1 Richard McGowan S.J. Boston College John F. Mahon University of Maine
2 1995 first gambling sites emerged. These were primarily free sites sites that let players make deposits with credit cards and wire transfers emerged. Many of the first IG sites were sports books.
3 Year Number of IG Sites Present 2640 The 2640 sites are governed by 74 different jurisdictions.
4 No clear legislation exists in many countries. Explicit Prohibition of IG (U.S.) Complete Legalization and Toleration Restrictions on IG
5 Revenue is the main issue for government. Need to achieve a delicate balance between addressing the government s revenue needs and the social costs that go along with more gambling freedom.
6 Federal Wire Act (1961) Knowingly (using) a wire communication facility for the transmission in interstate and foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers.
7 This act makes it illegal for all financial transaction providers to make fund transfers to internet gambling sites. U.S. players bypass the UIGEA by using non U.S. financial intermediaries.
8 It is nearly impossible to ensure the prohibition of IG. Very difficult to prevent individual access. Hard to prosecute sites that provide legal services in their jurisdiction.
9 Operator Integrity Concerns Player Integrity Concerns Compulsive Gamblers Minors IG sites enable criminals to launder money. Legal IG will negatively impact the revenues earned from other forms of gambling.
10 Internet Gambling s negative impact is outweighed by the benefits of industry regulation and tax revenue. Since it is impossible to successfully enforce the prohibition of IG, government should profit from it.
11 Illustrate how internet gambling revenue fluctuates over time. Quantify the substitution effect between internet gambling and land based gambling revenue. Forecast future internet gambling revenue. Estimate potential tax revenue for legalization in the United States. Show that it is impractical to legalize internet gambling without internet sports betting. Demonstrate that intrastate legalization of internet gambling is inefficient.
12 H2 Gambling Capital s egaming Bulletin Yearly data on internet gambling revenue by game type and player nationality from 2003 to Gross Gaming Yield by region and by gaming type (land/interactive) in each region from 2oo3 to Quarterly data on world internet gambling revenue (by game type) from 2003Q1 to 2011Q2.
13 Panel data for the G20 (minus the European Union and Saudi Arabia) from 2003 to t=8 n=18 Methodology: Fixed Effects
14 Perform the within transformation to remove the mean values of each individual panel unit. Explanatory power is derived from the comovements of y around its individual with x around its individual mean. It does not matter if a unit has consistently high or low values of y and x. It just matters how the variations around those means are correlated.
15 We used a panel data set of internet and land based gambling revenue. Regional Data Data was from 2003 to 2010 Hypothesis: As more people gamble on the internet (internet gambling revenue increases) more people will become attracted to gambling. Thus, an increase in the prevalence of internet gambling will cause land gambling revenue to increase. Methodology: Seemingly Unrelated Regression
16 When estimating a similar specification for a number of different units, we may want to estimate them jointly. We gain efficiency by allowing the error terms across equations to be contemporaneously correlated. If the errors are independent, there is no gain over equation by equation OLS. The higher the cross-equation contemporaneous correlations of the residuals the greater the efficiency gain. If the regressors in each equation are highly correlated across equations the efficiency gain is reduced.
20 We used quarterly observations from 2003Q1 to 20011Q2 to forecast future IG revenues. We ran both exponential smoothing and ARIMA models to forecast future revenue for each facet of the internet gambling industry. In each case we chose the model with the lowest RMSE.
21 Winters Additive Exponential Smoothing Model R-Squared=.900 RMSE= MAPE= 5.492
22 Winters Multiplicative Exponential Smoothing Model R-Squared=.758 RMSE= MAPE= 8.500
30 John Campbell s proposed Internet Gambling Regulation, Consumer Protection, and Enforcement Act attempts to legalize and regulate internet gambling federally. However, the provisions of this bill prohibit the legalization of sports betting.
31 Year % of US IG Rev % Global IG Rev % 63.50% % 55.60% % 51.85% % 50.04% % 51.77% % 52.15% % 49.33% % 49.10%
35 Assume total IG market share with SB will jump up to 38%. Assume IG market share without SB will jump to 45% (Q3, Q4)
36 UIGEA does not prohibit intrastate internet gambling. Ensuring that both the players and the operators of an online gambling site remain within the borders of a single state enables states to circumvent the Wire Act of In March 2011, New Jersey Governor Chris Christie vetoed a bill that would have made New Jersey the first state to legalize intrastate online gambling.
37 Caesars Entertainment is against this state by state legalization approach because it believes that this approach will lead to market inefficiencies that will prevent them from maximizing profits upon its entrance to the online realm
38 New Jersey State Senator Raymond Lesniak estimates that intrastate legalization would only generate $30 million in yearly tax revenue. This estimate does not include legal sports betting as included in the NJ bill vetoed by Chris Christie. In 2010 New Jersey GDP was 3.42% of national GDP. Therefore, we may assume that NJ would collect 3.42% of national internet gambling tax revenue.
39 Assuming NJ s fraction of GDP remains constant, I forecasted NJ s share of IG (without Sports betting) tax revenue. Year NJ Tax Revenue (Mil ) Currency Conversion FX Rate: 1 Euro= 1.25 Dollars
40 After conservatively controlling for the exchange rate, NJ s share of IG tax revenue is greater than Lesniak s $30m estimate in each year. Additionally, we may assume that Lesniak s future cash flow projections are biased upward because he is lobbying to get the New Jersey Intrastate Bill passed. Thus, the inefficiency could be of a larger magnitude.
41 Legalizing internet gambling is revenue opportunity that the federal government should capitalize on. The government will forgo significant amounts of tax revenue by legalizing IG without sports betting. Is this lower level of revenue worth the social costs? The substitution effect is positive and not negative in the U.S. market. This bodes well for other gambling tax revenues. Legalizing IG on an intrastate basis is inefficient. The social costs of legalizing internet gambling are definitely real. However, we have no way to quantify them and weigh them against the revenue benefits.
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