The High-Stakes World of Online Gambling

Just as Las Vegas pioneer Bugsy Siegel imagined a city of dice games and slot machines in the middle of the desert, entrepreneurs looked at the Web a few years ago and saw an audience hungry for online gaming.

They were right to suspect there was gold in all those clicks. A December 2002 report by the U.S. General Accounting Office stated that online gaming had worldwide revenues of more than US$4 billion, with roughly half of that total coming from the United States. According to many in the industry, thesector is still growing fast and raking in the cash.

There’s only one problem: In the United States, running an online gaming company is illegal. Despite this roadblock, many gaming sites are succeeding in playing a significant, though stealthy, role in the e-commerce industry. In this two-part special report, the E-Commerce Times takes a good look at how they are doing it.

Up the Mountain

Internet gaming first began appearing in 1995, and since then, 73 governments have approved some form of play. Expansion and competition have intensified, with the number of sites rising from 900 to 1,400 in just the last two years.

Recent consolidation maneuvers may knock the number of sites down a bit, but that does not mean the industry is anywhere near a decline.

As David Carruthers, CEO of Internet gambling site BetonSports.com, told the E-Commerce Times: “This industry isn’t different than any other. It’s growing and stretching to meet demand. We’ve had meteoric growth in the last three to five years.”

Crackdown in the Cards?

Yet prohibition is what some U.S. legislators would love to see. Pat O’Brien, an attorney at Greenberg Traurig who specializes in representing online gaming companies, told the E-Commerce Times that the United States would like nothing more than to make online gambling illegal.

In fact, doing business as an online gaming company in the United States is already illegal, which is why all online gambling sites are run from outside the country. BetonSports.com is located in Costa Rica, and other sites are spread across the globe, with companies based in Europe, Asia and especially the Caribbean.

Carruthers said the U.S. mania to wipe out online gaming seems to be more about legislating morality than catering to the wishes of the country’s citizens. “Online gaming is entertainment,” he noted. “It’s not one of the seven deadly sins. But some people think it is.”

Legal Quagmire

Indeed, the laws pertaining to online gaming are a messy batch. Federal law demands that any online gaming company adhere to state laws — but most states do not have specific Internet gaming laws.

“There are problems all the way down the line,” O’Brien said, “because the Justice Department takes that position that it’s all illegal. But they’re wrong.”

The distributed nature of the sector and its customers makes matters even more confusing. For example, it is illegal in Georgia to operate a house of gambling, but if a resident of Atlanta is playing a casino game owned by a company located in Antigua, the law does not specify whether or not that company is in violation of Georgia law.

Despite the cloudiness of current legislation, O’Brien said companies have decided not to risk prosecution, so they simply run their businesses from outside the United Stats.

Playing with Fire

Another difficulty of playing games in the virtual world is lack of assurance about the reliability of the gaming company. A tourist in Las Vegas can walk into the Bellagio and feel confident that the casino is on the up and up because brick-and-mortar casinos are strictly regulated. Online casinos are not.

Although it would be nice for a potential player to have a way to check out a particular gambling site, no method for doing so is available. As a result, there is widespread suspicion that gambling sites are scams. “It’s a very common misconception,” O’Brien said. “There have been some sites that have gone bankrupt, but in general, they’re pretty reliable.”

Avery Cardoza, publisher of gambling lifestyle magazine Avery Cardoza’s Player, told the E-Commerce Times: “The gaming sites don’t need to cheat you. There’s enough of a margin built in, and enough of a reason to keep people coming back, that you just don’t do it.”

Credit Workarounds

In some cases, credit card companies are less trusting than online gamblers. Transaction processing is a huge problem in the industry, partly because of the U.S. Department of Justice’s crackdown, and partly because of a tendency on the part of consumers to disavow online gambling charges.

To get around this problem, many gambling sites use third-party companies that make the charges look like product purchases. Money is taken from the credit card, put in these accounts and used as a virtual pile of casino chips. Legislators have been trying to find ways to dismantle this system, but online gambling sites are wily.

Carruthers noted that despite efforts by U.S. legislators to stop U.S. residents from gaming online, the industry will remain strong and will grow fast.

“We just accommodate changes in legislation and find ways around it,” he said. “There is far too much demand, and too many participants, for a prohibition to work.”

Go on to Part 2.