Should social casino games be regulated?

This is one of the hottest issues in Europe and Australia. Licensed land-based and Internet casino companies are spending hundreds of millions of dollars to get into this business, which means that lawmakers in the U.S. are also going to start looking into these games.

I don’t expect the result will be pretty. Legislators have trouble figuring out how to regulate real gambling—does anybody today think it was a good idea to require Mississippi’s casinos to be floating without engines or crews in the Gulf of Mexico’s hurricane alley?

And few people understand the difference between gambling and social games. Or that different forms of gaming create different risks.

In the U.S., gambling requires the presence of three elements: consideration, chance and prize. Players bet on the outcome of an uncertain event to win a larger amount.

Social games are not gambling if they eliminate one of the three elements.

If anyone can play a game for free, it does not matter if the outcome is determined more by luck than skill or that valuable prizes may be won. No-purchase-necessary sweepstakes have been common since at least 1954 when the U.S. Supreme Court ruled that the TV game show “Name That Tune” was not a lottery, although contestants at home could enter by sending in a postcard.

Contests of skill can charge contestants money—the smarter operators call the payments “entry fees” rather than “wagers”—to compete for valuable prizes.

Atari introduced millions of people to the idea of electronic video arcade games. Players pay money to play. Even if the game is predominantly chance, not skill, the game is not gambling if players cannot win anything of value.

So how do social games make money if they are not gambling?

Making a game free for anyone to enter does not mean that contestants are prohibited from spending money. Sweepstakes work because people do buy the product being promoted, perhaps thinking that subscribing to a magazine increases their chances of winning. Charities run “donation requested” raffles, knowing social pressure and guilt make most individuals send in money, even though it’s not required.

Subscription games, such as “free” poker for money prizes, are profitable because most players prefer their credit cards be billed about $20 every month rather than having to fill out and mail postcards for free entries.

Most social games with a free alternative means of entry (FAME) give players opportunities to play chips (I’ll call these “chips” for convenience) when they sign up and more every hour or every day. Operators sell additional chips for real money, but no one is required to buy them. Sites make their profits from players who have lost everything and do not have the patience to wait for additional free chips.

Because there is no consideration, a casino game with a FAME is not gambling. However, some old cases involving pinball games from the 1930s and ’40s indicate that these social games actually would be considered gambling in about a half-dozen states.

Social games in which players compete against each other are not gambling if the outcome is determined primarily by skill. States sometimes have special rules, for example, that the prize cannot be composed of the entry fees.

About 10 states put restrictions on contests of skill, such as requiring 100 percent of the players’ money to go to the winner or limiting the maximum amount that can be won. Interestingly, if you look at the skill contests for real money sites, you’ll find that there is no general agreement as to exactly which states should be avoided.

The most common way for social games to get around the prohibitions on gambling is by not offering valuable prizes. Then why would anyone play? Jurisdictions can differ widely on exactly what constitutes a “prize.” The easiest case is one in which the winner can win real cash or an item that can be quickly sold for cash. The FBI raided Second Life because there were casinos that used the site’s “linden” dollars. Because the linden dollars could be transferred to other players, a secondary market developed where this play currency could be converted into real money.

Social games have discovered that some players will spend a lot of real money to get avatars and virtual gifts that cannot be sold. Opponents have argued that these games do have all three elements since the prizes are of value to the players. But only a few jurisdictions would agree that a non-material item is a “prize of value” if it cannot be sold.

Social gaming is obviously very big. And very volatile. Zynga, the leading company, was at one point valued at $9 billion. In June, the company announced it was laying off 18 percent of its workforce and closing its New York, Dallas and even Los Angeles offices.

Meanwhile, Caesars Entertainment paid about $90 million for an Israeli company that was losing money but had a top-rated social game. Playtika’s Slotomania is still one of the most popular social games.

A controversy has exploded mainly because casino and other real-money gambling companies are getting into the social gaming field.

During the recent 15th International Conference on Gambling and Risk Taking in Las Vegas, I agreed to act as one of the trial lawyers for a moot court on whether social gaming should be regulated. The mock trial was extremely lively and entertaining. But it did have a serious side and raised these issues:

• Social casino games are not always social. There is a big difference between contests in which players interact and play against each other and games in which the patron is against the house. Lawmakers have long recognized that banking games are more dangerous than non-banking games. We regulate blackjack, craps and roulette more strictly than poker and bingo. A FAME slot game on an iPad is closer to a real slot machine than it is to Angry Birds®.
• Social casino games may be inherently misleading. Because the games are not regulated, they are free to set the odds at any level they want. In fact, they are almost never truly random. Game manufacturers don’t want players to get bored, so they make the game easier if a player is stuck at one level or harder if the player is winning too handily. This Dynamic Game Balancing (DGB) is done automatically because game designers want players to be hooked. Obviously, with real gambling, operators can’t change the odds mid-game. And casinos do not brag about a game being “addictive.”
• Because they are not regulated, social casino games are available to children and potential compulsive gamblers. No one should care if the games are harmless. But are they? Should an online or land-based real-money casino be allowed to offer games indistinguishable from slot machines, with no restrictions? If a child is playing a social casino game that is set for 120 percent, will he realize the difference when he plays a real slot machine set at 95 percent? If an adult is playing a social casino game with DGM and spending money on additional chips, will she realize the reason she is losing if that the game automatically set longer odds when she had a winning streak?

There may already be some regulation of these games, at least where it appears they are misleading consumers. But the real fights are about to begin in Australia, England and even the U.S. over whether licensed gambling companies can operate unregulated social casino games.
My bet is that unless there is major self-regulation, the government is going to step in. Gambling operators should start with eliminating DGM and setting the odds on games that look like slot games to the same as real slot games.

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