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The Online Gambling Industry[Part 3]

December 17th, 2007

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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.

 | 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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