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The Online Gambling Industry [Part 1]

December 17th, 2007 No comments

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A report on the Online Gambling industry, focusing on general issues of the business and government interference in it. This was partially motivated by the Senate ruining my shit by launching the war on international gambling.

Online Gambling: The Ideal Global Industry?

Gambling has long been a part of human history. For the past two thousand years, and likely even longer, societies have wagered their properties in games of chance. The earliest evidence of gaming for money coincides with the invention of the coin in 700 B. C. [i] In the present, gambling is still a popular past-time: in 1999, over two-thirds of Americans reported having gambled at least once in the previous year. [ii] With the introduction of personal computing and the integration of the internet into mainstream culture, real-money wagering has moved into cyberspace, resulting in the birth of a brand new industry: online gambling. –more–>Internet gambling[1] is blessed, having essentially “hopped on” pre-existing, well-developed technologies and infrastructures that constitute a majority of its business necessities. The industry relies on the independent, rapidly-expanding internet; the well-developed, low-cost financial system available to the consumer; and the large global markets created by the widespread cultural phenomenon of gambling. Despite these favorable circumstances, the industry is ultimately constrained by legal issues. Regardless, internet gambling in its current state is inherently international, with greater possibilities to be made available by the destruction of those legal barriers.

The Nature of Gambling as a Business

In most respects, internet gaming is an unconventional international industry. Its first defining characteristic lies in the character of the service provided by gambling, whether by traditional means or internet. A casino (“the house”) has several different outward manifestations its ways to make money, but its methods reduce to two basic concepts: rake and house edge.

Rake is primarily used only in games such as poker and sports betting, where wagers are made against other players and the house has no stake in the outcome. At some stage in each wager, a “fee” is collected for the services provided by the casino for the game (tables, cards, dealers, video screens, security, etc. This allows for a gambling environment that permits skilled players to become consistent winners, meanwhile not affecting the casino’s profits.

House edge, undoubtedly the most popular method used in Brick & Mortar[2] casinos, is incorporated into slot machines, bingo, “dealer” games, etc. which are the indicated preference of the average gambler. In such games, one wagers against the house, some randomized selection occurs, and the wager is either lost or the appropriate payout is given. The randomization process can occur through dice, a deck of cards, or computerized machines, but how these games are designed is ultimately governed by the principle of expected value: in short, the sum of the products of each payoff and the probability of it occurring, which equals the house edge. [3] Thus, if a house edge for a given slot machine game is 2%, in the long run each pull of the lever with a $1 wager should yield on average $0. 02. Conversely, the player’s edge is -2%, losing $0. 02 per $1.

By definition, a negative expectation is a losing proposition and should be avoided. However, casinos understand this and always investigate how their customers will treat it as well. Any casino’s profit-maximizing objectives can be generally summarized as a function of the number of wagers made in a given time-frame (quantity supplied), the size of the house edge or rake (price per wager), non-monetary value for the customer (entertainment, social interaction, etc. and the costs of meeting those goals.

The Speed, Power, and Expansiveness of Internet Technology

The internet is, quite obviously, as important to online gambling as roads are important to automobiles. Barring some disanalogies, both industries have largely been the beneficiaries of massive subsidies: common and widespread means for their customers to consume their products.

By far, the internet has become the supreme technology of commerce. The exponentially growing power and applicability of computers combined with lightning-fast transmission of data over long distances has- beyond its obvious contributions to production itself- lowered transaction costs while uniting buyers with sellers unlike ever before. By employing the tremendous strength of computers to achieve the casino’s profit-maximizing objectives, internet businesses have attained new-found efficiency in the service of gamblers.

Computers have reduced the physical limits of wagering itself. In traditional casinos, games like poker and blackjack are constrained by the ability of a human dealer to shuffle and distribute cards, count and appropriately pay bets, and determine outcomes- each with the possibility of human error at any stage. These obstacles are eliminated in the virtual world, thus allowing for the rapid, error-free execution of all games. For example, the average 10-player B&M Texas Hold’em[4] game plays about 30 hands per hour (thus rake is collected 30 times), but an online game of the same type plays between 60 and 80. Players also have the option of playing in multiple games at once (some experts play up to 12) since the games can be centralized and sorted conveniently on a single screen. [iii] In the same amount of time, the result is much more enjoyment of the game itself for the player and greater profitability for the casino.

To the consumer, the principal advantage offered by internet gambling is the increased comfort level of enjoying entertainment in one’s own home.

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The Online Gambling Industry[Part 2]

December 17th, 2007 No comments

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Driving, parking, waiting in line, and breathing second-hand smoke among all the other costs of visiting a B&M casino vanish. Getting into a game is nearly as fast as leaving a game; with two clicks players can quit for the day or just for a restroom break. Also, for communal games like poker, all sites have a chat feature for communicating with other players. Although the social experience is incomparable to that of a traditional casino, the difference may help as much as it hurts. Internet poker provides a non-committal, anonymous environment to play and interact with others (and for the sadistic, to take their money). These factors are likely to attract latent markets of individuals greatly discouraged by the prospects of visiting a local casino.

The products supplied by the casino can be understood in terms of the different games in which one can wager. B&M establishments, to add one new game, must allocate floor-space for it, pay for the table or machine, and hire staff to operate and oversee it. On the other hand, computer software only needs to be designed once to be replicated infinitely; it only occupies abundant, cheap memory and processing power; and it requires a minimal fraction of the oversight. This has allowed a wide variety of games and stakes to be available instantly when there is a demand for them. Expenditure on the construction of massive buildings, their aesthetics, and their infrastructure is no longer needed. Meanwhile, internet servers can support numbers that would conventionally require an entire stadium: in 2005, PartyGaming Plc often hosted over 60,000 players at one time. Hosting is so cost-effective that most sites offer an amount of “play money” games identical to real ones. This has the added benefit of letting customers get comfortable enough with the games and software interface to make the transfer to real wagers.

Relative ease of physical set-up is also a great boon of efficiency. Unlike in most material goods and services industries, infrastructural concerns including electricity, water, and mass/rapid/heavy transportation are not troublesome. Internet server housing facilities can be built practically anywhere, while only needing one or two landlines to a web source or a satellite uplink. Electricity and power demands can be met by autonomous sources. Transportation only needs the capability to support individual commuters. Most importantly, internet infrastructural technology has become so advanced that, especially for activities demanding as little bandwidth as online gambling, almost any two places on the globe can be seamlessly connected.

The Importance of Financial Transactions

It can be said that automobiles benefited from prior development of the petroleum industry. Similarly, internet gambling has profited tremendously from the well-developed financial system that preceded it, though this analogy does not do justice to the critical dependence of the former on the latter. The modern, advanced international financial system provides a strong foundation for the rapid and convenient placement of bets. The popularity of electronic, low-cost bank transactions goes hand-in-hand with an industry that is inherently monetary in its end product: money flows in for wagers, and money flows out for winnings. Inconveniences or long wait periods at either stage result in lost profits, by slowing down the wagering process and alienating casual consumers.

As it is in the B&M business model, the average user is potentially the source of greatest revenue. Millions of users around the world are already acquainted with using credit cards, and EFT-funded “e-cash” accounts such as Paypal to purchase goods on Amazon, eBay, and major retail stores’ websites. These stores have brought interstate and international trade closer to the average consumer by making him a direct participant. As buyers’ comfort with purchasing on the internet increases, so increases their likelihood of gambling online.

Internet gaming has even caused some minor new developments in the financial system. U. S. prohibition of credit card use for e-gaming transactions has itself produced an evolution of payment methods. Several offshore “e-wallets” and other accounts out of the reach of U. S. regulators sprung into existence to meet demand for legal and safe transfer points for gambling funds. International phone card balances became legal tender for some sites. Exchange rates play a major role in allowing individual sites to unite markets. Some sites, such as those hosted by Cryptologic, Inc. allow users to keep their accounts and even wager in different denominations.

In the past four years, investment has reached online betting. Explicit legalization and effective regulation has made the U. K. the de facto capital of online gambling, and the London Stock Exchange is host to all major publicly-traded gaming sites. The introduction of new cash reserves was originally part of an expansionary plan that shifted to consolidation via acquisition, following U. S. legislation in 2006 that prevented American financial institutions from dealing with online gaming sites, yielding devastating effects on revenue. [iv]

Global Markets

Games of chance are nearly cultural universals, especially in the Western World. Any person with access to a personal computer and the internet is a potential customer, and the internet is a single, united global network. As such, internet gambling is a truly global market. Ownership of computers and internet access has grown significantly in the past 10 years, and continues to grow quickly. Internet users constitute 16. 6% of the world’s population, for a whopping total of approximately one billion. [v]

North America is the first and biggest market considered by large online gaming firms, and the European Union is the second.

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The Online Gambling Industry[Part 3]

December 17th, 2007 No comments

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In 2006, 69. 1% of North Americans (about 229 million) and 51. 9% of Europeans (about 240 million) had internet access. In both these markets, alliances were formed between television and individual websites following the explosion in popularity of televised poker events. The largest sporting event worldwide featuring multi-million dollar cash prizes, The World Series of Poker, grew huge markets in the developed world almost overnight. In addition to providing regular cash games and tournaments, sites began hosting “satellites,” in which one pays an entry fee and competes with other players to win entries into one of the major televised events. The thrilling nature of No-Limit Texas Hold’em[5], plus enormous sums of money, appearance on television, and a chance at immortal fame as a World Champion of Poker was heartily accepted, especially by Americans. In 2005, PartyGaming Plc- the largest online gaming company at the time- earned 80% of its $1 billion revenues from U. S. players. Between 50% and 60% of the entire industry’s revenues of $12 billion in 2005 can be attributed to North American players. [vi]

Legal Issues and Obstructions

The issues most prominently affecting the growth and progress of internet gambling are nearly always legal. At the forefront of attacks on the industry, the United States Federal Government has been consistently battling domestic internet gambling since the late 1990s. It has justified this on grounds that internet betting sites can be easily exploited for money laundering, additionally arguing that online betting accentuates pathological gambling problems and undermines the integrity of professional sports. [vii] A more plausible explanation for this stance points to protectionism on the behalf of deep-seated domestic gambling interests. [viii] Because U. S. players constitute the industry’s most important market, the federal government’s aggressive stance is of immense concern. In October 2006, Republican Senator Bill Frist championed and passed the Unlawful Internet Gambling Act of 2006, a last-minute rider on the essential Port Security Act which passed in the final vote before Congress adjourned for the session. The law expressly prohibits U. S. financial institutions from conducting any transactions with “bet-taking” websites. The result of this law was the total shutdown of U. S. operations for three of the largest internet casinos: PartyGaming Plc, Sportingbet Plc, and 888 Holdings group, which lost 84%, 54%, and 52% of their revenues, respectively. Though business still continues for many rogue, but reputable sites, U. S. policy dealt a crushing blow to the industry.

International legal frameworks have played a role, albeit a minor one thus far. In 2003, the tiny island nation of Antigua lodged an official complaint in the World Trade Organization against the United States, citing that the U. S. discriminated between domestic and foreign providers of remote gambling and was therefore in violation of trade reciprocity requirements set forth in the General Agreement in Trade Services. It would either have to ban domestic remote bets, or permit WTO member nations access to its remote gambling markets. [ix] The U. S. was given until April 3, 2006 to comply, but took no action and claimed it had complied. Antiguan counsel Mark Mendel commented that it was the first time “an implementing [losing] party has announced itself in compliance with the recommendations and rulings of the Dispute Settlement Body of the WTO without having done anything at all. ” Nonetheless, the ruling demonstrates that the U. S. will have to comply eventually, or repudiate the workings of the WTO. Trade partners Japan and the EU have filed reports in support of Antigua; threats of undermining U. S. intellectual property rights are in the making. [x]

What of the regulatory option, supposing it were to be exercised? The internet intrinsically grants online casinos a great deal of protection from regulators. The ability to send and receive messages anonymously, change locations, and encrypt transmitted data may not make it impossible to trace transactions, but the cost of doing so will be prohibitively high. Mass subpoenas of thousands of private internet service providers’ records would be required, raising a storm of objections and privacy issues. “The very architecture of the Internet renders gambling prohibition futile,” states Tom Bell of the Cato Institute, as many experts have about the futility of regulation. [xi] New web-crawling technologies may begin to solve this problem, but even then, problems of jurisdiction persist. The ubiquity of possible locations for gambling sites’ servers presents a formidable obstacle to regulators, and sites can even go as far as making their operations extra-jurisdictional by preventing their cyberspace activities from being associated with any geographic location. [xii]

Given the regulatory environment, or lack thereof, in most of the world besides the U. K. this means that a sizeable portion of the internet gambling market is almost completely anarchic. There are no legal controls to protect consumers’ gambling accounts, yet the number of fraud operations conducted by any major sites has been limited for the brief history of the industry. A small degree of self-regulation has risen, likely due to large profit incentives and a desire to appear credible to skeptical customers. Accusations that online casinos are run by criminals persist, especially from the U. S. government, but these claims reflect scare tactics more than reality (at least in terms of how large sites treat their customers, not in the personal behavior of their owners). Ironically, government prohibition policies are responsible for driving poker sites underground.

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The Online Gambling Industry[Part 4]

December 17th, 2007 No comments

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As it stands, the U. S. government is the only real obstacle to the reliable, credible, and successful operation of internet casinos.

Online Gambling: A Perfect International Market?

While perfect markets can never realistically exist, internet gambling has the potential to be one of the closest approximations yet in human history. Usually, the export of services becomes complicated, as it usually involves the movement of people and equipment over state borders thus introducing new externalities; contrarily, gambling is one of few services that can be supplied exclusively via the internet, which practically operates in the absence of the burdens of physical limitations and their corresponding distortions.

Cyberspace is an abstract realm that holds the possibility of achieving closer adherence to perfect-market assumptions. It shows promise for the ever-increasing transparency of economic transactions. Practically infinite capacity, decentralization of access control, and constant innovation of hardware and software methods allows for thousands of companies to compete and cater to different preferences, making monopoly virtually impossible (no pun intended) in 2006, U. K. government estimates projected that there are 2,300 online gambling sites worldwide. The ready, rapid access of information can allow website to provide catalogues of competitors sorted by the user’s preferences, increasing symmetry of information. Even the elusive condition of arbitrage could be brought closer to fruition by compiling prices internationally.

Present efforts by private companies, namely Google, Inc. to centralize information have been met with great success. However, such centralization is a double-edged sword for the future of internet gambling and markets like it: while it can give the consumer easy access to a wealth of information never had before, it also gives government regulators new opportunities to police internet usage. Google’s recent cooperation with Chinese authorities in blocking access to government-censored websites is testament to this danger. When the appropriate technology is attained, the political climate surrounding internet gambling will determine whether it will be abolished entirely or permitted to blossom into the profit-making machine it has the potential to be. Nevertheless, in the status quo, legal barriers have held and continue to hold the industry’s growth in check.


[1] Internet gaming, online gambling, online gaming, etc. henceforth all refer to the same thing.

[2] The term “Brick & Mortar” (abbreviated B&M) used to describe casinos refers to conventional gaming houses.

[3] A good explanation can be found at http://en. wikipedia. org/wiki/Expected_value.

[4] Texas Hold’em is presently the most popular variant of poker played in casinos and online.

[5] This is just a variant of Texas Hold’em where the betting structure allows a player to bet all the chips he has on the table at any time. The result is a very volatile, but highly skill-dependent game.


[i] Cross-Border Gambling on the Internet: Challenging National and International Law, 21. Swiss Institute of Comparative Law. (Zurich: Schulthess, 2004)

[ii] National Gambling Impact Study Commission Final Report. http://govinfo. library. unt. edu/ngisc/reports/fullrpt. html (this and all websites accessed December 9, 2006).

[iii] Online Poker. Wikipedia. http://en. wikipedia. org/wiki/Online_poker

[iv] Basu, Indrajit. US-barred gambling set to roll in Asia. http://www. atimes. com/atimes/South_Asia/HJ31Df01. html

[v] Internet World Stats. “World Internet Usage and Population Statistics. ” http://www. internetworldstats. com/stats. htm.

[vi] McCarthy, Michael. New legislation may pull the plug on online gambling. http://www. usatoday. com/tech/2006-10-02-internet-gambling-usat_x. htm? POE=TECISVA.

[vii] Illegal Internet Gambling: Problems and Solutions. http://www. ncalg. org/Library/internet/Kyl_Internet. pdf

[viii] Hansen, Burke. Tiny Antigua grabs the US by its illegal, online dice. http://www. theregister. co. uk/2006/11/21/antigua_wto_bet/

[ix] Cross-Border Gambling on the Internet, 146.

[x] Burke, http://www. theregister. co. uk/2006/11/21/antigua_wto_bet/

[xi] Bell, Tom. http://www. cato. org/testimony/ct-tb052198. html

[xii] The Technical Feasibility of Regulating Gambling on the Internet. Australian Institute of Criminology http://www. anu. edu. au/people/Roger. Clarke/II/IGambReg. html

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