Simon wagers on Internet gambling’s future

Billionaire Herb Simon is betting online gambling will become legal—and that a new company he’s backing will reap a payoff as a result.

Simon, co-founder of Indianapolis-based Simon Property Group Inc. and owner of the Indiana Pacers, has put up part of the first roughly $6 million in seed money for U.S. Digital Gaming Inc.

Herb Simon put up part of the $6 million in seed money for the online gambling company.

The Beverly Hills, Calif.-based startup will provide everything from games to the technology to security systems needed for online gambling operators to get up and running, pending legalization of the pastime.

The 15-person company hired its first CEO, former Fox and Walt Disney executive Jon Richmond, last month and on June 30 moved to larger corporate offices.

Whether online gambling should become legal has become a nationwide debate, with the outcome likely to have a big impact on Indiana’s 13 casinos.

Simon is among a handful of big-name investors in the venture. Others include William and Robert Taubman, top executives of Michigan-based Taubman Centers; Steven Roth, chairman of New Jersey-based Vornado Realty Trust; and Richard Bronson, the company’s co-founder and a former executive of Mirage Resorts under casino billionaire Steve Wynn.

Bronson started out as a shopping center developer and met the Simon family four decades ago at an International Council of Shopping Centers conference. He has remained a close family friend.

Herb Simon, 76, who was out of the country when he was contacted by IBJ for this story, declined to discuss his investment.

Bronson wouldn’t say how much Simon invested in U.S. Digital Gaming, but he said Simon and others who contributed in the seed round all have an equity stake and could be given the chance to invest additional capital when the company raises more money down the road.

The Simon family has a history of interest in the gambling arena. Herb and his brother Mel Simon were part owners in a company that was passed over for a Vanderburgh County casino license in 1995. Herb’s son, Stephen, led an investment team that unsuccessfully vied for a Harrison County license in 1996.

Bronson and others in the industry see the legalization of online gambling as the inevitable next step in the evolution of the business.

“The gaming industry, in my view, is like a three-act play,” Bronson said. “The third and final act is the Internet. Everyone knows it, and everyone has been trying to figure it out.”

Online gambling already is rampant in the United States, albeit through offshore websites. Making it legal here could provide additional tax revenue to cash-strapped governments.

But it’s difficult for experts to predict what form legalization would take—whether it would be left to states or the federal government, for instance, and which companies, or state lotteries, would be allowed to operate sites.

All of those unknowns, experts say, will have a significant impact on whether U.S. Digital Gaming is successful.

They also could determine whether legalizing online gambling proves to be a shot in the arm or another setback for Indiana’s brick-and-mortar casinos, which are expected to lose revenue in coming years as they face competition from gambling venues in neighboring states.

State or federal?

Poker gurus and some big gambling companies say federal regulation is likely and most desirable, partly because poker—the primary game discussed as an online offering—is more appealing when there is a huge mass of players.

But others say the stars are aligning for state-by-state regulation. Many states are hurting for cash, and some have looked to online gambling as a new source.

This spring, Washington, D.C., became the first jurisdiction to allow online gambling and could roll out its system, which will be run by the state lottery, this fall.

Experts expect other states, such as New Jersey and Iowa, which have debated legislation, to follow suit.

“States are getting more and more desperate for any form of revenue,” said I. Nelson Rose, an expert in gambling law and professor at Whittier Law School in California. “Gambling is seen as a painless tax.”

U.S. Digital Gaming leaders also expect states to pass legislation.

Half the company’s spending is on lobbying efforts, with the strongest focus on places that have considered legislation.

Indiana—with existing gambling activity and large enough population to support online gambling—is on U.S. Digital Gaming’s radar and could receive more attention, should momentum build for legalization.

That appears to be unlikely for now. Indiana is one of just a dozen states that explicitly outlaws Internet gambling.

And while the Legislature has grown more accepting of the gambling industry since the first riverboat casino opened in 1995, many lawmakers remain hesitant to expand the industry.

“It’s one thing if you have to make a decision to drive down to Lawrenceburg or up to Gary—you’ve made a conscious effort to go to the gaming facility,” said Rep. Bill Davis, a Portland Republican who is chairman of the House’s public policy committee. “It’s another if we’ve made it so easy as you flip a button on your computer.”

But Indiana could be pressured to legalize online gambling if neighboring states do or the need for gambling revenue escalates.

Details dictate success

State-level legalization would be the most beneficial route for Indiana’s casinos, as well as for U.S. Digital Gaming, experts say.

Under a federal system, big players such as Caesars Entertainment Corp. and MGM would dominate the market. They have access to a huge list of gamblers—those who frequent their brick-and-mortar casinos—and could promote their online games to them.

“I don’t know who is going to have the money to get licensure and want to run up against MGM and Caesar’s,” said Dan Harkenrider, a gambling consultant who hosts a radio show and events in casinos across the Midwest. “Second position [in the market] will be half as big as first position, and after that, it will be nothing.”

Caesars and MGM, which already are gearing up for legalized online gambling, wouldn’t need the services U.S. Digital Gaming provides. And the dominance of those companies would put other gambling outfits—the potential customers of U.S. Digital Gaming—at a disadvantage.

If those companies can’t compete online, it also would hurt their casino operations in states such as Indiana, Harkenrider said.

But if states were to adopt laws similar to New Jersey’s, which passed this year but was vetoed by the governor, it could give other operators more leverage, said Philip Sicuso, former general counsel for the Indiana Gaming Commission who now represents gambling companies for Indianapolis-based law firm Bingham McHale LLP.

New Jersey’s law allowed only companies with brick-and-mortar facilities in a state to offer online gambling to residents within the state.

If that were the case, it would limit the reach of Caesars and MGM and create a fairer competitive environment, he said.

It also would give companies with a brick-and-mortar presence in Indiana a new means to increase revenue.

“If you follow that model, it could make a lot of sense in Indiana,” Sicuso said. “When you’re playing only within the state, the playing field is way more level.”•