Shades of Gray - legal status of Internet gambling is uncertain, but people keep betting

Reason, Oct, 1999 by James Ledbetter

The legal status of Internet gambling is uncertain, but people keep betting.

Despite the creeping approach of anti-cybergambling 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. residents 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 (jiml@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.