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Should Casinos Fear the Return of Online Poker?

For U.S. poker players, April 15, 2011 is a day that will be tough to forget. This is the day that the U.S. Department of Justice, for all intents and purposes shut down online poker. Millions of people woke up that morning and quickly realized that not only were they unable to play online poker, but they were unable to access the money (sometimes in the millions) that they had accumulated on the sites.

Nearly two years later, Americans are still not free to play online poker again, but that is about to change, at least for some people. There have been a few states recently to approve online poker, those being Nevada, New Jersey, and Deleware.

With these three states having already passed online gambling legislation, more are sure to follow. Understanding that the trend is moving towards online poker, the U.S. Congress will most likely join the race and try to get national legislation passed to avoid having 50 states with 50 different sets of laws. Uniformity is essential to the industry, and while Congress I expect it will do so soon, maybe as early as this spring.

There have been previous attempts in Congress, but prior drafted legislation never gained the support needed, mainly a result of stiff opposition from religious groups.

With the amount of money on the line, it is widely accepted that Congress will now look to step in before too many more states pass their own legislation.

Around the world, 85 countries have legalized online gambling, and it is estimated that around $35 billion is bet each year. Despite the current situation in America, there is still unauthorized gambling taking place online, with an estimated $4 billion taking place in 2011. The American Gaming Association estimates that number could grow to $10 billion by the year 2017, so the potential tax revenue is huge.

With the legalization of online poker apparently on the horizon, the obvious question that arises is how will the return of online poker impact the nation's brick and mortar casinos?

To some, it may seem as though casinos would be fearful of online poker. The logic is understandable… the more time people spend playing poker online, the less time they will spend in the casinos. While this sounds reasonable on the surface, it is simply not the case.

Casinos do not make a lot of money from offering poker games. Sure, they pull a percentage of each pot (called the rake), but the rake they earn pales in comparison to the revenue they generate from table games or slot machines. Casinos would almost certainly prefer to remove all the poker tables from their floors and replace them with craps or blackjack tables, where they would earn substantially more money per hour.

Sure, casinos love poker players that spend hours grinding away a profit and the tables and then take their profits to the craps table and hand them over to the casino, but as far as revenue is concerned, poker just does not provide a huge source of cash for casinos.

There is only so much floor space that casinos have available to allocate to poker, and even the biggest rooms have around 40 or 50 tables running. Live poker is slow, so there are not too many hands per hour. Now compare these two things with what an online poker site can accomplish. The games are faster, and there is no limit to the number of tables that an online site can offer. There can be thousands of tables all running simultaneously, all pulling in a bit of rake on each hand.

Established casino operators like Caesars Entertainment (CZR) will be in a good position to capitalize on the new legislation. New Jersey's law will allow established casinos to obtain licenses and big players such as Caesars will be among the first to offer online poker this year. All of the big casinos will get in the game, and even if they do not want to invest millions in developing their own proprietary software, it will be easy enough for them to team up with already established companies to brand software in their name.

All in all, the casinos have absolutely nothing to fear from the resurgence of online poker. They will be able to increase their overall poker revenue by offering their own platform, they will be able to offer promotions on their sites for comps in order to attract more people to actually visit their casinos, but most importantly the bottom line is that the more money that comes into the community the better.

While investors could easily make the case that online poker creates a good buying opportunity in established casinos such as Caesars and Wynn (WYNN), there are also other stocks that should be considered.

One company that would love to get into online gambling is Zynga (ZNGA). The game maker has been struggling as of late due to its shrinking profit from its Facebook (FB) relationship, but online poker could drastically change the company's future. Zynga currently is the largest provider of play-money online poker, so it could easily make the transition into the lucrative real-money poker games. With its already established customer base, should Zynga transition into real money poker it could easily become the biggest player in the U.S.

Like it or not, online poker is coming back to the U.S. It may not happen this year, but it is coming, and smart investors realize that big casino operators will benefit from its return, and revenues will start to move higher as a result.

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.