Online skill games flourish, skirt ban

Bob Tedeschi

Tuesday, May 25, 2004 | 9:14 a.m.

For U.S. companies locked out of the lucrative global industry in Internet gambling, there is still money to be made -- as long as they don't call it gambling.

So-called games of skill such Spades, 8-ball and Solitaire are attracting more players online than ever, thanks partly to the growing pool of prize money available to winners and the tightening noose of federal regulation around online games of chance. Although revenue is small compared to those reaped by pure gambling sites, some in the industry believe that could change.

"This will continue to be a larger part of the online gambling market, although since there's skill involved you can't really call it gambling," said Sebastian Sinclair, president of Christiansen Capital Advisors, a gambling industry consultancy. "These games are better suited to the medium than casino games, because they're more entertaining, and money is secondary."

Secondary to some, perhaps, but for others, the money is everything.

"We refer to this as competitive entertainment," said Stephen J. Killeen, chief executive of WorldWinner, which runs a game site that charges tournament players and head-to-head challengers about $1.50 for every game they play, while awarding winners roughly $3.20. "The idea behind this is 'loser buys drinks.' "

"And because these are games of skill, as opposed to games of chance, there's an added dimension of, 'OK, I have to concentrate on this,' " Killeen added. "It's not, 'What's this random roll going to show me?' "

The generally accepted standard for legal gaming is that it must involve a contest where skill is the predominant factor in winning or losing; if a game is too easy or too hard for the participants, skill is less a factor in the outcome than luck.

Dennis Neilander, chairman of the Nevada Gaming Control Board, said state regulators receive requests from time to time to review games to determine whether they are a form of gambling or are skill-based. Some, he said, are considered skill games in some states and gambling in others.

"Poker, for example, is a game that some states consider to be a skill-based," he said. "It's considered a gambling game here."

Gambling games are defined in state regulations, but all others are categorized as games of skill.

Neilander believes the proliferation of games of skill available on the Internet helps build the confidence of players, potentially boosting tourism to Nevada, in the same way that free gambling sites whet the appetites of potential visitors to the state.

Killeen's site offers about 30 games, and provides game services to Yahoo, Lycos and Entertainments Arts' Pogo.com. He compares his company's role to that of the U.S. Tennis Association, which organizes the U.S. Open tournament.

"We provide the setting, award the prizes and create the draws," he said. "We take a management fee and award the prize to the winners. The difference is, we do it for millions of people."

WorldWinner has more than 10 million registered users, which places the site near the top of its category.

Sixty-five percent of WorldWinner's registrants are women over age 40. "It turns out they really like to play games online," Killeen said. "Mostly, they like the traditional games they're used to playing offline."

The company, which is privately held, does not disclose revenue, but Killeen says it is "at break-even level" after nearly four years in operation. It raised $23 million from investors during that time.

No one in the industry is making a lot of money from this yet: Sinclair, the industry consultant, estimates that these kind of skill-based games account for less than 5 percent of the $7.5 billion online gambling industry. But the crackdown on illegal gambling, Killeen said, has turned the market in a more favorable direction. Under pressure from the Justice Department, Yahoo, Google and MSN last month stopped accepting advertisements from online casino operators, because such advertisements could be deemed by courts as aiding and abetting illegal gambling.

As a result, WorldWinner and its competitors no longer must bid against some of the Web's more aggressive marketers to get top placement for advertisements. Nor are their sites lumped in with casinos.

WorldWinner requires players to download game software, a process that requires a fair amount of trust on the part of consumers.

"We're not as scary a download anymore, now that you don't have all the Casino-On-Net pop-ups all over the place," Killeen said, referring to a widely advertised gambling site.

Still, purveyors of skill-based Internet games have not emerged unscathed from online gambling's legal hassles. Companies such as WorldWinner and others continue to lobby Congress, lest they be included in legislation barring all types of games with awards. A bill that would forbid the use of credit cards and fund transfers to pay for unlawful gambling passed in the House last year and is now in the Senate.

Indeed, some states have laws that bar such contests or discourage them because their statutes blur the distinction between games of skill and games of chance. As a result, WorldWinner, for instance, turns away prospective customers in Arizona, Arkansas, Delaware, Florida, Iowa, Louisiana, Maryland and Tennessee.

If games of skill finally win market share in the states where they are deemed legal, it will be a vindication of sorts for a business that is intrinsically more difficult to run than casino games, analysts said.

I. Nelson Rose, a law professor at Whittier Law School in Costa Mesa, Calif., and a consultant to gambling companies and gambling regulators, said that creating legal skill-based games was "very difficult, because they can't be too easy or too hard." For example, if the contest is a game of knowledge asking participants to say how many varieties of roses there are, Rose said, only a lucky guess would determine the outcome.

"And if the question is 'How much is two plus two,' then it's luck as to whether you're the first one to answer," he said.

The difficulty of running cash-based games of skill is one reason companies such as Electronic Arts simply buy the service from businesses such as WorldWinner. According to Erick Hachenburg, general manager of EA Online, the company regards its skill-based games as a complementary service, rather than a primary one.

Of the roughly 60 games available on Pogo.com, about 25 percent are skill-based, and winners are rewarded with points that can be redeemed for tickets in prize drawings. "There's a core audience that really enjoys skill-based games," Hachenburg said, "but in the end, the games that aren't skill-based tend to be more popular."

On a per-player basis, however, skill-based games could be more lucrative, according to some industry executives.

While sites such as Yahoo or Pogo generate revenue from subscription fees or advertising, those that charge entry fees and distribute cash or prizes to winners tend to attract more serious players who spend more time and money on a site.

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