Gambler's Web

Why online betting can't be stopped--and why Washington shouldn't bother trying.


Why online betting can't be stopped–and why Washington shouldn't bother trying.

By Tom W.  Bell

When Angel–mother, wife, and self-described "patriotic Italian-American"–feels like unwinding, she heads to the bingo parlor. But Angel (not her real name) avoids the local church's game: She doesn't like the smoke, and besides, "The crowd can get pretty vicious at Immaculate Mary's when the callers are inadequate."

Nor does she fly to Atlantic City or Las Vegas. "I'm not against that personally," she explains on her Web site. "The coffee boys in Caesar's are very buff. They can serve me in their little togas anytime. But road trips don't go over real well when you're a Mommy. You sorta hafta stay home and take care of things, capice?"

For Angel, the nearest bingo parlor waits on just the other side of an Internet connection. Like an increasing number of Americans, she loves the convenience and fun of online gaming. "If I choose to be a chooch and spend my money here unwisely, it's my choice," she writes. But if a potent coalition of lobbyists and politicians gets its way, neither Angel nor any other American will have the legal right to make that choice.

Though it defies exact measurement, all studies of the Internet gambling market agree that it's growing explosively. It more than doubled from 1997 to 1998, according to a widely cited report by economist Sebastian Sinclair, with the number of gamblers increasing from 6.9 million to 14.5 million and revenue jumping from $300 million to $651 million. By 2001, Sinclair predicts, 43 million Internet gamblers will generate $2.3 billion in revenue. Estimates of the number of gaming Web sites vary from 250 to 1,000, ranging from online casinos to sports betting sites to lotteries, tournaments, bingo games, and sweepstakes.

Not surprisingly, the old boys' network of licensed, land-based gambling businesses does not welcome competition from this worldwide digital network. They aren't losing much money to it yet. But they will soon, and they know it.

So do their political patrons. Politicians relish the taxes that pour in from tightly regulated casinos, parimutuel tracks, and similar operations–some $3.7 billion in 1997. Net gambling, by contrast, pays virtually no taxes.

What's more, the government itself owns a share of the gambling market, with 37 states and the District of Columbia sponsoring lotteries. Those lottos earned $14.9 billion in 1997, in part by offering the worst odds of any common form of gambling. They consequently have the most to fear from online competition.

The gaming industry helps politicians fight off another sort of competitor: candidates who campaign against them. The industry's federal campaign contributions increased 447 percent during the 1990s. Its soft money and PAC contributions hit nearly $6.3 million in the 1997-98 election cycle, more than double the $2.6 million it gave in the previous nonpresidential cycle. It spent even more at the state level, the locus of most U.S. gambling policy, giving more than $100 million in donations and lobbying fees to state legislators from 1992 to 1996.

Unsurprisingly, some politicians want to restrict Internet gambling. Sen. Jon Kyl (R-Ariz.) claims that online gaming lets you "click the mouse and bet the house." His response–the Internet Gambling Prohibition Act of 1999, whose penalties include fines of up to $20,000 and four years in prison–would send a different message: "Use e-mail and go to jail."

By their plain language, several federal statutes already outlaw Internet gambling. The Federal Interstate Wire Act prohibits using interstate communications to run a gambling business. The Organized Crime Control Act of 1970 makes it a federal crime to engage in a gambling business illegal under state law. The federal Travel Act, as read broadly by the courts, criminalizes all interstate communications meant to facilitate the distribution of gambling proceeds. If Net gambling is unhindered nonetheless, this suggests not that the police lack the authority to stop it but that they lack the interest–or ability.

In essence, Kyl's law would make it illegal to send or receive bets using an interactive computer service. He misrepresents the bill as a mere update of the Wire Act. In fact, it targets online gaming for new and special penalties. It would expand the definition of a "gambling business" to include anyone who wins more than $2,000 in a day. It would also, unlike the Wire Act, make it a federal crime to gamble to and from states that have legalized the games in question. And whereas the Wire Act modestly limits its scope to transmissions "in interstate or foreign commerce," Kyl's bill targets any messages sent over a computer service connected to the Internet. It would thus cover e-mail sent across town, or even across the hall.

An earlier version of the act passed the Senate 90-10 last year, only to expire in the House when the clock ran out on the 105th Congress. This time, the prospects for passage look good. Kyl can cite support from both Republicans and Democrats, from state, local, and federal law enforcement, and from private groups ranging from the Christian Coalition to Ralph Nader's Public Citizen.

It's a funny bill, filled with telling loopholes. Kyl says he's targeting gambling because it "erodes the values of hard work, sacrifice, and personal responsibility." Yet his proposal aims selectively at those who would compete with the existing gaming industry. State lotteries, duly licensed parimutuel race tracks, and the booming fantasy sports business win broad exemptions under the bill. Casinos benefit, too, both because they participate in pari-mutuel betting networks and because their Megabuck shared-payoff slot machine network falls within the bill's loopholes. Even the Department of Justice criticized Kyl's bill for treating segments of the incumbent industry too favorably, arguing that "there are no legitimate reasons why these gambling operations should be exempted from the ban while other forms of gambling are not."

In June, Sen. Dianne Feinstein (D-Calif.), a co-sponsor of the bill, offered a candid explanation for the exemptions. Notwithstanding the bill's stated aim, she testified, "it became very clear that there were some legitimate interests that also needed some recognition, and so the bill does contain provisions for horse racing." A lobbying free-for-all apparently followed. "Now, the problem is that once that was done others wanted into it, and the bill contains a similar exception for dog racing, which is also dependent on wagering. Other modifications have been made to the legislation, making certain that legal fantasy sports leagues can continue to operate, and that an important source of revenue for state lotteries [is] not disrupted."

A similar odor of special interest dealing hovers around the National Gambling Impact Study Commission, whose final report–mandated by Congress and published last June–wails that "millions of families throughout the nation suffer from the effects of problem and pathological gambling," including "depression, abuse, divorce, homelessness, and suicide." Since no modern political statement is complete without an invocation of "the children," the commission duly links underage gaming to alcohol and drug abuse, violent behavior, truancy, and low grades.

And what powerful, sweeping remedy does the commission propose to stop such woes? A moratorium on the expansion of gambling.

The incumbent industry must have raised many a toast to that recommendation. Though already well-protected from competition by highly restrictive licensing schemes, it would, if the commission's proposal became law, win a legal lock on the gaming market. Its would-be competitors online, not having jumped through the requisite regulatory hoops, would never even get started.

In the short run, then, Kyl's bill will mean trouble for the fledgling industry, its customers, and the Internet service providers (ISPs) who connect them. But it will not stop online gambling. The very architecture of the Internet will frustrate prohibition.

The Internet relies on a packet switching protocol that breaks each message into discrete parts and sends them over various unpredictable routes, to be reassembled at the message's destination. It's a bit like writing a letter, chopping it up, and mailing each piece separately to the same address.

Now imagine Congress ordering the U.S. Postal Service to search for and seize all correspondence related to illegal gambling. The post office would object to the cost and futility of the task, while its customers would object to having their privacy violated. Nor could the postmen simply stop delivering mail to and from addresses associated with illegal gambling. Gamblers would simply change their P.O. boxes periodically and send letters without return addresses.

Attempts to ban Internet gambling face even higher hurdles. The flood of data alone prevents ISPs from discriminating between illicit gaming information and other messages. Furthermore, it's much easier to encrypt messages, change addresses, and send and receive mail anonymously on the Internet.

And e-mail has no monolithic postal service. It relies on thousands of separate and wholly private service providers, many of which stridently object to enforcing a burdensome ban. Testifying before the National Gambling Impact Study Commission on behalf of over 250 ISPs, Ralph Simms said that the prohibitionists "imagine that problems of illegal content on the Internet could be resolved if ISPs assumed the role of traffic cop. This could not be further from the truth." Unless a gambling site rents space on an ISP's own server, Simms said, "the ISP has virtually no ability to control it."

Furthermore, American cops can do little to stop the explosion in legal gambling sites based in other countries. Such services can already set up shop in Australia, Antigua, Austria, Belgium, Costa Rica, the Dominican Republic, Finland, Germany, Grenada, Honduras, Liechtenstein, Mauritius, Vanuatu, and Venezuela, among other places. This growing number of overseas havens guarantees that, regardless of domestic policies, U.S. consumers will have access to Internet gambling.

Even Kyl admits that "we don't have jurisdiction over the people abroad who are doing it." To isolate Americans from the gaming traffic, he proposes to "pull the plug at the point of entry into the United States." But that traffic can enter the country from any number of overseas sites. To stop the trade, Kyl would have to "pull the plug" on every international Internet connection. He might as well demand a ban on horseless carriages.

Given those constraints, Kyl's bill cannot work as intended. It would, however, sorely compromise the cost, efficiency, and security of Internet communications; it would bring legal trouble to several otherwise innocent gamblers; and it would mock the rule of law.

Fortunately, no full ban on Net gambling would likely survive, especially after cooler heads in the nation's revenue departments recognize the prohibited pastime as a new breed of cash cow. Prohibition, after all, merely ensures that bettors will ship their money to gambling sites based abroad; state governors and legislatures in the United States will soon demand a share of that bounty. The same political forces that have led to the widespread legalization of lottery, casino, and riverboat gaming will thus eventually embrace online gambling too. We can get there quickly and easily or slowly and painfully, but get there we almost certainly will.

By the same token, some in the existing gaming world do not fear competition from the Net as much as they want to take it on. The industry has thus taken the somewhat awkward position of demanding that Internet competitors share its regulatory burdens. "We cannot support it without tough regulation," American Gaming Association President Frank Fahrenkopf told the Las Vegas Review-Journal last year. Fahrenkopf and his allies prefer not to dwell on whether Internet gambling poses a competitive threat, nor do they publicly demand that it share their shackles simply to keep it from speeding ahead. They instead argue that the absence of regulation could lead to a scandal tainting the entire industry. It seems far more likely, however, that an Internet scandal would reaffirm the distinction between honorable old-timers and naughty onliners.

In all likelihood, the domestically licensed gambling industry simply wants to slow down its Internet competitors until it can join the race. Big-name casinos already sport some of the flashiest sites on the Web. Some, such as Caesar's Casino, run real sweepstakes online. The Hard Rock Casino has already set up space on its site for a virtual casino. Naturally, Kyl's bill includes an exemption for such online advertising and promotion. If and when U.S. lawmakers finally legalize Internet gambling, the incumbent industry will stand ready to cash in.

And so will the rest of us. Despite what you've been told about the evils of the betting life, legal gambling on the Internet would cause far less harm than you probably suppose–and it would provide some remarkable benefits.

Real-world casinos, we hear, lure gamblers into windowless caverns far from the real world, with money traps at every turn and free-flowing booze. Sadly, they give customers places to socialize, creating little communities that console losers and–for a price–minister to the lonely. True or not, such criticisms certainly do not apply to Internet gambling, which must vie with slamming doors, barking dogs, and other household distractions. Online gamblers have to buy their own drinks, too, and console themselves when they lose.

Net gambling doesn't offer just a more wholesome environment than its land-based competitors. It offers its weak-willed customers more help. How many casinos and lottery machines host "Gamblers Anonymous" banners? Many Web sites provide the functional equivalent: a link to Gamblers Anonymous. The Interactive Gaming Council, the industry's self-governing body, has promulgated a code of conduct that goes even further. Its more than 50 members must "implement adequate procedures to identify and curtail compulsive gambling"–something their software-based systems make relatively easy to do. Real-world gambling services, in contrast, would find it hard to detect and prevent excessive gambling even if they wanted to.

What about "the children"? Here, too, Web sites have an advantage over their offline counterparts. The former can automatically check the identity and age of every player who walks through the virtual door. The latter rely, at best, on hunches about high heels and facial hair. State lotteries, which sell tickets through machines, do even less to guard against underage gambling. Prohibitionists thus err in claiming that Internet gambling presents a new and dire risk to the young. At most, it will marginally increase the chances that some kids will gamble–kids with unsupervised and unfiltered Internet connections, who have not been raised to steer clear of adult-only activities, and who have ready access to credit cards.

Against this, weigh the many benefits Internet gambling offers. For one, it will drive development of the Net's infrastructure. Just as real-world casinos invest heavily in cutting-edge architecture, online gaming services will strive to offer the zippiest graphics and most sophisticated user interfaces. That competition will, as a side benefit, generate broader bandwidth and better software for all sorts of Internet applications, from e-mail to movies on demand.

It will also bring benefits to the gamblers themselves, who deserve the same advantages enjoyed by consumers of other entertainment services–including the fruits of a competitive marketplace. By giving customers cheap and easy access to a variety of gaming opportunities, the Internet can bring competition to an industry that has too long enjoyed the shelter of highly restrictive licensing practices. Freeing up the gambling market will help make payoffs more generous–and more honest.

Internet gaming services have an acute regard for trustworthiness. They lack the usual signs of respectability, such as big buildings and established reputations, and they cannot count on legal monopolies to rope in customers. Graeme Levin, founder of the popular gambling.com index of Internet gambling sites, explained the situation to James Rutherford, one of the many researchers who have studied the Net gaming phenomenon. "This is as close as I believe mankind has come to a free market," Levin said, "and sanctions follow where dishonest behavior is detected and publicized." Sue Schneider, chair of the Internet Gaming Council, agreed: "If you don't like the way you're treated at The Mirage, what can you do? Shout about it in the street? But with the Net, it wouldn't take long for the news groups to be abuzz."

Gamblers also deserve the same legal protections that other consumers enjoy. Prohibition will not cut off access to Internet gaming. It will, however, cut off access to courts. From time to time, Internet gamblers–like other consumers–will suffer fraud, breach of contract, and other legal wrongs. Prohibition merely assures that Internet gamblers will have no recourse to legal remedies.

Finally, the right to peaceably dispose of one's property surely includes the right to trade, throw, or gamble it away. The Founding Fathers understood this. As Thomas Jefferson drafted the Declaration of Independence by day, he relaxed in the evening by betting on backgammon, cards, and bingo. Benjamin Franklin–using his era's most advanced technology–printed a good portion of the colonies' playing cards. George Washington regularly bet on horses, gambled in card games, and bought lottery tickets. He also managed public lotteries, as did Franklin and John Hancock. Apparently, some notable Founders regarded gambling as part of their inalienable right to the pursuit of happiness.

Over a century ago (in Internet years), .com originated as shorthand for commercial. To its business users, the suffix retains that meaning. To the many clubs, hobbyists, and individuals who have adopted it, it has come to mean communication. To politicians and the gambling businesses they run and license, it stands for competition.

Internet competition has hit old-fashioned offline businesses first and hardest–especially those, like gambling, that have long profited under the shelter of highly restrictive licenses. But as the political storm over gambling demonstrates, Internet competition poses an even greater threat to government monopolies.

At home, in private, with the click of a mouse, citizens and consumers can now escape the grip of merely local legislation. They will shrug off domestic prohibition on Internet gambling and take their business to overseas sites with more respect for their rights. Sooner or later, incumbent gaming services and their political patrons will wake up to these gales of change. They will see their futile efforts to ban online gaming collapse–like a house of cards.

Tom W. Bell (www.tomwbell.com) is an assistant professor at Chapman University Law School and an adjunct scholar at the Cato Institute.

C'mon Lucky Seven!
What it's like to gamble online
By Nick Gillespie

My quest for cybergambling action began around 6 p.m. and started at Yahoo!, where I used the site's "Recreation" heading to find almost 300 online casinos. Faced with such overwhelming choice (and $100 of REASON-supplied cash burning a hole in my pocket), I scrolled through the list of links and settled on the Kenny Rogers Casino. Yes, that Kenny Rogers–the country-singer-cum-chicken-magnate who has also portrayed a character called "The Gambler" in a series of rotten TV movies.

Such is the power of branding in cyberspace: Though I loathe Rogers–I've never forgiven him for the two hours I lost while sitting through his execrable 1982 movie, Six Pack–he was a devil I knew, as opposed to some faceless offshore operator to whom I'd otherwise be sending credit card information. Assuming his casino–technically headquartered in the wager-friendly Caribbean–ripped me off, I told myself, I could at least track The Gambler down and take it out of his ample hide.

As is typical with online operations, wagering at Kenny's place requires a free–though lengthy–download in order to play a variety of card games, slots, craps, and the like. I patiently monitored the process as my gambling jones grew stronger and my deadline crept nearer. After 40 minutes, the download was done, but my frustration with Kenny was far from over. When I went to install the program, there was a corrupted file, so I had to start all over. Finally, about an hour later, I was ready to register and buy some cyberchips via credit card. That turned out to be a nonstarter twice over. When I entered my actual U.S. address, I was told I couldn't gamble for "real money" and was kicked over to the electronic version of the kids' casino. Then, after I used a friend's address in a faraway country to get through the registration process, Kenny's e-cash setup wouldn't accept any of my credit cards–probably because they have U.S. billing addresses.

It was still early in the evening–around 8 p.m.–and I was still eager to rattle them bones, so I wandered over to www.wheretogamble.com and clicked on its "#1 Best Bet," a place called the Aloha Casino & Sportsbook (www.alohacasino.com), which promised a $25 bonus for opening an account and no need to download any software. Despite some misgivings–I couldn't find any mention of a physical location for the operation, only an 800 number and an e-mail address–I was ready to play. The casino accepted my credit card information quickly and automatically e-mailed me a valid user ID, and within minutes I was figuratively sitting in front of a pile of chips and mulling over what game to start with.

Our 5-year-old son tucked away for the night, my college-professor wife joined me as we sipped wine in our family room and took our chances at slot machines, video poker games, blackjack, craps, and baccarat–all running on the same laptop she's using to write a scholarly book about 17th-century female preachers. The mechanics were simple enough: Click on a game and wait a minute or so for a Java applet to load; the graphics looked like those for any standard video game.

To be sure, much of the appeal of real-world casinos–the jazzed-up lights, the tacky decor, the very specialness of the trip–is sorely lacking at home. Still, the essential appeal of gambling–that momentary thrill that comes while the wager is alive–is there in spades. And the convenience of it all makes up for most of the razzmatazz: Living outside Cincinnati, we're a good two hours from the nearest legal casinos, a group of gaudy river boats dotting the Indiana bank of the Ohio River.

The comfort level of home is unbeatable, too. As only an occasional gambler, I'm usually intimidated from playing relatively complicated games such as craps (where wrong moves can bring down the wrath of pit bosses and fellow gamblers alike) and from staying at blackjack tables as the minimum bets rise over the course of an evening. Such concerns are absent on the Web, where you can't screw up anyone else's action and where you always set the bet (as low as 25 cents a wager at the Aloha).

Curiously, both my wife and I had confidence that the games were not rigged–or at least not any more rigged than those in real-world casinos. Our intimation of fair play was doubtless helped along by the fact that we were up over $300 at one point (due mostly to a single slots payout). As our earnings started to dwindle, the missus paraphrased Kenny Rogers, of all people, who once famously sang that a good gambler "knows when to hold `em and knows when to fold `em." Up about $170, we decided to cash out. We put in a withdrawal request with the cybercashier and were informed via e-mail that a check for the proper amount would be processed in a few days. If and when that happens, it's likely we'll be saying hello to the Aloha from time to time.

Nick Gillespie is executive editor of REASON. 

Shades of Gray
The legal status of Internet gambling is uncertain, but people keep betting.
By James Ledbetter

Despite the creeping approach of anti-cyber gambling legislation and judicial rulings, there remains a formidable appetite in the United States for Internet wagering. No comprehensive statistics are kept on the subject, but industry analysts agree that there are at least 300 gambling sites currently in existence, through which as much as $1 billion a year flows.

The legal status of these sites within the United States is uncertain. Some companies, particularly those that are publicly held, have chosen to play it safe: They don't allow U.S. citizens to bet money on their sites. The San Diego-based company Inland Entertainment, for example, is a vital consultant to four different casino gambling sites–including the popular www.kennyrogerscasino.com and www.goodluckclub.com–but none of them lets U.S. citizens play for money. They monitor U.S. citizenship by checking one's postal code against the billing address of the credit card used to open an account.

Another "legitimate" category of Internet gambling sites revolves around noncasino gambling. Probably the best-known company in this area is YouBet.com, which has offered Internet wagering on horse races since early this year. For residents of 40 states and the District of Columbia, this is a perfectly legal transaction. Like most Internet companies, YouBet.com is not profitable, and so its future is unclear. But the company is on a pace to surpass $2 million a year in revenue. (Interestingly, Rupert Murdoch's News Corp. and John Malone's TCI this summer launched a cable channel called Television Games Network that broadcasts horse racing live. Many media observers believe that the ultimate goal of this project is in-home interactive parimutuel betting.)

Other noncasino gambling Web sites include Bingohour.com, where users buy virtual bingo cards for $1 apiece. A bingo number is announced on the site every seven seconds, and the site claims that its jackpots regularly reach as high as $100,000. There have been no major legal challenges to the site yet, but Bingohour does claim that it "discourages players from playing bingo on the Internet in any country or state where it is illegal to participate in Internet gaming."

Other sites are located abroad but allow U.S. citizens to gamble. They offer a wide array of casino games, typically including slots, blackjack, roulette, craps, and video poker. Such sites have long operated on the premise that because their servers sit in countries where gambling is legal (usually the Caribbean, but also parts of Australia and Canada), it is legal for a U.S. resident to use them.

In late July, however, a New York judge issued a decision asserting that the state's prohibition against casino gambling applies to such transactions, regardless of where the server is located. If that reasoning holds–and it's unclear what the results of any appeals will be–much of this sector of the online gaming industry will suffer.

For the individual gambler, these sites raise reliability questions: How do you know that the game you're playing isn't rigged? Most of the sites claim to have an audited guarantee that their methodology is solid, but the simple truth is that you're at their mercy. One commentator recently compared gambling with an online casino to playing poker with someone over the phone: He tells you he's got a straight, and when you ask for proof, he sends you a printout. Similarly, there's a real problem knowing whether or not you're going to receive winnings–a major barrier to Web gambling's commercial viability.

Over the course of several months, I gambled on about a dozen of these sites. Though skeptical about relying on markets alone for consumer protection–and well aware that there are scamsters out there–I became convinced over time that Internet casinos are regulating themselves pretty well, at least for the time being. The sites are not cheap to run, and given the formidable competition, they must rely on repeat business. Any site that leaves its users with feelings of unreliability is not going to get customers to come back. In the long run, though, these sites are going to be either banned or regulated, most likely by state governments–much as real-world casinos already are.

James Ledbetter (jim/@thestandard.com) is New York bureau chief of The Industry Standard, a weekly newsmagazine covering the Internet economy; some of this material was originally published there.