John Mehaffey Pechanga CA online poker racing

Mark Macarro, Tribal Chairman of the Pechanga Band of Luiseño Indians, testified at a hearing before the Governmental Organization Committee in California on Wednesday.

While most speakers held a hard line on their stances, Macarro suggested an interesting compromise that may help move California online poker one step closer to reality.

A post with live reporting of the hearing can be found here.

Tracks could play a part, but not star in the show

Pechanga and other tribes in its coalition are opposed to racetracks entering the online poker industry, should it get regulated in California. Macarro proposed allowing racetracks the limited ability to participate in California online poker.

“That’s why Pechanga can support legislation that specifically shares revenue derived from online poker for the benefit of the horse racing industry,” Macarro testified. This suggestion works for the California online poker movement in multiple ways.

The racing industry could be an important participant in California online poker. Internet wagering on horse racing is already permitted in California. It is the only legal form of online gambling in the state.

The horse racing industry has slumped over the years due to expansion of gambling in California. Expanding its online off-track betting to online poker may help reverse that trend.

The off-track betting industry holds a database of active bettors that place wagers on races held in California and other states. These players are already verified bettors that are comfortable with placing wagers online.

These players may be the exact demographic legal California online poker hopes to capture.

Saturation is a concern for California online poker market

New Jersey taught the U.S. online poker industry a valuable lesson. The state opened with five online poker networks. One generated virtually no players throughout its existence.

That site was Betfair, which operates online and mobile racing betting in California. Betfair shuttered its poker site after one year. It barely registered $1 in monthly rake through the last few months of its existence.

Ultimate Poker held about three percent of the market before it failed. 888, the third most popular New Jersey poker site, eventually merged its player base with WSOP, leaving that partnership and Borgata/Party as the only two poker networks in New Jersey.

There are about 90 card clubs and 70 tribal casinos in California. There are about a dozen racetracks in the state.

While some card clubs and tribes have created partnerships, others will be forced to launch independent online poker rooms or sit on the sidelines. If all interested parties entered the online poker landscape in California, there would be far more losers than winners.

The state can only handle five or fewer poker networks. The perfect number is probably three.

Creating an online poker network that would be forced to compete with brands like WSOP and PokerStars may turn out to be a futile effort. On the other hand, creating a skin on these networks or being a marketing affiliate would be a low cost way to benefit from online poker without making the major investment of developing software or partnering with a company that already owns a platform.

Low cost affiliate model may be a great alternative for racetracks

The affiliate business is a lucrative one. Hundreds of companies throughout the world promote online poker using low cost business models. These businesses receive a share of a player’s rake or a flat fee for referring customers. The investment in an affiliate business is much lower than that of an operator.

A skin would operate the same way. It would simply be a branded online poker site on an existing network. The skin could offer its own payment processing and support or leave it to the host network.

The failure of Ultimate Gaming in Nevada and New Jersey demonstrates the difficulty in acquiring existing software in-house and conforming it to regulatory standards, a burden made worse by a lack of branding.

Allowing racetracks to promote online poker through revenue sharing agreements or permitting turnkey skins is a cost effective way to include the racetracks without the industry making a major investment in what could quickly become a saturated market.

In a research note circulated by Eilers Research, Adam Krejcik agreed, writing, “Our view is that the tracks should accept a revenue share agreement not only because it would increase the likelihood of legislation passing, but it also makes more financial sense.”

This solution would leave the burden of the expense related to launching online poker within experienced poker providers. Racetracks could simply go along for the ride.

John Mehaffey
John Mehaffey - John is a writer for multiple online poker publications and is the author of the popular Online Poker Payment Processing Report. Read more from John by following @John_Mehaffey on Twitter.