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Strict rules limit Americans' access to Internet gaming
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By Jason Krause. Special to the Tribune. Jason Krause is a Chicago-based freelance writer
Published January 28, 2002
This Sunday's Super Bowl will be the biggest gambling event of the year--even though very few Americans can legally bet on the game.
Of course, the law hasn't stopped many Americans from placing a bet, and it's only getting easier with Internet gambling.
Thousands of Americans will place Super Bowl bets with offshore Internet casinos, where they can wager on everything from the final score to who scores the first touchdown.
This is a big business, and legitimate casino operators are dying to get a piece of the action. They just have to figure out how to get in without breaking the law.
If you spend any time on the Web, you're almost certain to run across banner ads or pop-up windows trying to lure you to visit an online casino. Legitimate companies run some of these sites, but seedy offshore operators are behind more.
That typically means a couple of college buddies hoping to make a quick buck by setting up shop in some Caribbean island with lax banking, gaming and extradition laws. But a few big-name companies such as Chicago-based Playboy Enterprises Inc., MGM Mirage and Harrah's Entertainment Inc. are trying to bring their brands to the online gaming world.
These U.S. companies face one huge hurdle as they get into the business--online gambling is illegal in the U.S.--except in Nevada. That means that they have to set up offshore subsidiaries that cater only to international customers. It's a major drawback, especially when the companies they will be competing with openly flout the law and target U.S. customers.
"It makes things a little tougher for us, but it could also be an advantage," said Larry Lux, president of Playboy.com. "I think people will come to us knowing we're not just a couple of guys working out of a basement in Antigua."
Playboy thinks online gambling is worth the risk. Gambling and Internet companies struggled mightily last year, as the dot-com crash and overbuilding in the casino industry depressed both businesses.
But if you combine the two worlds--gambling and the Internet--the business potentially becomes quite lucrative.
"We were profitable from Day One," says Playboy Chief Executive Christie Hefner about her company's gaming service. "Barring some nuclear event, I put my money on online gaming being the biggest source of online revenue for us in five years."
Playboy launched its online sports book service in May. In August the company followed with a horse racing gambling site and PlayboyCasino.com, the centerpiece of its gambling business.
The casino site offers more than 50 traditional casino games, along with a few Playboy specialties like strip poker. The company won't disclose the revenue from these businesses but is confident gambling will help lift its online operations toward profitability.
Playboy is the first among American companies to take a serious risk on Internet gambling, and the casino operators, who could lose their gaming licenses if they are caught running an illegal operation, are waiting to see if regulators leave Playboy alone. Along with Playboy, among the major operators only Park Place Entertainment, the parent company for Las Vegas hotels Paris and Bally's, has a gaming site for overseas customers.
MGM Mirage and Harrah's are in the process of opening online sites for Nevada residents and international customers.
Tougher enforcement
Lawmakers are a bit skeptical such sites can stay within the law.
"How does a casino know the person on the other end is who they say they are?" asks Rep. Bob Goodlatte, a Virginia Republican who has introduced a tough new gambling reform bill. "I'm sure technology will mature enough to make it possible some day, but I don't know that it's there right now. These companies are taking a big risk."
Goodlatte and his colleagues in Congress are trying to make it easier for law enforcement agencies to identify and prosecute companies that offer online gambling to Americans. As it is, Internet gambling is not difficult for most Americans to do, though credit card companies have begun to cut off accounts used by U.S. citizens to pay off gambling sites.
One Chicago-area businessman and sports fan, who asked not to be named, says he has had little trouble gambling on sports-betting sites out of England.
"It was very easy to do. I just gave them an English street address, and they immediately accepted my credit card," he said. "But after Sept. 11, the credit card companies seem to have cracked down. Visa would no longer let me deposit into my account. But there's a few alternative payment methods I'm looking into."
(The Playboy Online Casino rejected this writer's credit card because it originated in the United States.)
Stakes run high
Most of the big-name gaming companies were vocal supporters of legislation to curb Internet gambling until very recently. But the opportunity has become too big for them to leave to overseas operators.
According to Bear Stearns, an estimated 4.5 million people regularly gamble online, half of whom are thought to be Americans. By most estimates, gamblers will wager as much as $3 billion online this year, with the online gambling market expected to grow to more than $5 billion by 2003.
According to the American Gaming Association, that number remains dwarfed by the $25 billion U.S. casinos cleared in 2000, but online numbers are growing much faster.
So far, Wall Street analysts have endorsed the early efforts of respectable American operators to crack this problematic market.
"This is a real, profitable business and, even though they're limited to international markets, this is still a huge opportunity for the legitimate American gaming companies," says Bear Stearns analyst Marc Falcone. "I think the credibility of a brand-name company will really open this market up."
Finding partners
To get a quick foothold in the business, Playboy, MGM and others have been partnering with experienced gaming companies. For example, Playboy's primary partner is Ladbrokes, a unit of Ladbrokes Ltd., the betting and gaming division of Hilton Groups PLC. Ladbrokes takes care of all of the operational costs of the online casino, leaving only the marketing, advertising and content-creation chores to Playboy.
That partnership is interesting, because Ladbrokes was responsible for reporting irregularities at Playboy's wildly profitable London casino, driving it out of business in 1981. Apparently Playboy bears no grudge, and since Ladbrokes is the United Kingdom's largest bookmaker and casino operator, Hefner thinks her company has an ideal partner for launching an international gambling venture.
By splitting the costs--and the revenue--Playboy saves millions of dollars in start-up costs, something that has hamstrung its other online ventures.
The overhead is so low that Lux says Playboy has only three employees working full time on the online casino.
Online gaming is just one component of Playboy's online revenue, along with e-commerce, advertising and subscriptions. But gambling could be the most lucrative. The company is confident that its adult online content can bring some excitement to the online gaming world that other operators may be lacking.
Playboy is, as Hefner puts it, "more like Las Vegas than even Las Vegas used to be."
Online gambling may be legalized in the U.S. only if individual states regulate it. So far, only Nevada has dabbled with forms of legalized Internet gaming for state residents, to mixed results.
Legalization obstacles
And unfortunately for the casinos, lawmakers have become increasingly leery of Internet gambling since Sept. 11. Goodlatte says he has been made aware of two cases involving overseas gambling sites being used by "criminal or terrorist organizations" to launder money.
But casinos are holding out hope that some form of regulated, legal Internet gaming can be worked out.
"Most of these bills being pushed by anti-gambling zealots in Congress are just foolish," says Allan Soldman, senior vice president of public affairs for MGM Mirage.
"Millions of Americans do it, and to say they're supposed to stop because Bob Goodlatte says so is foolish. There has to be a more sensible way to regulate online gambling rather than a prohibition."
Online gambling could face years of struggle with American lawmakers, but even with the U.S. market off limits, Internet casinos should be a profitable venture.
As Hefner puts it, even on the Internet, "it's good to be the house."
AUTHENTIFY INC.
Software a legal aid for casinos
The biggest problem legitimate casinos face as they launch online gaming sites will be keeping the play legal. The U.S. has some of the strictest anti-Internet-gambling statutes in the world, but legitimate casino operators have little indication about how rigorously those laws will be enforced.
Chicago-based Authentify Inc., which sells security systems to companies such as Hewlett-Packard Co. and VeriSign Inc., is marketing its software to gaming companies to help casino operators stay on the right side of the law.
The system uses the telephone as a means to identify people on the other end of a computer connection.
"A telephone is the world's most broadly used identifier," said Peter Tapling, Authentify's chief executive.
"There are a lot of other ways to pinpoint someone's location, but nothing is as ubiquitous as the telephone's country code and area code."
The phone is an especially useful tool because an area code does not cross state lines. This is important because in the U.S., Internet gambling can be legalized only on a state-by-state basis.
When someone logs onto a casino site, the Authentify system places an automated call to the person, who then has to enter a password into the phone.
Still, using the telephone to make sure a gambler is legally allowed to play is not a perfect plan. Cell phones easily cross state lines, and it is almost impossible to verify that the person on the end of a call is who they say they are.
Authentify's software can block any forwarded calls or calls from cell phones. Using voice recognition makes it possible to positively identify a person on the phone by their voice.
But it will be up to casino operators to decide how rigorous they need to make the system.
"The question casinos have to ask is whether a security system is `business reasonable,'" Tapling said. "They have to find a way to follow the law without making the online experience so onerous no one will want to play at their casino."
Chicago-based Playboy Enterprises Inc. is the only major U.S. company testing the legal system.
"Everyone is watching Playboy to see what happens," Tapling said. "They are the biggest, most reputable name attempting to crack this market within the confines of the law."
Playboy's site checks to make sure a gambler's credit card is from outside the United States, because online gambling is illegal everywhere in this country except Nevada. If that system fails to pass muster with U.S. regulators, Authentify and others will be ready with more thorough systems.
Some security firms are preparing global positioning systems designed to pinpoint where in the world a user's computer is located.
Strict rules limit Americans' access to Internet gaming
E-mail this story
Printer-friendly format
Search archives
By Jason Krause. Special to the Tribune. Jason Krause is a Chicago-based freelance writer
Published January 28, 2002
This Sunday's Super Bowl will be the biggest gambling event of the year--even though very few Americans can legally bet on the game.
Of course, the law hasn't stopped many Americans from placing a bet, and it's only getting easier with Internet gambling.
Thousands of Americans will place Super Bowl bets with offshore Internet casinos, where they can wager on everything from the final score to who scores the first touchdown.
This is a big business, and legitimate casino operators are dying to get a piece of the action. They just have to figure out how to get in without breaking the law.
If you spend any time on the Web, you're almost certain to run across banner ads or pop-up windows trying to lure you to visit an online casino. Legitimate companies run some of these sites, but seedy offshore operators are behind more.
That typically means a couple of college buddies hoping to make a quick buck by setting up shop in some Caribbean island with lax banking, gaming and extradition laws. But a few big-name companies such as Chicago-based Playboy Enterprises Inc., MGM Mirage and Harrah's Entertainment Inc. are trying to bring their brands to the online gaming world.
These U.S. companies face one huge hurdle as they get into the business--online gambling is illegal in the U.S.--except in Nevada. That means that they have to set up offshore subsidiaries that cater only to international customers. It's a major drawback, especially when the companies they will be competing with openly flout the law and target U.S. customers.
"It makes things a little tougher for us, but it could also be an advantage," said Larry Lux, president of Playboy.com. "I think people will come to us knowing we're not just a couple of guys working out of a basement in Antigua."
Playboy thinks online gambling is worth the risk. Gambling and Internet companies struggled mightily last year, as the dot-com crash and overbuilding in the casino industry depressed both businesses.
But if you combine the two worlds--gambling and the Internet--the business potentially becomes quite lucrative.
"We were profitable from Day One," says Playboy Chief Executive Christie Hefner about her company's gaming service. "Barring some nuclear event, I put my money on online gaming being the biggest source of online revenue for us in five years."
Playboy launched its online sports book service in May. In August the company followed with a horse racing gambling site and PlayboyCasino.com, the centerpiece of its gambling business.
The casino site offers more than 50 traditional casino games, along with a few Playboy specialties like strip poker. The company won't disclose the revenue from these businesses but is confident gambling will help lift its online operations toward profitability.
Playboy is the first among American companies to take a serious risk on Internet gambling, and the casino operators, who could lose their gaming licenses if they are caught running an illegal operation, are waiting to see if regulators leave Playboy alone. Along with Playboy, among the major operators only Park Place Entertainment, the parent company for Las Vegas hotels Paris and Bally's, has a gaming site for overseas customers.
MGM Mirage and Harrah's are in the process of opening online sites for Nevada residents and international customers.
Tougher enforcement
Lawmakers are a bit skeptical such sites can stay within the law.
"How does a casino know the person on the other end is who they say they are?" asks Rep. Bob Goodlatte, a Virginia Republican who has introduced a tough new gambling reform bill. "I'm sure technology will mature enough to make it possible some day, but I don't know that it's there right now. These companies are taking a big risk."
Goodlatte and his colleagues in Congress are trying to make it easier for law enforcement agencies to identify and prosecute companies that offer online gambling to Americans. As it is, Internet gambling is not difficult for most Americans to do, though credit card companies have begun to cut off accounts used by U.S. citizens to pay off gambling sites.
One Chicago-area businessman and sports fan, who asked not to be named, says he has had little trouble gambling on sports-betting sites out of England.
"It was very easy to do. I just gave them an English street address, and they immediately accepted my credit card," he said. "But after Sept. 11, the credit card companies seem to have cracked down. Visa would no longer let me deposit into my account. But there's a few alternative payment methods I'm looking into."
(The Playboy Online Casino rejected this writer's credit card because it originated in the United States.)
Stakes run high
Most of the big-name gaming companies were vocal supporters of legislation to curb Internet gambling until very recently. But the opportunity has become too big for them to leave to overseas operators.
According to Bear Stearns, an estimated 4.5 million people regularly gamble online, half of whom are thought to be Americans. By most estimates, gamblers will wager as much as $3 billion online this year, with the online gambling market expected to grow to more than $5 billion by 2003.
According to the American Gaming Association, that number remains dwarfed by the $25 billion U.S. casinos cleared in 2000, but online numbers are growing much faster.
So far, Wall Street analysts have endorsed the early efforts of respectable American operators to crack this problematic market.
"This is a real, profitable business and, even though they're limited to international markets, this is still a huge opportunity for the legitimate American gaming companies," says Bear Stearns analyst Marc Falcone. "I think the credibility of a brand-name company will really open this market up."
Finding partners
To get a quick foothold in the business, Playboy, MGM and others have been partnering with experienced gaming companies. For example, Playboy's primary partner is Ladbrokes, a unit of Ladbrokes Ltd., the betting and gaming division of Hilton Groups PLC. Ladbrokes takes care of all of the operational costs of the online casino, leaving only the marketing, advertising and content-creation chores to Playboy.
That partnership is interesting, because Ladbrokes was responsible for reporting irregularities at Playboy's wildly profitable London casino, driving it out of business in 1981. Apparently Playboy bears no grudge, and since Ladbrokes is the United Kingdom's largest bookmaker and casino operator, Hefner thinks her company has an ideal partner for launching an international gambling venture.
By splitting the costs--and the revenue--Playboy saves millions of dollars in start-up costs, something that has hamstrung its other online ventures.
The overhead is so low that Lux says Playboy has only three employees working full time on the online casino.
Online gaming is just one component of Playboy's online revenue, along with e-commerce, advertising and subscriptions. But gambling could be the most lucrative. The company is confident that its adult online content can bring some excitement to the online gaming world that other operators may be lacking.
Playboy is, as Hefner puts it, "more like Las Vegas than even Las Vegas used to be."
Online gambling may be legalized in the U.S. only if individual states regulate it. So far, only Nevada has dabbled with forms of legalized Internet gaming for state residents, to mixed results.
Legalization obstacles
And unfortunately for the casinos, lawmakers have become increasingly leery of Internet gambling since Sept. 11. Goodlatte says he has been made aware of two cases involving overseas gambling sites being used by "criminal or terrorist organizations" to launder money.
But casinos are holding out hope that some form of regulated, legal Internet gaming can be worked out.
"Most of these bills being pushed by anti-gambling zealots in Congress are just foolish," says Allan Soldman, senior vice president of public affairs for MGM Mirage.
"Millions of Americans do it, and to say they're supposed to stop because Bob Goodlatte says so is foolish. There has to be a more sensible way to regulate online gambling rather than a prohibition."
Online gambling could face years of struggle with American lawmakers, but even with the U.S. market off limits, Internet casinos should be a profitable venture.
As Hefner puts it, even on the Internet, "it's good to be the house."
AUTHENTIFY INC.
Software a legal aid for casinos
The biggest problem legitimate casinos face as they launch online gaming sites will be keeping the play legal. The U.S. has some of the strictest anti-Internet-gambling statutes in the world, but legitimate casino operators have little indication about how rigorously those laws will be enforced.
Chicago-based Authentify Inc., which sells security systems to companies such as Hewlett-Packard Co. and VeriSign Inc., is marketing its software to gaming companies to help casino operators stay on the right side of the law.
The system uses the telephone as a means to identify people on the other end of a computer connection.
"A telephone is the world's most broadly used identifier," said Peter Tapling, Authentify's chief executive.
"There are a lot of other ways to pinpoint someone's location, but nothing is as ubiquitous as the telephone's country code and area code."
The phone is an especially useful tool because an area code does not cross state lines. This is important because in the U.S., Internet gambling can be legalized only on a state-by-state basis.
When someone logs onto a casino site, the Authentify system places an automated call to the person, who then has to enter a password into the phone.
Still, using the telephone to make sure a gambler is legally allowed to play is not a perfect plan. Cell phones easily cross state lines, and it is almost impossible to verify that the person on the end of a call is who they say they are.
Authentify's software can block any forwarded calls or calls from cell phones. Using voice recognition makes it possible to positively identify a person on the phone by their voice.
But it will be up to casino operators to decide how rigorous they need to make the system.
"The question casinos have to ask is whether a security system is `business reasonable,'" Tapling said. "They have to find a way to follow the law without making the online experience so onerous no one will want to play at their casino."
Chicago-based Playboy Enterprises Inc. is the only major U.S. company testing the legal system.
"Everyone is watching Playboy to see what happens," Tapling said. "They are the biggest, most reputable name attempting to crack this market within the confines of the law."
Playboy's site checks to make sure a gambler's credit card is from outside the United States, because online gambling is illegal everywhere in this country except Nevada. If that system fails to pass muster with U.S. regulators, Authentify and others will be ready with more thorough systems.
Some security firms are preparing global positioning systems designed to pinpoint where in the world a user's computer is located.
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