambling marks Gov. Christie's latest attempt to revitalize Atlantic City. But the onetime East Coast gambling monopoly, hit hard in recent years by competition in nearby states, has proven resistant to many of his efforts. While optimistic that online gambling will help increase revenues for casino operators in Atlantic City due to the extra source of cash, analysts have been mixed on how great the impact will be.

Two Atlantic City casinos recently sold for $20 million or less, according to people familiar with the sales, believed to be the lowest-ever prices for casinos in the city. The company that owns Atlantic City's newest and glitziest casino, Revel, recently said it would likely file for bankruptcy next month.

"This is a lifeline for the casino industry in Atlantic City, which has been in free fall," said New Jersey state Sen. Raymond Lesniak, who sponsored the online-gambling measure.

(Click to display full-size in gallery)New Jersey Gov. Chris Christie