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The Online Gambling Industry [Part 1]

December 17th, 2007

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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.

 | The Online Gambling Industry[Part 1] | The Online Gambling Industry[Part 2] | The Online Gambling Industry[Part 3] | The Online Gambling Industry[Part 4] | 

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