CHAPTER 7
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early all types of gambling opportunities are available on the Internet. Gambling sites include lotteries, horseracing, sports wagering, and casino gaming. The predominant types of Internet gambling sites are virtual casinos and sports wagering. This chapter discusses which forms of |
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gambling are most likely to succeed over the Internet by looking at their advantages and obstacles. Types of GamblingLotteries |
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53 The PLUS lotto operates in conjunction with the principality of Liechtenstein, a sixty odd square mile sovereignty between Switzerland and Austria. In October 1995, it launched a weekly lotto game that promised jackpots of up to $1 million. Its URL is www.interlotto.li. This top prize is based on a player picking six out of six balls chosen randomly from a pool of 40 balls. The odds of doing this are about one out of four million. The high jackpots, therefore, do not show how much participants spend on lottery entries because it is not paid every game, nor does it increase progressively with each wager made. Liechtenstein’s daily lotteries provided top prizes of about $5,000, which is probably more indicative of handle (i.e., the total amount of all bets made). To boast the credibility and attractiveness to potential gamblers, the lottery aligned itself with the International Red Cross and Red Crescent Services in April 1997. This, however, only increased opposition to the lottery from other countries. Bowing to pressure, the lottery does not allow persons from Finland, Austria, and New Zealand to enter. The split is 25% to the Red Cross, 25% to Liechtenstein and 50% to winners. Claire Nullis, “Red Cross Tries to Navigate Internet Gambling Laws, “Cyberia,” The Detroit News, June 18, 1997. |
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Native American tribe.54 Finland’s national lottery operates over the Internet, but only accepts wagers from Finnish citizens.55 Bingo is a form of lottery where participants buy cards containing various numbers organized in a grid. Like other lotteries, the prizes are distributed among the participants by drawing numbers. The numbers drawn correspond to numbers on the cards distributed to the participant. The first person who either fills the entire card or a row or column wins the prize. Bingo generally is a “live” game where the participants gather and follow the draw as it progresses. At least one bingo site exists on the Internet. Other lottery sites do not conduct online lotteries that include the actual drawing of winning numbers. For example, this may include a site that simply buys state-run lottery tickets for customers for the face price of the ticket plus a commission.56 Sports and Race WageringSports and race wagering sites can take one of three forms. First, the site may offer straight bookmaking operations where the operator accepts wagers directly from the home user. Here, the operator accepts the risk of winning or losing. Second, instead of directly accepting wagers, the operator may serve as the broker and arrange wagers between home users. Here, the operator receives a commission on the wager. Suppose a person in Texas wants to bet the Dallas Cowboys and give seven points and a person in Denver wants to take the Broncos and seven points, the site operator will arrange the bet, serve as the stakeholder and earn a commission. Third, the operator may conduct pari-mutuel wagering. This involves placing all wagers on a particular event in a common pool. From the pool, the operator takes a commission and the remaining money is then divided pro-rata between the winners. Pari-mutuel wagering is common for race wagering, but is not yet available for online sports wagering. |
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54 The tribe operating the site is the Coeur d’Alene, which has a reservation in the state of Idaho. See supra note 92 and accompanying text. 55 The lottery requires the participant to put in a Finnish social security number to play. 56 This activity is illegal under 18 U.S.C. §1301. |
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"Fantasy" sports contests also are available over the Internet. These contests require a person to choose several athletes in a given sport to be on his or her "fantasy team." The person accumulates points based on the chosen the athletes’ performances over the course of a particular game or season. The person competes against other fantasy teams. Major "fantasy" sports include American-style football, basketball, baseball and soccer. Whether fantasy sports contests are gambling is a matter of debate that revolves around whether skill or chance predominates the contest. Fantasy sports require skill to assess players and decide their worth in relation to their expected performance over the course of a season. Strategy is also involved in drafting players and making trades. There is, however, a significant element of chance. While a participant can draft or trade for the most talented players, the chance of injury to those players may eliminate his opportunity to win. Until a prosecutor decides to arrest some fantasy league operators under anti-gambling laws, the issue of its legality will remain unresolved and will be left as a close question. CasinosVirtual casinos offer software-based video facsimiles of most casino games, including reel slot machines, craps, blackjack and roulette. Unlike the “live” games, these video facsimiles rely on a computer program to randomly generate the results to simulate the play of the game. Some sites, however, have announced intentions to offer “live” video feeds of the play of the traditional games. For example, an actual blackjack dealer will play the game using real cards before a video camera. The only difference will be that the players will be participating by Internet connections. Gambling-Related SitesBesides the actual gambling sites, many gambling-related sites exist on the Internet.57 Many legal land-based casinos have home pages where prospective players can view the casino property and learn about its facilities, services and amenities. These sites are popular because federal law prohibits many legal U.S. casinos from advertising their casinos by television, radio or direct mail. |
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57 As of March 15, 1997, Rolling Good Times, an Internet magazine for gamblers listed over 700 such sites. |
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Other Internet sites provide or sell gambling-related information, services or products to the public. Some informational sites list legal or Internet gaming sites, describe or rate their services and provide links58 to their home pages. Rolling Good Times is an example of an Internet magazine that contains articles and advertising that appeal to gamblers, including how to play, odds, statistical analysis and similar information. Other sites provide information that is useful to conducting gambling, such as the current sports betting lines at Las Vegas casinos. Still other sites conduct “tout” services where persons claiming to have superior knowledge or systems offer prospective gamblers the opportunity to buy their selections on various sporting events or horseraces or to purchase their “system” for beating a particular casino game or lottery. Lastly, some sites sell products for gamblers, such as chips, gambling table layouts, books, dice and similar materials. What Are the Obstacles to Gambling Opportunities on the Internet?Unlike the inroads that the Internet will make in delivering communications, news and entertainment, Internet gambling opportunities face a less certain future. Whether it evolves into a billion-dollar industry or a minor irritation to law enforcement and traditional gaming operators will be determined by whether Internet gambling can overcome certain obstacles. These five major obstacles are:
The Challenges Facing Electronic Transfer of Funds |
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58 A link, also known as a hyperlink, allows the user to use the pointer on his computer screen to a specific word or icon and upon merely clicking his or her mouse on it, the link will connect to the requested location containing that information, whether it be a different page or a different site. |
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Because gambling requires that a person pay consideration, usually money, for the chance to win a prize, usually money, systems must be established for the transfer of the wager (consideration) from the person to the operator and the transfer of winnings (the prize) from the operator to the person. As a practical matter, this requires using some method to transfer funds between the parties. Assessing Financial Transaction Systems for Gambling PurposesFour criteria are important in evaluating financial transaction systems that facilitate the transfer of funds for Internet gambling purposes:
All systems must be measured against these criteria. Front Money Accounts And Traditional Credit CardsCurrently, a person wishing to gamble over the Internet must first register with the gaming operator and provide personal information that is necessary to establish some form of funds transfer, such as a credit card or direct bank transfer. For example, a typical gambling site operator may require potential gamblers to register and either establish a “front money” account or provide credit card information.59 |
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59 Aguilar, Rose, Another Virtual Casino Rolls the Dice, C/Net, June 27, 1996. |
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A player creates a “front” money account by sending a check or money order to the operator. Credit card transfers require that the player use his credit card to obtain a cash advance and transfer this cash to the casino’s account. Only after establishing a credit card or front money account may the home user access the Web site and begin gambling. While gambling, funds are either added to or subtracted from the player’s account. The player can request that a check or money order be mailed to him for amounts remaining in the account. These methods of setting up and operating an account are an impediment to the growth of the Internet gambling industry. Front money and credit card accounts lack immediacy, security and anonymity. Compared to the traditional casinos, establishing an account is time consuming and inconvenient. Some players do not have immediate access to the funds in their account. A player also will not know if the operator credited his account until he requests a withdrawal and has no security that the operator will not simply abscond with his money. Finally, most systems for front money and credit card deposits require the player to provide personal information. Therefore, prospective players cannot retain their anonymity. Debit CardsWhile front money and credit card transactions are most common today, several viable methods of funds transfers are available or will soon be available for this specific use. One method involves debit or credit cards or direct bank transfers. These systems would electronically transfer funds between the player’s bank or credit account and the operator’s account. A similar option is electronic checking, which provides an electronic facsimile of the payee’s check as proof of the transaction. Stored Value MediumsA third alternative is stored value mediums, also known as digital cash. A home user would buy digital cash from a bank or other issuer. This digital cash would be stored in either a “smart card” or in electronic form on the person’s home computer. A smart card is a plastic card with an embedded microchip that can store digital information of any sort. Home computers must have some type of reader to use a smart card. Because they can contain information other than electronic cash, smart cards can assist the user. For example, a person that buys airline tickets with a smart card can program the card with airline, seat or meal preferences, frequent flyer numbers or other information. He can then buy the tickets at the terminal or through his home computer without having to enter such information. In a traditional or Internet gambling environment, smart cards can store slot club information or other information to allow the casino to better serve the player. |
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Two types of smart card systems will be available, open and closed systems. Open systems allow the cards to be used at a variety of locations. For example, the same card could be used to buy gasoline at the corner station and buy software on the Internet. In contrast, closed systems can only be used between the cardholder and the issuing merchant or company. Regardless of whether the digital cash is stored in a smart card or in other electronic form, the system for transferring the digital cash over the Internet between the consumer and the merchant will be similar. When the person wants to buy a product or service over the Internet, he could pay for the service by electronically transferring the digital cash to the host computer. The business would then request the issuing bank to verify the authenticity of the digital cash and credit the business’ bank account. At the same time, the bank would debit the user’s digital cash account. Digital cash also can include peer-to-peer payments, such that neither party need be a merchant nor have a direct contractual relationship with the issuing bank or agency. Here the digital cash is much like currency and can change hands without the issuer knowing about or accounting for it. The holder, however, can request the issuer to convert the digital cash to real cash at any time. This form of transfer would have application in games where the house is not a participant, such as a poker game. In this circumstance, money is exchanged between players with the house receiving a commission, called a “rake,” based on the size of the pot. Peer-to-peer systems exist without the issuer maintaining an audit trail, and are referred to as “unaccounted” systems.60 These systems have the benefit of being less expensive and potentially anonymous, but also pose a risk because the lack of an audit trail makes it vulnerable to fraud and lack of accountability. On the other hand, systems that account for all transactions may be particularly worrisome to potential gamblers. These systems provide an audit trail of every customer transaction, including every play at an Internet gaming site. This could provide government or others with an unprecedented amount of information on an individual, including cash flow and uses. This may be of particular use in prosecutions for income tax evasion and money laundering. |
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60 IRS Policy Paper, “Taxation of Internet Commerce,” April 2, 1997. |
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Of the various financial transaction systems, digital cash presents the most promise for Internet gambling. At least one company, CyberCash, has introduced cyber-coins, a method where persons can transfer some fraction of a dollar at a time. This would work well with the quarter cyber-slot machine and other low denomination gambling activities. Moreover, unless the player decides to carry credits on the cyber-slot or in his casino account, digital cash can immediately transfer winnings back to his computer. Some digital cash systems may provide complete anonymity,61 where the transferor will not know the identity of the transferee by virtue of the transfer of funds. Most digital cash systems, however, will provide only some level of protected anonymity. CyberCash, for example, will maintain transfer logs, but such logs will be encrypted with only the buyer having the key.62 Other than digital cash, no method protects the anonymity of the player. A practical problem with digital cash that must be overcome is cost efficiency. A transfer fee of greater than 1% of the transferred amount will probably make its use impractical for gambling transactions. Currently the fee for a small twenty-five cent transaction range is as high as 30%. No casino, traditional or Internet, can charge such percentage and expect to remain in business. Despite the availability of digital cash,63 its use has not yet gained widespread consumer confidence. Other than cost-efficiency, a major problem is that various incompatible types of digital cash are competing for market dominance. A home user may find that he or she uses one type of digital cash and the prospective Internet gaming operator supports a different type.64 Cost-Efficiency Of Financial Transaction SystemsMost financial transaction systems are not cost-efficient unless the site operator aggregates transactions. For example, without aggregation, |
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61 Whether governments will allow complete anonymity remains an issue. Complete anonymity to some governmental officials means unaccountability. This, in turn, may facilitate money laundering. 62 Interview of David Lynch, Internet World, vol. 7, no. 7 (1996). 63 In October 1995, St. Louis’ Mark Twain Bank opened the first digital cash accounts. Linda Kanamine, “Despite Legal Issues, Virtual Dice Are Rolling,” USA Today, Nov. 17, 1995. 64 Five major competitors are attempting to set up Internet cash systems. They are Cybercash, Inc., Visa Cash, Netcheque, Microsoft, Intercoin and Digicash. |
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every time a person using a credit or debit card plays a slot machine, his or her account would have to be debited and every time that person wins, the account would have to be credited. The operator of the financial transaction system expects to receive a fee on each transfer. Even if the fee is a mere 3%, this may equal or exceed the casino’s house advantage in many games. Without aggregation, an operator cannot operate efficiently using electronic checking, credit card transfers or bank debits. Aggregation allows the casino to wait until the player concludes play and then either credit or debit his account. Using aggregation, however, makes payment less immediate and may create concerns by players as to whether the host computer will properly credit his account in the aggregate if the system were to crash. Security Of Financial Transaction SystemThe Internet's success in the gambling market also will depend on advances in technology improving security for electronic funds transfers and commerce. Most commercial transactions now take place either face to face or over the phone. These traditional methods of commerce have proven to be trustworthy and secure. However, with electronic commerce, the location and identity of the party at the "other end" remains unknown, and the authenticity of transmissions becomes more precarious. For example, home users may have justifiable concerns that a third person can intercept their data transmissions, steal their credit card or bank account numbers and conduct unauthorized transactions. Or, perhaps, a hacker65 can simply divert wire transfers of funds. Of course, stealing credit card numbers or wire transfers would be illegal under the Computer Fraud and Abuse Act,66 but declaring something illegal and being able to arrest and prosecute violators for the offense are different things. |
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65 A “hacker” has two meanings. Originally, it meant a sophisticated computer user that could create computer code. It later was associated with persons who illegally break into others computer systems to steal information, cause damage or are simply being mischievous. Because many thought that the negative connotation was unwarranted, new jargon was created for those who break codes and passwords, called “crackers.” With all due respect to hackers, the word “hacker” is used throughout this book to describe persons that break into computer systems or steal information from the Internet in violation of the law. 66 The Computer Fraud and Abuse Act provides in pertinent part that it shall be a crime:
18 U.S.C. §§1030(a)(2) (1986). |
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Other scenarios are possible. For example, a hacker could “steal bets” without being detected. Suppose a person who is playing a virtual slot machine wagers $100 via electronic transmission. If the hacker can intercept the wager, he could credit, let’s say $90 of the wager to his own account. Instead of the $100, only the remaining $10 bet is sent to the Internet site operator. To avoid detection, the thief would then intercept the returning transmission from the site operator, and alter it to show the bet was $100. If the player won, the thief would credit his “phantom” account by $100. If he lost, neither the home user nor the site operator would realize that $90 was diverted to the thief’s bank account. The home gambler will assume he lost the $100 bet, while the site operator will assume the gambler lost a $10 bet. The fraud would be detected only where the home user won over the course of his play and later discovered that his bank account was not credited for the full amount of his winnings. Because Internet security is not unique to gambling, but affects all commerce over the Internet, it is an issue of considerable research and development. Major companies in both the credit and Internet browser industries have formed joint ventures to tackle the problem. While the continuing problem of security is likely, one can assume that an acceptable solution to the problem will emerge and will likely use some form of data encryption. Internet Gambling Must Be Secure From HackersAs noted, a foremost security issue faced by Internet gambling involves funds transfer. But, security problems do not stop there. Like traditional casinos, cheats will attempt to steal from both the casino and the player. Internet gaming operators are the most likely targets of security problems. If a hacker can break into the operator’s system, he or she could cause considerable damage or loss. The hacker could simply alter or observe the random number generator. If he alters it, he could set the game so that he would win. By simply learning the algorithm that runs the random number generator, he could learn its weakness and exploit it. Another scenario contemplates a hacker intercepting the transmission of a home user who lives in a state where gambling on the Internet is illegal. The criminal could then “blackmail” the home user by threatening public exposure or criminal prosecution. Chapter 6 on Internet security covers these in depth. |
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Internet Gambling Must Overcome Integrity IssuesA question exists about whether a player will accept that Internet gambling operators are fair and honest. The integrity of Internet gambling operators already is a controversial area, as two major Internet gambling operators have been uncovered as having criminal histories including bank fraud and association with organized crime. Moreover, according to the same exposé in Web Week Magazine, allegations continue to surround operators that have established sites in the Caribbean concerning copyright infringement, cheating and of misrepresentations concerning the existence of real casinos used to legitimize the Internet casino.67 Players are rightly concerned that the operators honestly conduct the games. This is more problematic in the electronic age. Both modern slot machines in the traditional casinos and video gambling games operated over the Internet rely on the honesty of the programmers of the software. A software-based random number generator (“RNG”) within the host's microprocessor controls the "chance" portion of these games. Whether this RNG provides random results or is rigged to cheat the player is within the control of the software programmers. Unlike Internet gambling, players have greater assurances in the honesty of the slot machines or video gambling devices that they play at regulated casinos in Nevada, New Jersey and similar places. These jurisdictions have state-run electronic laboratories that review, approve and periodically inspect all software used in gambling devices. A casino found to have “gaffed” a device would likely lose its gaming license. No such testing, licensing or approvals yet apply to Internet gambling. One company sells a product that provides “collaborative” random number generation.68 In essence, this software product requires instructions from both the client (i.e. the player’s computer) and the host (i.e. the gaming operator’s computer) to generate the random numbers that control game outcome. The player can then verify that the result occurred through the collaborative random number generation. This method would eliminate the casino from cheating by determining game outcome by design as opposed to randomly, by alternating game outcome or by spooking the user’s computer into believing the outcome was other than it really was. |
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67 Jeremy Carl, Online Casinos: Drawing to a Tough Hand, Web Week, September 1995. 68 The company is Quixotic Solutions, Inc. |
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This type of system has promise but still requires the patron to trust both the integrity of a third party company and the infallibility of the software. The latter concerns whether the public will trust that the casino cannot manipulate the software itself. Besides cheating, an unscrupulous operator can simply defraud the home user. One possibility is that a site operator may take the money that the player deposits in the casino and then close the site, without intention of returning the deposits or paying unpaid winning wagers. Players at Internet sites also can become victims of the operator’s bad luck or incompetence. In many jurisdictions where gambling is legal, the government requires the casino operator to maintain reserves to pay winning bets or to have annuities to pay winnings that are paid over time. These controls are not applicable to Internet gambling operators. For example, a major publicly-traded Internet operator has filed financial reports with the United States Securities and Exchange Commission showing that money owed to or deposited by patrons substantially exceeded cash reserves.69 Therefore, if all the patrons wanted their money back or the company liquidated its assets, there would not be sufficient cash available to repay all the patrons. Patrons also need some assurances that information given to casino operators will not be used for other purposes. One reason that a person may prefer to gamble online as opposed to in a casino is privacy. This trust in the operator maintaining privacy can be shattered if the information given to the casino operator is distributed. For example, a “tout” service that uses telemarketing to convince people to buy its football picks may be willing to pay money for a list of Internet sportsbook players. Internet Gambling Faces an Uncertain Legal FutureAs is discussed later in this report, many governments have pronounced that any form of Internet gambling is illegal. Most gambling laws, however, were not written to address the issues presented by Internet gambling. Therefore, some question exists, particularly in the United States, about whether these laws apply to Internet gambling. The important question for the future of Internet gambling, however, is not what is the current state of the law, but what future holds for both law and enforcement efforts. The simplest part of attempting to regulate or |
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69 Joe Lambe, “Missouri Judge Bans Internet Gambling Firm,” Kansas City Star, May 26, 1997. |
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prohibit Internet gambling is drafting legislation. The most difficult part is implementation. Because implementation of anti-gambling laws on the Internet is difficult, laws will not result in a gambling-free environment. They may, however, inhibit the growth of the industry and dissuade involvement by legitimate gaming operators that will not jeopardize their land-based casino licenses by being involved in an activity prohibited by federal law. Prohibition would then result in Internet gambling becoming an unregulated industry dominated by persons willing to violate law in the United States and elsewhere. Whether the government ultimately enforces the laws will, however, influence the size of the industry. The Relationship between Integrity and LegalityIntegrity and legality are related because legality is, by definition, the result of governmental action and the public’s perception of integrity in an industry may only come from governmental oversight. Certainly other methods may exist to create integrity. The principal methods are establishing a good reputation, industry self-regulation, and independent third party oversight.70 These methods generally are inferior to legitimate government oversight. Buying Integrity through Government OversightThe idea of “buying” integrity from a government is an unusual concept. Governments may provide services, but rarely sell them in an open international market. Governments historically govern, which means to exercise authority, rule or control over persons. Governing does not include selling services. Since the dawn of modern history, man has existed under a system of governance that has relied on the government having physical control over a geographic area and its inhabitants. This has evolved into a basic principle of International law. According to one authority, “Under International law, a state is an entity that has a defined territory and a permanent population, under the control of its own government….”71 Modern technology has gradually eroded some control – by facilitating inter-jurisdictional transactions. The advent of a national mail system spurred the creation of mail fraud, as well as the advent of the first national lottery. |
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70 Industry self regulation and independent third party oversight are discussed in Chapter 20. 71 Restatement (Third) of Foreign Relations Law of the United States §201 (1987) |
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More recently, the movement of money received from illegal transactions was much easier to track and prevent before the advent of electronic bank transfers. The Internet significantly raises those stakes. It is a human community that exists without traditional notions of territory. The struggle for governments, therefore, is how to either extend their monopoly to a boundless territory or to control the Internet within their territorial boundaries. This is not that difficult of a proposition for many countries. So long as government controls access to the Internet, it can control what content that its citizen’s view. This type of Draconian approach is acceptable in places like Singapore, Vietnam, India or Saudi Arabia. It is unacceptable in most western cultures, such as the United States, Canada, Western Europe and Australia. These countries have two options. The most daunting, and perhaps impossible, is to maintain traditional governmental controls over its citizens while relinquishing control of the Internet infrastructure. The reason this is such a daunting task is that an open Internet changes the way people interact socially and commercially. One can buy virtually anything over the Internet from a business that does not exist anywhere but in cyberspace. The online gaming industry is an example. Where is the casino? Is it really in Antigua where it is licensed or is it next door but only routed through a surrogate server in Antigua? Moreover, how long does it take to move the Internet casino between countries? These questions illustrate that the location of the Internet business is increasingly irrelevant. They led, however, to a greater question. Without having physical control over the business, how does government control or tax gambling activities? To maintain both traditional controls and an open Internet environment, governments need to deal with the issue of international enforcement of their criminal statutes and to resolve conflicts between the laws of sovereign jurisdictions. In other words, governments need to create wide-ranging international cooperation. Nations may want to address several issues by international treaty such as bank fraud, consumer fraud, theft of intellectual property, copyright infringement, child pornography and the like. Yet, the likelihood that international treaty can or will be address gambling is questionable because government attitudes on the subject vary so greatly. For example, any attempt by the United States, which recognizes $47 billion a year in legal gaming revenues, to tell a small Caribbean country to stop receiving a few million dollars in fees annually from Internet operators is likely to fall on deaf ears. Even divergence between top level countries may doom such efforts. |
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The alternatives to an international treaty are limited. Like Vietnam, the government could simply assume control of all Internet services and block all sites that it deems objectionable. The other major alternative is to allow the Internet to remain open and uncontrolled. The latter, however, will change the nature of government from the purveyor of monopoly power over its territory, to a service provider. Instead of being "governed" in the traditional sense by territorial state, mobile Internet industries have the ability to buy government services. In essence, they can chose between various packages of governmental services. This evolution is evident in the Internet gambling world. The first players came from the Caribbean. Antigua passed legislation in early 1997 to grant licenses to Internet operators. For $100,000 per year, an operator is assured of little regulatory oversight, anonymity and tax-free profits.72 St. Kitts and Grenada also provide licenses for sale at up to $100,000 per year.73 Some countries currently selling licenses include Antigua, Turk and Caicos Islands, St. Martin, Belize, Grenada, Cook Islands, and the Netherlands Antilles. Moreover, incorporating offshore is both simple and cheap. Besides obtaining a government license to operate an Internet casino, some countries have granted “master” licenses. These licenses allow the holders to sublicense other persons to operate Internet gambling sites. This can allow some operators to enter the business with lower initial costs as these sublicenses can be granted for about $4,000 to $8,000 per month. As Internet scams by persons using certain countries as bases of operation continue to generate publicity, Internet users may be inherently suspicious of any operator doing business in that locale. For example, Antigua already has seen a major Internet scandal. Two Russians, using Antigua as its headquarters, opened in Internet bank. They collected tens of millions of dollars and then fled. The Russians, like other criminal elements, were attracted to Antigua's pay-for-government-protection racket.74 In contrast to many Caribbean countries are the top-level countries including world leaders, such as the United States, Great Britain, Australia, France, Japan, Germany, Spain and Canada. If a world leader were to |
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72 Mark Fineman, Antigua Betting The Net Will Yield Huge Dividends, Los Angeles Times, September 21, 1997. 73 Lane Kelly, Betting With Internet Casinos Can Be A Real Pull of the Dice, Sun-Sentinel, September 8, 1997. 74 Mark Fineman, Antigua Betting the Net Will Yield Huge Dividends, Los Angeles Times, September 21, 1997. |
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provide legitimate government oversight, this would provide a very bankable commodity for which most Internet gambling operators would be willing to pay a premium. This is because their government oversight brings credibility. The reality, however, is that the top-level countries are still struggling with the concept of how they fit into the Internet world. The basic struggle is whether government can control the Internet or whether the Internet will control the government. Top level governments are simply not yet willing to give up control of the Internet and become vendors of services. It is a much bigger issue than gambling. But, the issues that are pushing the envelope so happen to be pornography and gambling because they are the first to challenge traditional government roles. Possible top level governments that may bring legitimacy to Internet gambling are Canada, Australia and New Zealand75 Australia has given preliminary approval on a regulatory scheme that would allow its states to license Internet gambling. The Canadian Parliament is considering bill by Dennis Mills (Toronto) that would allow the government to license Internet gambling operators. New Zealand Casino Control Authority head Trevor Garrett also has moved for regulation that would both generate tax revenue and ensure Internet sites operate in a safe, legal environment. The pivotal decision is whether a top-level country will decide to accept Internet gambling and basically sell its regulatory oversight to Internet gambling operators. In a real sense, when this happens, hopes of containing Internet gambling will be difficult, if not impossible. For one, the industry will be able to earn the patron’s trust when it submits to real regulatory control by a legitimate government. Just like most people believe the slot machines in Las Vegas are honest, if Nevada regulated an Internet site, that same level of trust would transfer. In one stroke, the industry will gain credibility. Obvious benefits accrue to both the regulated Internet operators and the sponsoring top-level country that offers real regulation. Internet gambling operators have certain needs or wants and will bargain for (1) infrastructure support; (2) basic legality of the types of gambling that the operator wishes to offer; (3) financial infrastructure; (4) anonymity for customers; and (5) credibility through regulatory oversight and public accountability. |
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75 Adam Snyder, Odd Alliance Taxes on Internet Gambling, MSNBC. See Chapters 11 and 19 for a greater explanation of the current affairs in these countries. |
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As with all negotiations, the sellers, in this case the government will want certain things in return. The first is to receive fees and taxes. The fees will be used to pay for the cost of the regulatory services provided by the government. The taxes will be used for other governmental purposes. Moreover, the top-level governments have a notion of social responsibility. They will seek some basic implementation of public policy. This could include controls on underage gambling, bet limitations or loss limits, or that the games meet minimum levels of fairness. The price of these government services will necessarily vary according to market conditions. When few governments offered Internet gaming licenses, operators were willing to pay $100,000 per year for minimal governmental benefits. As more of the lowest level governments offered similar benefits, the costs decreased. In comparison, governmental benefits provided by the highest level governments will come at considerable premium over the lowest level countries. Moreover, pressure is placed on being the leader in the area because the first top-level country to provide buyable governmental oversight will have, at least, a temporary monopoly. This will allow it to reap an extraordinary premium for its services. Internet Gambling Must Compete Against Traditional GamblingNever before in history, have people had so varied opportunities to gamble. In 1997, in the United States, all but two states offered some form of legal gambling such as casinos, lotteries, video lottery terminals, on-track horse wagering, off-track wagering, bingo or pull tabs. The United States is not unique. Legal gambling is more prevalent throughout the world than at any other time in modern history. To be successful, Internet gambling must compete against these traditional forms of gambling. For the reasons stated below, Internet casino gambling and sports wagering offer the most promising futures, at least in the short term. CasinosInternet and traditional casinos will compete on several levels. The most important will be accessibility, quality of play, amenities/ambiance, trust and value. These are discussed below. Accessibility Internet casino gambling has an advantage over traditional casinos in that it provides more immediate gratification. The major advantage is accessibility. A person does not have to leave his or her home to play casino |
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games. The strength of this advantage depends on the accessibility of traditional casinos to the prospective home user. For example, Internet casinos may enjoy little or no advantage over traditional gambling in places like Las Vegas, where a person can visit a casino within a few miles of his or her home. The Internet advantage, however, is greater where a person cannot visit a nearby casino because the state law prohibits them or because the legal casinos are far from the person’s home. Quality of Game Play Although a person may gain immediate access to a virtual casino, it may take longer to play the games once the person gets there. This is because the games offered over the Internet tend to be slow. Speed of data transmission over the Internet effects the playability of certain types of games. Internet casinos require software-driven virtual facsimiles of casino games. Problems with speed of play are temporary and may be cured by technology advances such as in Internet infrastructure, faster modems or other connections, and better data compression. Another disadvantage to Internet casinos is that some casino games do not lend themselves to Internet gambling. For example, participants that share the value of their hands with other participants using a separate telephone line can cheat multiple player games, such as poker. This type of cheating scheme would allow the conspirators to gain an advantage over the other players.76 Similarly, offering blackjack would require the Internet casino to frequently shuffle the deck to prevent computer-assisted card counting. This will raise the house advantage over the player and may convince some players to visit a traditional casino instead of the virtual casino. Amenities/Ambiance Neither live nor animated video of traditional live games will equal the experience of actually being at the craps table for most players. Gambling at home over the Internet lacks the social and environmental experience of an actual casino. A large part and draw of the casino experience are the spontaneous sights and sounds of a live casino. These can include the personalities of other players, the challenge of beating a live dealer, and the shared excitement and attention of a winning streak. |
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76 Id. |
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Moreover, most casinos do not operate in isolation, but are part of a larger resort complex. A typical resort can offer many traditional amenities such as hotel rooms, swimming pools, spas, golf courses, restaurants and tennis courts. They also offer unique experiences such as magic shows, roller coasters, or exotic rainforests. Internet casinos lack these elements. One can image a casino in a three-dimensional multiple user domain that could provide a surreal “Roger Rabbit-type” environment. Three dimensional multi-user domains are in their early infancy and also hindered by inadequate bandwidth. Computers still have a long way to go before they can recreate more than an audio-visual representation of real life experiences. So, while programmers can create “virtual” Las Vegas, it still is preferable to most players only if time or costs prevent a trip to the real Las Vegas. To a small segment of the population, the solitude of Internet gambling may be an advantage. Some persons do not enjoy the casino experience because of noise, smoke, intimidation or social reasons. Others (e.g., politicians and evangelists) may prefer perceived anonymity of in home gambling. Still others may be physically unable to travel to the casinos or are not of legal age. These small market segments, however, may suffice to create a thriving Internet casino industry. Trust Fairness and honesty are two different concepts. A casino can be honest, but not fair. Honesty refers to whether the casino offers games whose chance elements are truly random. For example, a slot machine is honest if the outcome of each play is not predetermined in the casino’s favor. Fairness refers to the games being designed so that they do not take unreasonable advantage of the player. For example, many slot machines in traditional casinos are designed to pay back on average 95% of all wagers accepted. The five-percent retained is the casino’s profit. This is a reasonable amount for the casino to retain to pay for its capital costs, operating expenses and a fair profit. On the other hand, setting the machine’s to retain 40% is not reasonable. Players have no inherent reason to believe that Internet casinos are honest or fair. No top-level country regulates Internet casinos nor are any effective methods of self-regulation or third party regulation in place. In contrast, most traditional casinos are in places with established regulatory systems such as Great Britain, Australia, France and the United States. |
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Statements by current operators that expounded the enormous profits and high margins that they are realizing from Internet gamblers do not reinforce the concept of fairness. These claims can be easily interpreted as the equivalent of taking advantage of the players. Competition, however, may ultimately force operators to offer odds more consistent with a competitive economy. Besides fairness and honesty, players also must trust that the software they install on their computer is safe. In other words, it does not contain viruses or ghost programs. Many people retain all their financial information on their computer. They need some assurance that the software they download from an unknown casino operator operating from a Caribbean country doesn't have a ghost program that transfers bank, credit card, stock account and password information. These disadvantages will limit the ability of Internet casinos to compete against traditional casinos and other types of gambling. The gambling market, however, is enormous. The possibility of capturing even a fraction of the projected revenue of $31.4 billion for the year 2001, and the relatively small costs to open an Internet gambling site presents a significant incentive to entice entrepreneurs. As the disadvantages are eliminated or reduced, the Internet casino’s market share is likely to increase. Value No Internet gambling sites are competing based on price. Therefore, they generally offer worse odds than tradition casinos in highly competitive markets, such as Las Vegas. As more sites compete for the patrons’ dollar, their odds will become as competitive. LotteriesQuality Of Play Internet lotteries face substantial obstacles. The most significant is that Internet lotteries are currently unable to offer jackpots sufficient to compete with government-run lotteries. State and national lotteries throughout the world offer large prizes as inducements to play. For example, the UK lottery often offers a top prize exceeding $100 million (US). Governments can do this because they have a large base of players and can pay the jackpots out over many years. Moreover, state-run lotteries can and do heavily advertise their lotteries and conveniently offer tickets at many retail establishments to promote impulse purchases. This helps create the sales needed to support the large jackpots. |
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Internet lotteries do not have, at least for the present, the large base of players willing to place lottery wagers over the Internet. Moreover, if an Internet site promoted its lottery by offering a large jackpot to be paid over many years, many players may justifiably question whether the jackpot payments will ever be paid in the ensuing years. This could all change, however, if governments with large lotteries, such as Great Britain or California, began to use the Internet to supplement existing lottery sales. Players should have greater comfort in knowing that a government entity will make these periodic payments than a third world-based lottery operator. Internet lottery sites have one significant advantage over Internet casinos. Unlike Internet casinos, they do not require sophisticated graphics or frequent interaction with players. Therefore, the technical limitations of the Internet are less substantial. Accessibility The advantage of Internet lotteries over traditional lotteries is that Internet lotteries can be more convenient because of their availability at home. This advantage is significant to existing lottery operators who view this as a method to increase the size of traditional lotteries, not to replace them. Lottery leaders, such as GTECH, have products under development for delivery of lotteries over the Internet.77 These companies realize that most lottery players do not have Internet access, but are following the changing demographics of Internet users. For the near term, GTECH and others are developing the product for the international market given the U.S. legal issues. Trust Like Internet casinos, players must rely on the honesty of the operator to assure that the lottery is fair and honest. All other things being equal, players would choose participating in a legal government-run lottery over an illegal Internet lottery for this reason alone. Value Government-run lotteries usually have geographic monopolies and charge exorbitant rates, which translate into poor odds for the players. Internet lotteries have the opportunity to undercut these rates. |
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77 Q&A, Don Stanford, GTECH Senior Vice President and Chief Technical Officer, “A Lottery Product for the Internet User,” IGWB, Nov. 1997. |
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Horserace WageringHorseracing was once the king of the gaming hill. Twenty years ago, it had about 30% of the gaming market. Today, it is struggling with a mere 8%. If horseracing is to survive as a viable gaming industry, interactive home wagering will need to be a large part of its future plans. Simply, on track pari-mutuel wagering has been steadily declining for many years. Where it once was the dominant gaming player in the nation, it has seen its revenues fall more than 55% since 1982.78 Its only savior has been inter-track wagering and off-track betting, which has more than made up for the on-track decline and allowed a modest 2.4% growth in total revenues in that time.79 Horseracing interests are aware of the trends and have begun focusing on the home market. Some of these efforts are directed at packaging top races from various tracks for regular, national broadcasts. Only slightly beyond are efforts to introduce interactive home wagering. While home wagering presents significant opportunities, delivery of such gambling services over the Internet is less advantageous in most circumstances to other mediums. In many places, a person wishing to bet on horseraces already can use his or her telephone to place a wager with an off-track bookmaker. In many states, persons can view information regarding the race and the actual race itself on cable television. In these places, the player can view the race and all relevant racing information over an existing television or cable broadcast and uses his telephone to place the wager. Moreover, evolving television technologies have opened new opportunities. On-demand systems allow the home user to watch the broadcast of the horserace and receive relevant race information over a cable television system.80 The home user can then interactively place wagers through an inexpensive device attached to the person's television set. This system has significant advantages over the use of the Internet. First, difficult issues of bandwidth needed to transmit a live video feed do not have to be addressed. This is important because the ability to watch the actual race is |
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78 Christiansen/Cummins Associates, Inc., IGWB United States 96 Gross Annual Wagering, 32. 79 Id. 80 ODS Technology has tested a system in Louisville, Kentucky, that provides interactive wagering from Churchill Downs using a combination of cable broadcast and direct dial modems. Home patrons can watch the race on cable television and place a wager through a dedicated box on the television that contains a modem connected to the racetrack’s server. |
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important to the success of home-based horse wagering. Second, public accessibility is greater since more people have cable television than have Internet access. Third, costs to the player are less than the cost of a computer with an Internet connection because most persons already own a television. Fourth, the use of this technology poses fewer security problems. Most cable systems were not designed for interactive communications. To offer systems where the cable customer can send data to the cable station, the cable system must be upgraded. If cable systems are slow to upgrade their systems to allow two-way communication, interactive horseracing betting systems using modems can obtain early market penetration. These systems, however, are likely to be direct dial systems as opposed to using the Internet for three reasons. First, the legality of placing a horse wager over the Internet is less certain than over telephone lines. For example, in the United States no one questions that purely intrastate wagering over telephone lines is legal if allowed by state law. Second, direct dial systems provide for greater bandwidth than the Internet. This allows for better video of the horserace. Third, these systems, if well designed, are more secure than the same system that uses the Internet. If Internet or Intranet systems gain significant market penetration over cable systems, the problems that telephone systems have with low bandwidth may be solved before cable systems can be fully functional and capture market share. Some racing operators are taking advantage of the cable opportunity. The New York Racing Association (“NYRA”), a public entity, has its own pari-mutuel network that reaches millions of homes within its state. While it does not offer interactive wagering, home users can place bets by telephone.81 The involvement of companies, such as the NYRA, provides horseracing with a significant advantage over other forms of Internet gambling. Players will have little concern that NYRA or other government-licensed racing associations will cheat them, or fail to honor winning wagers. The concern with cheating in pari-mutuel wagering is not so much in altering the outcome, but in having the operator understate the amount of the pool. In an open and regulated environment, this is unlikely. |
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81 Another company, iwn.inc a subsidiary of NTN Communications, Inc., is testing international horse wagering over GTE Mainstreet Interactive Cable Systems in Cerritos, California for “points.” Evan Schwartz, Wanna Bet?, ”Hot Wired Places Hosting Sites: Turk and Caicos Islands, St. Martin, Belize.” Similarly, You Bet! is developing a system for home wagering by computer modem. |
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Sports WageringWhile cable systems are an alternative to horseracing wagering on the Internet, legal constraints deter their application to sports wagering. The critical difference between the two is that horseracing is legal in most states, while traditional sports wagering is legal only in Nevada, Delaware and Oregon. Under federal law, other states cannot legalize sports wagering. Given this, cable companies will not risk the loss of their license or criminal prosecution by offering interactive sports wagering. Therefore, horseracing has a vehicle to deliver legal home-based interactive wagering over cable systems, while sports’ wagering does not. Quality Of Play Internet sports wagering sites do not need to be as technically advanced as horseracing sites. The interaction between the sports wagering site and the home user is simple. The site only needs to provide information on those games or events on which it will accept wagers. In turn, the player chooses the wager that he or she wishes to place and the amount of the wager. Because of the wide availability of sports broadcasts over television and cable, Internet sites do not have to provide "live" video feeds of the sporting events. Although allowing a person to place wagers while watching a sporting event, whether it be on each play, pitch or round, is an enticing feature because it encourages more frequent wagers. Trust Moreover, the trust issue is less critical with sports wagering than with casinos or lotteries. Unlike Internet casinos, most sports players should have little concern that the Internet operator can cheat him. The outcome of the sporting event is outside the control of either the player or the gambling operator. Fairness also is less of an issue because the operator must state and that player can easily verify the house commission. Some concerns may exist, however, regarding pari-mutuel wagering, i.e., whether the actual payouts accurately reflect the proper division of the pari-mutuel pool after the operator takes its commission. Lastly, few sports bettors will consider the illegality to be a substantial barrier. Americans openly wager billions of dollars each year with illegal bookies because most states have decriminalized sports’ wagering. To be successful, an Internet sportsbook need only convince prospective players that it will pay winning wagers and that the activity is as safe or safer from prosecution than betting with the traditional bookies. |
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