Will iGaming Ever Reach its Potential in the US?

Posted by Harry Kane on Friday, September 3, 2021

According to comprehensive figures released by Reportlinker.com, the online gambling market in the US was valued at approximately $1.978 billion in 2020.

The projected growth rate for the market is even more interesting that these headline figures, however, with marketplace set to expand by a Compound Annual Growth Rate (CAGR) of 17.32% from 2021 through 2026.

We’ll explore both the potential of the market and its key challenges below, while asking whether the US can ever deliver on its potential as the biggest iGaming sector in the world.

A Brief History of Online Gambling in the US

Globally, the iGaming market was launched in earnest during the early 1990s, with the world’s first ever online casino (powered by the iconic Microgaming brand) opening its virtual doors in 1994.

However, it was a further two years before the first ever wager was placed online at the legendary Intercasino, with this site offering a total of 18 table and dice games to players. Then came the formation of the Kahnawake Gambling Commission in the late 90s, which precipitate the launch of more than 700 online casinos across the glove.

Many of these were initially located in the US, which was also at the forefront of the global poker boom at the turn of the noughties.

By the time of the Millennium, online casinos throughout the world were generating in excess of $2.2 billion in global revenue, with operators based in North America accounting approximately $1.5 billion to this sum.

This growth continued at pace through until the end of 2005, at which point several US casino brands were listed as lucrative and coveted assets on major stock exchanges across the globe.

However, the US market met its first major stumbling block in 2006, when the Senate choose to enforce the controversial Unlawful Internet Gambling Enforcement Act (UIGEA). This legislation was the manifestation of ant-gambling sentiment in the US Senate and Congress, while it was tacked onto the ‘Safe Port Act’ in a stealth-like way that avoided major scrutiny by lawmakers.

While this didn’t officially make online gambling illegal (including video poker, sports betting and casino gameplay), it did prohibit any financial transactions from being processed between gambling sites and payment providers.

Because of the immediate impact of the bill, a number of high-profile casino and poker brands choose to withdraw from the US marketplace, causing many to speculate that the legislation would sound the death knell for online gambling in North America.

Fortunately, the wording of the UIGEA was relatively ambiguous, while it failed to actively prohibit the practice of online gambling.

This enabled the state of New Jersey to press ahead with plans to legalise online gambling within the state’s boundaries in January 2011, while circumnavigating potential federal prohibitions by ensuring that the servers underpinning iGaming websites were located at licensed casinos in Atlantic City.

The innovative iGaming model created by NJ was certainly transformative, while it also blazed a trail for similar, like-minded states to follow. Delaware was quick to legalise iGaming and poker channels in 2012, for example, while Pennsylvania and (most recently) Michigan have since followed suit.

The decision of the Department of Justice (DoJ) to revise its opinion of the 1961 Wire Act also allowed for the legislation of iGaming channels and the potential formation of interstate liquidity pacts.

This federal legislation, which historically banned interstate betting by wire communications, was deemed in 2011 to apply only to sporting events and contests. This meant that interstate and cross-border wagers pertaining to casino gambling fell outside of the legislation’s scope, freeing up states to engage in liquidity pacts with others nationwide.

Given the nature of iGaming in North America, however, it should come as no surprise that the market took another step back in November 2018. At this time, the new DoJ reversed its 2011 opinion, declaring that the Wire Act could be applied to iGaming verticals like poker and table games.

This has subsequently been challenged successfully in the courts, with the most likely outcome being that the DoJ will have to return to its 2011 opinion. However, it highlights the legislative issues that iGaming continues to face at both state and federal level, but we’ll touch a little more on this later in the post.

What About Sports Betting in the US?

While there currently remains ample opportunity for states to legalise iGaming in the US, there are only four local authorities that allow residents to wager freely on virtual casino gameplay, sports betting and poker (while Nevada has made online poker available to its subjects).

The issue is slightly different for sports betting, however, which was historically governed by a standalone piece of legislation that was passed in 1992.

Referred to as the ‘Professional and Amateur Sports Protection Act of 1992’ (PAPSA), this banned sports betting across all channels at a federal level. New Jersey was one of numerous states to lead a charge against this legislation through the years, however, with the US Supreme Court finally agreeing in May, 2018 that the law was actually unconstitutional.

Since this time, more than 22 US states have moved to legalise, regulate and monetise sports betting, including unlikely suspects such as Tennessee, Montana and North Carolina.

This has been empowered by a combination of rising demand, shifting social attitudes and the clarity provided by the change in legislation, which has enabled individual states to plot their own course without fear of recrimination.

What’s more, a further 10 or so states are preparing to push through sports betting legislation in the near-term, while Oklahoma and Maine may join these jurisdictions in the coming months.

The rapid growth of this vertical has certainly helped to shine a light on the true potential of the US marketplace as a whole, with states like New Jersey, Pennsylvania and Illinois contributing to record breaking month after record breaking month stateside.

In March of this year, for example, the total sports betting handle in North America peaked at more than $4.6 billion. Illinois ranked as the third most generative state by this measure during the reporting period, revealing an individual betting handle of $633.6 million.

Interestingly, Illinois ranked behind New Jersey and Nevada in March’s figures, while it was placed second nationally from the perspective of total revenue.

Overall, March was the third straight month in which the sports betting handle stateside topped $4 billion, while there are no signs of this trend abating any time soon as more states commit to legalising and regulating the practice.

Clearly, sports betting has emerged as the key driver of online gambling revenue in North America since the spring of 2018, while simultaneously offering an insight into the market’s scope and potential for growth in the future.

Why are Some States Loathe to Legalise Online Gambling (and Especially Casino Wagering)?

We can also see a distinct difference in the perception of sports betting and online casino gambling, as while states have been quick to legalise the former, barely 10% of all jurisdictions in the US have moved to regulate virtual poker, slots and table games.

Of course, this has much to do with the relative legal complexity, with the ever-changing Wire Act and UIGEA legislation combining to create a much more challenging regulatory landscape for online casinos to navigate.

However, there are other factors that prevent online casino gameplay from being legalised and adopted on a mass scale. Firstly, verticals such as slots and table games are largely considered to be games of chance, despite the capacity to utilise limited skill and strategy when playing online poker or blackjack.

As a result, such verticals are considered to be the purest forms of gambling, with the prohibition of games of chance central to most examples of anti-gambling legislation in the US and throughout the rest of the world.

Conversely, sports betting is often viewed as a skilled practice, particularly as players are able to deploy knowledge and insight when wagering on the favourite teams, sports and individual betting markets.

This, when allied to the decision to strike down the single piece of legislation that had prohibited sports betting federal level, creates a compelling case of legalisation and one that has been hard for individual states to dispute.

Secondly, we must consider that one of the primary reasons used to justify the legalisation of betting verticals is the potential tax levies on offer. By leveraging lucrative iGaming revenues, states have argued that legislation enables them to monetise a regulated activity with a view to reducing their individual budget deficits.

However, this must be balanced against the attitudes of locals and the potential of gambling-related harm in society, forcing lawmakers to adopt a considered and conservative approach when legalising different verticals and creating legislation.

As a result, many states have sought to compromise by forcing through sports betting as a way of creating a lucrative source of revenue, while leaving more challenging and controversial verticals such as online casino on the back-burner.

In states such as Texas, we’ve seen both iGaming and sports betting bills fall short in the Senate, while there’s no suggestion that this trend will be reversed anytime soon.

In this instance, it’s fair to surmise that the Texas Senate is able to ignore the fiscal appeal of such legislation thanks to the state’s resource-rich status and relatively small budgetary deficit. So, even though considerable demand for gambling verticals is thought to exist amongst Texans, there’s no strong motivation for lawmakers to push ahead with a bill of legalisation.

More extreme examples of resistance can be found in states such as Utah, where there remains vehement opposition to all forms of gambling. This is underpinned by religious objections and prevailing social attitudes, and there’s little chance of the local authority changing its stance or outlook any time soon.

The Last Word

By now, we can begin to understand the precariously balanced nature of the gambling industry in the US, from the legislative challenges that exist and the varying attitude of state lawmakers to the rising demand for online verticals nationwide.

The question that remains, of course, is can the US marketplace ever fully overcome its numerous challenges to realise its full potential, especially when it comes to the online casino and poker verticals?

As you can imagine, the answer varies across different verticals and disciplines. For example, the sports betting market has already experienced exponential growth since the removal of federal legislative obstacles in 2018, with this sector benefitting from a simple regulatory landscape and the practices status as a so-called “game of skill”.

Overall, it’s estimated that nearly 80% of all US states will have some form of legal sports betting product on offer within a few years, with this likely to translate into a vast, multi-billion-dollar marketplace that’s the envy of the world.

However, the future is less clear for online casino gaming in the US, thanks largely to the ongoing impact (and vagaries) of The Wire Act and the UIGEA legislation.

Similar, iGaming verticals of this type continue to be besieged by moral and ethical objectives, while land-based casinos have also sought to oppose the widespread legalisation of online sites and digital wagering channels.

These complex and variable issues will be difficult to overcome in the near or medium-term, making it hard to envisage a scenario where states legalise iGaming en-masse as they did in the case of sports betting.

However, this doesn’t mean that gradual progress won’t be made within the market, with states such as Connecticut and Illinois thought to be on the verge of passing legislation either this year or at some point in 2022. Indiana may also follow suit, as several states look to fill the void left by declining offline casino revenues (which has been accelerated during the coronavirus pandemic).

Such slow progress makes it hard to gauge the potential for future iGaming growth in monetary terms, but it would at least mean that the US market is working towards realising its undeniably immense potential.