Gambler’s Web: Online Betting Can’t Be Stopped — and Why Washington Shouldn’t Bother Trying

This article appeared in Reason, October 1, 1999.

When Angel -- mother, wife, and self-described "patriotic Italian-American" -- feels like unwinding, she heads to the bingo parlor. But Angel (not her real name) avoids the local church's game: She doesn't like the smoke, and besides, "The crowd can get pretty vicious at Immaculate Mary's when the callers are inadequate."

Nor does she fly to Atlantic City or Las Vegas. "I'm not against that personally," she explains on her Web site. "The coffee boys in Caesar'sarevery buff. They can serve me in their little togas anytime. But road tripsdon'tgo over real well when you're a Mommy. You sorta hafta stay home and takecareof things, capice?"

For Angel, the nearest bingo parlor waits on just the other side of an Internet connection. Like an increasing number of Americans, she loves the convenience and fun of online gaming. "If I choose to be a chooch andspendmy money here unwisely, it's my choice," she writes. But if a potentcoalitionof lobbyists and politicians gets its way, neither Angel nor any otherAmerican will have the legal right to make that choice.

Though it defies exact measurement, all studies of the Internetgambling market agree that it's growing explosively. It more than doubled from 1997to 1998, according a widely cited report by economist Sebastian Sinclair,withthe number of gamblers increasing from 6.9 million to 14.5 million and revenue jumping from $ 300 million to $ 651 million. By 2001, Sinclair predicts,43 million Internet gamblers will generate $ 2.3 billion in revenue.Estimatesof the number of gaming Web sites vary from 250 to 1,000, ranging from online casinos to sports betting sites to lotteries, tournaments, bingo games,and sweepstakes.

Not surprisingly, the old boys' network of licensed, land-basedgambling businesses does not welcome competition from this worldwide digitalnetwork. They aren't losing much money to it yet. But they will soon, and they knowit.

So do their political patrons. Politicians relish the taxes that pourin from tightly regulated casinos, parimutuel tracks, and similaroperations -some $ 3.7 billion in 1997. Net gambling, by contrast, pays virtually no taxes.

What's more, the government itself owns a share of the gambling market,with 37 states and the District of Columbia sponsoring lotteries. Those lottosearned $ 14.9 billion in 1997, in part by offering the worst odds of any commonform of gambling. They consequently have the most to fear from online competition.

The gaming industry helps politicians fight off another sort ofcompetitor: candidates who campaign against them. The industry's federal campaign contributions increased 447 percent during the 1990s. Its soft money andPAC contributions hit nearly $ 6.3 million in the 1997-98 election cycle, morethan double the $ 2.6 million it gave in the previous nonpresidential cycle. Itspent even more at the state level, the locus of most U.S. gambling policy,giving more than $ 100 million in donations and lobbying fees to statelegislatorsfrom 1992 to 1996.

Unsurprisingly, some politicians want to restrict Internet gambling.Sen. Jon Kyl (R-Ariz.) claims that online gaming lets you "click the mouse andbet the house." His response - the Internet Gambling Prohibition Act of 1999,whose penalties include fines of up to $ 20,000 and four years in prison - wouldsend a different message: "Use e-mail and go to jail."

By their plain language, several federal statutes already outlawInternet gambling. The Federal Interstate Wire Act prohibits using interstate communications to run a gambling business. The Organized Crime Control Actof 1970 makes it a federal crime to engage in a gambling business illegalunder state law. The federal Travel Act, as read broadly by the courts,criminalizes all interstate communications meant to facilitate the distribution ofgambling proceeds. If Net gambling is unhindered nonetheless, this suggests notthatthe police lack the authority to stop it but that they lack the interest - or ability.

In essence, Kyl's law would make it illegal to send or receive betsusing an interactive computer service. He misrepresents the bill as a mere updateofthe Wire Act. In fact, it targets online gaming for new and special penalties.It would expand the definition of a "gambling business" to include anyone whowins more than $ 2,000 in a day. It would also, unlike the Wire Act, make it a federal crime to gamble to and from states that have legalized the gamesin question. And whereas the Wire Act modestly limits its scope totransmissions "in interstate or foreign commerce," Kyl's bill targets any messages sentover a computer service connected to the Internet. It would thus cover e-mailsent across town, or even across the hall.

An earlier version of the act passed the Senate 90-10 last year, onlyto expire in the House when the clock ran out on the 105th Congress. Thistime, the prospects for passage look good. Kyl can cite support from bothRepublicansand Democrats, from state, local, and federal law enforcement, and fromprivate groups ranging from the Christian Coalition to Ralph Nader's PublicCitizen.

It's a funny bill, filled with telling loopholes. Kyl says he'stargeting gambling because it "erodes the values of hard work, sacrifice, andpersonal responsibility." Yet his proposal aims selectively at those who wouldcompete with the existing gaming industry. State lotteries, duly licensedparimutuel race tracks, and the booming fantasy sports business win broad exemptionsunder the bill. Casinos benefit, too, both because they participate inparimutuel betting networks and because their Megabuck shared-payoff slot machinenetwork falls within the bill's loopholes. Even the Department of Justicecriticized Kyl's bill for treating segments of the incumbent industry too favorably, arguing that "there are no legitimate reasons why these gamblingoperations should be exempted from the ban while other forms of gambling are not."

In June, Sen. Dianne Feinstein (D-Calif.), a co-sponsor of the bill,offered a candid explanation for the exemptions. Notwithstanding the bill's statedaim, she testified, "it became very clear that there were some legitimateinterests that also needed some recognition, and so the bill does contain provisionsfor horse racing." A lobbying free-for-all apparently followed. "Now, theproblem is that once that was done others wanted into it, and the bill contains asimilar exception for dog racing, which is also dependent on wagering. Other modifications have been made to the legislation, making certain that legal fantasy sports leagues can continue to operate, and that an importantsource of revenue for state lotteries [is] not disrupted."

A similar odor of special interest dealing hovers around the National Gambling Impact Study Commission, whose final report - mandated byCongressand published last June - wails that "millions of families throughout thenation suffer from the effects of problem and pathological gambling," including "depression, abuse, divorce, homelessness, and suicide." Since no modern political statement is complete without an invocation of "the children,"the commission duly links underage gaming to alcohol and drug abuse, violent behavior, truancy, and low grades.

And what powerful, sweeping remedy does the commission propose to stopsuch woes? A moratorium on the expansion of gambling.

The incumbent industry must have raised many a toast to thatrecommendation. Though already well-protected from competition by highly restrictivelicensing schemes, it would, if the commission's proposal became law, win a legallock on the gaming market. Its would-be competitors online, not having jumpedthrough the requisite regulatory hoops, would never even get started.

In the short run, then, Kyl's bill will mean trouble for the fledgling industry, its customers, and the Internet service providers (ISPs) whoconnect them. But it will not stop online gambling. The very architecture of the Internet will frustrate prohibition.

The Internet relies on a packet switching protocol that breaks eachmessage into discrete parts and sends them over various unpredictable routes, tobe reassembled at the message's destination. It's a bit like writing aletter, chopping it up, and mailing each piece separately to the same address.

Now imagine Congress ordering the U.S. Postal Service to search for and seize all correspondence related to illegal gambling. The post officewould object to the cost and futility of the task, while its customers wouldobject to having their privacy violated. Nor could the postmen simply stopdeliveringmail to and from addresses associated with illegal gambling. Gamblers wouldsimply change their P.O. boxes periodically and send letters without returnaddresses.

Attempts to ban Internet gambling face even higher hurdles. The floodof data alone prevents ISPs from discriminating between illicit gaminginformation and other messages. Furthermore, it's much easier to encrypt messages,change addresses, and send and receive mail anonymously on the Internet.

And e-mail has no monolithic postal service. It relies on thousands of separate and wholly private service providers, many of which stridentlyobject to enforcing a burdensome ban. Testifying before the National GamblingImpact Study Commission on behalf of over 250 ISPs, Ralph Simms said that the prohibitionists "imagine that problems of illegal content on the Internetcould be resolved if ISPs assumed the role of traffic cop. This could not befurther from the truth." Unless a gambling site rents space on an ISP's ownserver, Simms said, "the ISP has virtually no ability to control it."

Furthermore, American cops can do little to stop the explosion in legal gambling sites based in other countries. Such services can already set upshop in Australia, Antigua, Austria, Belgium, Costa Rica, the DominicanRepublic, Finland, Germany, Grenada, Honduras, Liechtenstein, Mauritius, Vanuatu,and Venezuela, among other places. This growing number of overseas havensguarantees that, regardless of domestic policies, U.S. consumers will have access to Internet gambling.

Even Kyl admits that "we don't have jurisdiction over the people abroadwho are doing it." To isolate Americans from the gaming traffic, he proposesto "pull the plug at the point of entry into the United States." But thattraffic can enter the country from any number of overseas sites. To stop thetrade,Kyl would have to "pull the plug" on every international Internet connection.He might as well demand a ban on horseless carriages.

Given those constraints, Kyl's bill cannot work as intended. It would, however, sorely compromise the cost, efficiency, and security of Internet communications; it would bring legal trouble to several otherwise innocent gamblers; and it would mock the rule of law.

Fortunately, no full ban on Net gambling would likely survive,especially after cooler heads in the nation's revenue departments recognize theprohibited pastime as a new breed of cash cow. Prohibition, after all, merely ensuresthat bettors will ship their money to gambling sites based abroad; stategovernors and legislatures in the United States will soon demand a share of thatbounty. The same political forces that have led to the widespread legalization of lottery, casino, and riverboat gaming will thus eventually embrace online gambling too. We can get there quickly and easily or slowly and painfully,but get there we almost certainly will.

By the same token, some in the existing gaming world do not fearcompetition from the Net as much as they want to take it on. The industry has thustaken the somewhat awkward position of demanding that Internet competitors share its regulatory burdens. "We cannot support it without tough regulation,"American Gaming Association President Frank Fahrenkopf told the Las VegasReview-Journal last year. Fahrenkopf and his allies prefer not to dwell on whetherInternet gambling poses a competitive threat, nor do they publicly demand that itshare their shackles simply to keep it from speeding ahead. They instead arguethat the absence of regulation could lead to a scandal tainting the entireindustry. It seems far more likely, however, that an Internet scandal would reaffirmthe distinction between honorable old-timers and naughty onliners.

In all likelihood, the domestically licensed gambling industry simplywants to slow down its Internet competitors until it can join the race. Big-name casinos already sport some of the flashiest sites on the Web. Some, suchas Caesar's Casino, run real sweepstakes online. The Hard Rock Casino hasalready set up space on its site for a virtual casino. Naturally, Kyl's billincludes an exemption for such online advertising and promotion. If and when U.S.lawmakers finally legalize Internet gambling, the incumbent industry will standreadyto cash in.

And so will the rest of us. Despite what you've been told about theevils of the betting life, legal gambling on the Internet would cause far less harmthan you probably suppose - and it would provide some remarkable benefits. Real-world casinos, we hear, lure gamblers into windowless caverns farfrom the real world, with money traps at every turn and free-flowing booze.Sadly, they give customers places to socialize, creating little communities that console losers and - for a price - minister to the lonely. True or not,such criticisms certainly do not apply to Internet gambling, which must viewith slamming doors, barking dogs, and other household distractions. Onlinegamblers have to buy their own drinks, too, and console themselves when they lose.

Net gambling doesn't offer just a more wholesome environment than its land-based competitors. It offers its weak-willed customers more help. Howmany casinos and lottery machines host "Gamblers Anonymous" banners? Many Websites provide the functional equivalent: a link to Gamblers Anonymous. TheInteractive Gaming Council, the industry's self-governing body, has promulgated a codeof conduct that goes even further. Its more than 50 members must "implement adequate procedures to identify and curtail compulsive gambling" -something their software-based systems make relatively easy to do. Real-worldgambling services, in contrast, would find it hard to detect and prevent excessive gambling even if they wanted to.

What about "the children"? Here, too, Web sites have an advantage overtheir offline counterparts. The former can automatically check the identity andage of every player who walks through the virtual door. The latter rely, at best,on hunches about high heels and facial hair. State lotteries, which selltickets through machines, do even less to guard against underage gambling. Prohibitionists thus err in claiming that Internet gambling presents a newand dire risk to the young. At most, it will marginally increase the chancesthat some kids will gamble - kids with unsupervised and unfiltered Internet connections, who have not been raised to steer clear of adult-onlyactivities, and who have ready access to credit cards.

Against this, weigh the many benefits Internet gambling offers. Forone,it will drive development of the Net's infrastructure. Just as real-worldcasinos invest heavily in cutting-edge architecture, online gaming services willstrive to offer the zippiest graphics and most sophisticated user interfaces.That competition will, as a side benefit, generate broader bandwidth and better software for all sorts of Internet applications, from e-mail to movies on demand.

It will also bring benefits to the gamblers themselves, who deserve thesame advantages enjoyed by consumers of other entertainment services -includingthe fruits of a competitive marketplace. By giving customers cheap and easyaccess to a variety of gaming opportunities, the Internet can bring competitiontoan industry that has too long enjoyed the shelter of highly restrictivelicensing practices. Freeing up the gambling market will help make payoffs moregenerous - and more honest.

Internet gaming services have an acute regard for trustworthiness. Theylack the usual signs of respectability, such as big buildings and established reputations, and they cannot count on legal monopolies to rope incustomers. Graeme Levin, founder of the popular index of Internetgambling sites, explained the situation to James Rutherford, one of the manyresearchers who have studied the Net gaming phenomenon. "This is as close as I believe mankind has come to a free market," Levin said, "and sanctions followwhere dishonest behavior is detected and publicized." Sue Schneider, chair ofthe Internet Gaming Council, agreed: "If you don't like the way you're treatedat The Mirage, what can you do? Shout about it in the street? But with theNet, it wouldn't take long for the news groups to be abuzz."

Gamblers also deserve the same legal protections that other consumersenjoy. Prohibition will not cut off access to Internet gaming. It will, however,cut off access to courts. From time to time, Internet gamblers - like other consumers - will suffer fraud, breach of contract, and other legal wrongs. Prohibition merely assures that Internet gamblers will have no recourse tolegal remedies.

Finally, the right to peaceably dispose of one's property surelyincludes the right to trade, throw, or gamble it away. The Founding Fathersunderstood this. As Thomas Jefferson drafted the Declaration of Independence by day,he relaxed in the evening by betting on backgammon, cards, and bingo.Benjamin Franklin - using his era's most advanced technology - printed a goodportion of the colonies' playing cards. George Washington regularly bet on horses,gambled in card games, and bought lottery tickets. He also managed publiclotteries, as did Franklin and John Hancock. Apparently, some notable Founders regarded gambling as part of their inalienable right to the pursuit of happiness.

Over a century ago (in Internet years), .com originated as shorthandfor commercial. To its business users, the suffix retains that meaning. To themany clubs, hobbyists, and individuals who have adopted it, it has come to mean communication. To politicians and the gambling businesses they run andlicense, it stands for competition.

Internet competition has hit old-fashioned offline businesses first and hardest - especially those, like gambling, that have long profited underthe shelter of highly restrictive licenses. But as the political storm overgambling demonstrates, Internet competition poses an even greater threat togovernment monopolies.

At home, in private, with the click of a mouse, citizens and consumerscan now escape the grip of merely local legislation. They will shrug offdomestic prohibition on Internet gambling and take their business to overseas siteswith more respect for their rights. Sooner or later, incumbent gaming servicesand their political patrons will wake up to these gales of change. They willsee their futile efforts to ban online gaming collapse - like a house ofcards.

Tom W. Bell

Tom Bell is an adjunct scholar at the Cato Institute and an assistant professor at Chapman University Law School