Gambling has long been a part of human history. For the past two thousand years, and likely even longer, societies have wagered their properties in games of chance. The earliest evidence of gaming for money coincides with the invention of the coin in 700 B.C.[i] In the present, gambling is still a popular past-time: in 1999, over two-thirds of Americans reported having gambled at least once in the previous year.[ii] With the introduction of personal computing and the integration of the internet into mainstream culture, real-money wagering has moved into cyberspace, resulting in the birth of a brand new industry: online gambling.
Internet gambling[1] is blessed, having essentially “hopped on” pre-existing, well-developed technologies and infrastructures that constitute a majority of its business necessities. Though the industry relies on the independent, rapidly-expanding internet; the well-developed, low-cost financial system available to the consumer; and the large global markets created by the widespread cultural phenomenon of gambling, these favorable circumstances are ultimately constrained by legal issues. Regardless, internet gambling in its current state is inherently international, with greater possibilities to be made available by the destruction of those legal barriers.
The Nature of Gambling as a Business
In most respects, internet gaming is an unconventional international industry. Its first defining characteristic lies in the character of the service provided by gambling, whether by traditional means or internet. A casino (“the house”) has several different outward manifestations its ways to make money, but its methods reduce to two basic concepts: rake and house edge.
Rake is primarily used only in games such as poker and sports betting, where wagers are made against other players and the house has no stake in the outcome. At some stage in each wager, a “fee” is collected for the services provided by the casino for the game (tables, cards, dealers, video screens, security, etc.) This allows for a gambling environment that permits skilled players to become consistent winners, meanwhile not affecting the casino’s profits.
House edge, undoubtedly the most popular method used in Brick & Mortar[2] casinos, is incorporated into slot machines, bingo, “dealer” games, etc., which are the indicated preference of the average gambler. In such games, one wagers against the house, some randomized selection occurs, and the wager is either lost or the appropriate payout is given. The randomization process can occur through dice, a deck of cards, or computerized machines, but how these games are designed is ultimately governed by the principle of expected value: in short, the sum of the products of each payoff and the probability of it occurring, which equals the house edge.[3] Thus, if a house edge for a given slot machine game is 2%, in the long run each pull of the lever with a $1 wager should yield on average $0.02. Conversely, the player’s edge is -2%, losing $0.02 per $1.
By definition, a negative expectation is a losing proposition and should be avoided. However, casinos understand this and always investigate how their customers will treat it as well. Any casino’s profit-maximizing objectives can be generally summarized as a function of the number of wagers made in a given time-frame (quantity supplied), the size of the house edge or rake (price per wager), non-monetary value for the customer (entertainment, social interaction, etc.), and the costs of meeting those goals.
The Speed, Power, and Expansiveness of Internet Technology
The internet is, quite obviously, as important to online gambling as roads are important to automobiles. Barring some disanalogies, both industries have largely been the beneficiaries of massive subsidies: common and widespread means for their customers to consume their products.
By far, the internet has become the supreme technology of commerce. The exponentially growing power and applicability of computers combined with lightning-fast transmission of data over long distances has- beyond its obvious contributions to production itself- lowered transaction costs while uniting buyers with sellers unlike ever before. By employing the tremendous strength of computers to achieve the casino’s profit-maximizing objectives, internet businesses have attained new-found efficiency in the service of gamblers.
Computers have reduced the physical limits of wagering itself. In traditional casinos, games like poker and blackjack are constrained by the ability of a human dealer to shuffle and distribute cards, count and appropriately pay bets, and determine outcomes- each with the possibility of human error at any stage. These obstacles are eliminated in the virtual world, thus allowing for the rapid, error-free execution of all games. For example, the average 10-player B&M Texas Hold’em[4] game plays about 30 hands per hour (thus rake is collected 30 times), but an online game of the same type plays between 60 and 80. Players also have the option of playing in multiple games at once (some experts play up to 12) since the games can be centralized and sorted conveniently on a single screen.[iii] In the same amount of time, the result is much more enjoyment of the game itself for the player and greater profitability for the casino.
To the consumer, the principal advantage offered by internet gambling is the increased comfort level of enjoying entertainment in one’s own home. Driving, parking, waiting in line, and breathing second-hand smoke among all the other costs of visiting a B&M casino vanish. Getting into a game is nearly as fast as leaving a game; with two clicks players can quit for the day or just for a restroom break. Also, for communal games like poker, all sites have a chat feature for communicating with other players. Although the social experience is incomparable to that of a traditional casino, the difference may help as much as it hurts. Internet poker provides a non-committal, anonymous environment to play and interact with others (and for the sadistic, to take their money). These factors are likely to attract latent markets of individuals greatly discouraged by the prospects of visiting a local casino.
The products supplied by the casino can be understood in terms of the different games in which one can wager. B&M establishments, to add one new game, must allocate floor-space for it, pay for the table or machine, and hire staff to operate and oversee it. On the other hand, computer software only needs to be designed once to be replicated infinitely; it only occupies abundant, cheap memory and processing power; and it requires a minimal fraction of the oversight. This has allowed a wide variety of games and stakes to be available instantly when there is a demand for them. Expenditure on the construction of massive buildings, their aesthetics, and their infrastructure is no longer needed. Meanwhile, internet servers can support numbers that would conventionally require an entire stadium: in 2005, PartyGaming Plc often hosted over 60,000 players at one time. Hosting is so cost-effective that most sites offer an amount of “play money” games identical to real ones. This has the added benefit of letting customers get comfortable enough with the games and software interface to make the transfer to real wagers.
Relative ease of physical set-up is also a great boon of efficiency. Unlike in most material goods and services industries, infrastructural concerns including electricity, water, and mass/rapid/heavy transportation are not troublesome. Internet server housing facilities can be built practically anywhere, while only needing one or two landlines to a web source or a satellite uplink. Electricity and power demands can be met by autonomous sources. Transportation only needs the capability to support individual commuters. Most importantly, internet infrastructural technology has become so advancedthat, especially for activities demanding as little bandwidth as online gambling, almost any two places on the globe can be seamlessly connected.
The Importance of Financial Transactions
It can be said that automobiles benefited from prior development of the petroleum industry. Similarly, internet gambling has profited tremendously from the well-developed financial system that preceded it, though this analogy does not do justice to the critical dependence of the former on the latter. The modern, advanced international financial system provides a strong foundation for the rapid and convenient placement of bets. The popularity of electronic, low-cost bank transactions goes hand-in-hand with an industry that is inherently monetary in its end product: money flows in for wagers, and money flows out for winnings. Inconveniences or long wait periods at either stage result in lost profits, by slowing down the wagering process and alienating casual consumers.
As it is in the B&M business model, the average user is potentially the source of greatest revenue. Millions of users around the world are already acquainted with using credit cards, and EFT-funded “e-cash” accounts such as Paypal to purchase goods on Amazon, eBay, and major retail stores’ websites. These stores have brought interstate and international trade closer to the average consumer by making him a direct participant. As buyers’ comfort with purchasing on the internet increases, so increases their likelihood of gambling online.
Internet gaming has even caused some minor new developments in the financial system. U.S. prohibition of credit card use for e-gaming transactions has itself produced an evolution of payment methods. Several offshore “e-wallets” and other accounts out of the reach of U.S. regulators sprung into existence to meet demand for legal and safe transfer points for gambling funds. International phone card balances became legal tender for some sites.Exchange rates play a major role in allowing individual sites to unite markets. Some sites, such as those hosted by Cryptologic, Inc., allow users to keep their accounts and even wager in different denominations.
In the past four years, investment has reached online betting. Explicit legalization and effective regulation has made the U.K. the de facto capital of online gambling, and the London Stock Exchange is host to all major publicly-traded gaming sites. The introduction of new cash reserves was originally part of an expansionary plan that shifted to consolidation via acquisition, following U.S. legislation in 2006 that prevented American financial institutions from dealing with online gaming sites, yielding devastating effects on revenue.[iv]