Shuffle up and deal

A special report on gambling J

uly 10th 2010

Gambling.indd 1 23/06/2010 14:54

The Economist July 10th 2010 A special report on gambling 1

The internet is radically changing the business of gambling. Nowpolicy must catch up, argues Jon Fasman

changed out of all recognition in the pastdecade but all forms of gambling world­wide. The reason has been simple: for the�rst time anyone who wants to gambleand has an internet connection can do so.The desire has been there for much of re­corded history. An excavation of a bronze­age city in south­eastern Iran turned up apair of dice dating back nearly 5,000 years.Islam forbids gambling, but the Bible men­tions casting lots or using fortune to deter­mine an outcome. Card­playing for moneyhas often been depicted in art (see detailabove of Georges de la Tour’s �The Cheatwith the Ace of Diamonds�, circa 1635­40).

Gambling’s widespread and enduringappeal comes as much from the hope ofimposing order on the fundamental ran­domness of the world as from the expecta­tion of economic gain (though that certain­ly has its charms). Blaming a bad result onan o�ended spirit or a good result on di­vine favour is far more comforting than ac­cepting the cold indi�erence of probability.

But there is a darker side to gamblingwith which ancient civilisations were alsowell acquainted. The Rig Veda, a collectionof Hindu religious hymns more than 3,000years old, contains a section known as theGambler’s Hymn which laments: �With­out any fault of hers I have driven my de­voted wife away because of a die exceed­ing by one [an unsuccessful bet]. Mymother­in­law hates me; my wife pushesme away. In his defeat the gambler �nds

Shu�e up and deal

PINPOINTING a precise moment whenthe world changes is never easy, even in

retrospect. Yet it is possible to say with rela­tive con�dence that the world of gamblingwas changed dramatically by eventsaround a green felt table at Binion’s Horse­shoe in Las Vegas on May 23rd 2003, the �­nal day of that year’s World Series of Poker(WSOP). The hand immediately precedingthe �nal table�the last nine of the tourna­ment’s 839 competitors who would playfor $2.5m�pitted Phil Ivey, one of thesharpest and most ruthless players of histime, against Chris Moneymaker, an un­known 27­year­old accountant from Nash­ville. The newcomer eliminated Mr Iveythanks to a lucky draw on the last carddealt. Mr Ivey, a stone­faced old­schoolplayer, declined to shake his vanquisher’shand. Mr Moneymaker went on to win thetournament.

His victory created what came to becalled �the Moneymaker e�ect�: interest inpoker soared. Suddenly spending timeplaying a game on a computer looked like aroad to riches. And those riches seemed at­tainable. The stars in poker, unlike those inprofessional sport, look very much like thespectators; they just happen to be moresuccessful. In the years since Mr Money­maker’s victory, the tournament has vari­ously been won by a patent lawyer, a Hol­lywood agent and a 21­year­old profess­ional poker player.

It is not just professional poker that has

An audio interview with the author is at

Economist.com/audiovideo/specialreports

A list of sources is at

Economist.com/specialreports

The risk instinctWhy do people bet? Page 2

At war with luckIs poker a game of skill or chance? Page 3

Bet on the botWill Polaris do for poker what Deep Blue didfor chess? Page 4

Log on, ante upOnline gambling o�ers the greatest threatsand the biggest opportunities. Page 5

Lengthening oddsNew betting options imperil horseracing’sfuture. Page 6

Cutting o� the armsSlot machines are becoming mobile. Page 8

When the chips are downCompetition and the economic downturnhave hurt, but Las Vegas is �ghting back.Page 9

The dragon’s gambling denMacau is only the start: all Asia is coming outto play. Page 11

Come, all ye gullibleLotteries are a bad bet, but everybody lovesthem. Page 12

Sure thingPeople will keep on betting, legally or illegal­ly. It makes sense to tidy up the rules. Page 13

Also in this section

AcknowledgmentsIn addition to the people named in this report, the authorwishes to thank Jeremy Aguero, Stephen Burn, NicCoward, Scott Daruty, Behnam Dayanim, Markus Funk,Bobby Geiger, Marshall Gramm, Carlos Guestrin, MarkHarris, Simon Holliday, Randy Matthews, Adam Pliska,Peter Reynolds, Emmanuel de Rohan­Chabot, Bas Rokers,John Shepherd, Eric Tom, Mor Weizer, Jenny Williams andJohn Williams.

1

2Watch it grow

Source: H2*Online, TV and mobile †Stakes

less prizes, including bonuses

Global interactive* betting industrygross gaming yield†, $bn

0

5

10

15

20

25

30

35

40

2003 04 05 06 07 08 09 10 11 12

F O R E C A S T

1The wages of sin

Source: H2 *Including online

Global gambling market*, 2009, % of total

Total:$335bn

Casinos31.2

Lotteryproducts

29.6

Non-casinogaming

machines21.6

Horseracing7.2

Bingo/othergaming5.4

Sportsbetting5.0

none to pity him. No one has use for a gam­bler, like an aged horse put up for sale.�

As the newly single poet above had justdiscovered, the numbers make most formsof gambling a mug’s game. The odds of

winning the jackpot in America’s richestlottery, Mega Millions, is one in 176m. Euro­Millions, available to players in nine west­ern European countries, o�ers slightly bet­ter odds: one in 76m. Roulette players, onaverage, will hit their number once in 36 or37 attempts. Poker players’ chances of be­ing dealt a royal �ush are much the same asbeing struck by lightning.

A majority sportYet hope never dies. In 2007 nearly half ofAmerica’s population and over two­thirdsof Britain’s bet on something or other.Hundreds of millions of lottery tickets aresold every week. The global gambling mar­ket is estimated to be worth around $335billion a year (see chart 1). Last year Las Ve­gas alone raked in gambling revenues of$10.4 billion and Macau $14.7 billion.

For Las Vegas, that represents a declinein revenue from 2008. By contrast, rev­

enues from online gambling continue torise. H2 Gambling Capital, a consultancythat monitors the global gambling market,estimates online gambling revenues in2009 at around $26 billion (see chart 2).

2 A special report on gambling The Economist July 10th 2010

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�AT 11pm there usually remained be­hind only the real, the desperate

gamblers�persons for whom, at spas,there existed nothing but roulette, andwho went there for that alone. Thesegamesters took little note of what was go­ing on around them, and were interestedin none of the appurtenances of the sea­son, but played from morning till night,and would have been ready to playthrough the night until dawn had thatbeen possible.�

Playing until dawn is often possible to­day, and the game is not always roulette,but otherwise Dostoyevsky’s descriptionfrom 1867 will be familiar to anyone whohas ever been in a casino late at night. Dos­toyevsky wrote from experience; his no­vella �The Gambler� is thought to havebeen written to enable him to pay hisgambling debts. What is it that drivessome people to go on betting until theylose their shirts, whereas others can take itor leave it?

W.I. Thomas, an early­20th­centuryAmerican sociologist, argued that a tastefor risk is essential to human develop­ment. He believed that the gambling in­stinct �is born in all normal persons. It isone expression of a powerful re�ex, �xed

far back in animal experience. The instinctis, in itself, right and indispensable.� Apsychologist of the same period, ClemensFrance, saw similarities between gam­bling and faith: both expressed a need forreassurance, order and salvation.

Those theorists were writing aboutgambling as a pastime, but for some peo­ple it is much more than that. In the 1960sand 1970s excessive gambling began to beseen as a medical problem. Robert Custer,an American psychiatrist, argued thatgambling could be just as addictive as al­cohol and drugs, and indeed substanceabusers gamble to excess more often thanothers. About three­quarters of problemgamblers su�er from depression, andquite a few attempt suicide. Mr Custer’s�eldwork showed that pathological gam­blers were often gregarious, clever andgenerous but also impulsive, anxious andrestless, looking for instant grati�cation.

As with many aspects of psychiatry,the study of gambling has moved frommind to brain. A 1989 study conducted byAlec Roy, a psychiatrist, found that chron­ic gamblers had low levels of norepineph­rine, a chemical secreted by the brain attimes of stress or excitement. This seemedto suggest that such people gamble for the

thrill of action. A more recent study byHenry Chase and Luke Clark at the Behav­ioural and Clinical Neuroscience Instituteat Cambridge University found that nearmisses and wins in gambling producesimilar responses in the brain.

Russell Poldrack, who runs a cognitiveneuroscience lab at the University of Tex­as at Austin, has found that activity in theventromedial prefrontal cortex dependson a person’s attitude to loss. And PaulGlimcher, a neuroeconomist at New YorkUniversity, has shown that activity in theprefrontal cortex and ventral striatum re­veals the value someone puts on a reward.

Undoubtedly gambling, like other ad­dictions, depends on a complicated mix­ture of brain chemistry, environment andsocialisation. Howard Sha�er, a professorof psychiatry at Harvard Medical School,notes that the rate of pathological gam­bling in America has remained relativelyconstant for the past 35 years, despite ahuge expansion in the opportunities ono�er. There was a spike in the late 1990sbut levels have dropped since then. DrSha�er draws a parallel with a classic vi­rus­infection curve: high at the beginningas those most susceptible fall ill, but grad­ually tailing o� as people adapt.

Why do people bet?The risk instinct

The Economist July 10th 2010 A special report on gambling 3

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The world’s gambling centres are no longerjust Vegas, Macau and Monaco; they nowalso include Alderney, Gibraltar, Antiguaand Malta, whose favourable tax systemsmake them irresistible homes for internet­based companies.

Thanks to these companies the old re­strictions have started to crumble. Govern­ment prohibition of online gambling hasworked about as well as prohibition ofother online content, which is to say it isobserved mainly in the breach. Americaremains the world’s biggest single onlinegambling market by far, despite the pas­sage in 2006 of the Unlawful InternetGaming Enforcement Act (UIGEA)�a pro­vision tacked onto a port­security bill thatprohibits the transfer of funds from a �­nancial institution to an online gambling

site. After the ban some established sitesclosed down their American operations,but others �lled the void. Americans aregambling roughly the same amount onlineas they did in 2006.

The move online threatens some tradi­tional forms of gambling, such as bettingon horses, but appears to bene�t others,such as slot machines and lotteries. Andbricks­and­mortar expansion still contin­ues. The latest addition to the Las VegasStrip, CityCenter, opened last December.Covering 76 acres (31 hectares) and costingaround $8.5 billion, it is the largest private­ly funded construction project in Ameri­can history. Thirty­three American stateshave casinos (many of them operated byaround 200 Native American tribes), as domore than 20 countries across Europe. The

Las Vegas Sands Corporation, which ownsthe Venetian casinos in Las Vegas and Ma­cau, opened Marina Bay Sands in Singa­pore in April. Sheldon Adelson, Sands’schief executive, believes that Asia can easi­ly accommodate ��ve to ten Las Vegases�.

In the past ten years gambling haschanged more than in the previous 70. Theinternet has forced existing businesses toadapt, opened up new opportunities andfundamentally altered the political, eco­nomic, corporate and moral climate inwhich these businesses operate. This spe­cial report will trace those changes throughthe main forms of gambling, which sadlywill mean neglecting strong but local pas­sions such as greyhound racing, bingo, jaialai and cricket �ghts. It will begin with MrMoneymaker’s game. 7

IN 1969 Benny Binion, owner of theHorseshoe Casino in Las Vegas, attended

the Texas Gamblers’ Reunion in Reno,where he played high­stakes poker for sev­eral days. His opponents were a group ofmen�and men only�with the sort of Run­yonesque names endemic in poker’s his­tory and lore: Chill, Puggy, Minnesota Fats,Texas Dolly. The following year Mr Binioninvited the high­rollers to his casino. Aftera few days the players elected JohnnyMoss the best of their number and award­ed him a silver cup. Thus was the World Se­ries of Poker (WSOP) humbly begun.

The next year it evolved into a freeze­out game with a $5,000 buy­in, meaningthat once a player lost his $5,000 stake, hecould not buy his way back in. In 2006�the WSOP’s peak year�8,773 entrants com­peted in 45 separate tournaments featuringmost of the main varieties of poker forover $100m in prize money.

But the WSOP is not the only game intown. The World Poker Tour (WPT) alsohosts a series of international tourna­ments each year. Millions of dollars,pounds and euros change hands everynight at poker tables around the world andon dozens of poker websites. At the time ofthe Texas Gamblers’ Reunion there werefewer than 50 poker tables in Las Vegas; to­day the Bellagio alone has 40, and Binion’sHorseshoe holds four no­limit Hold ’emtournaments every day.

Moreover, poker is spreading far be­yond America. WPT poker games arebroadcast in over 150 countries to around400m people. H2, a gambling consultancy,puts the global online­poker market at $4.9billion, of which America (where thegame’s legal status is dubious) accounts for$1.4 billion. WSOP Europe has hosted tour­

naments in London since 2007. In May andJune the European Championship of On­line Poker awarded some $5.1m in prizemoney. The tournament was hosted by Ti­tan Poker, which claims to be Europe’smost popular poker site, with up to 30,000simultaneous players. The WPT has host­ed events in Spain, France and Morocco.

Like so many global crazes, this world­wide rise was powered by two engines:television and the internet. Poker has beenon television for quite a while; CBS, anAmerican network, broadcast the WorldSeries of Poker in 1978. But the programmeswere pretty basic: a camera or two record­ed the game and commentators told view­ers what they could already see for them­selves. Only action on the felt was visible:two cards dealt face down to each player,followed by a round of betting, then threecommunal cards face down, anotherround of betting, then a fourth and �fthcard, both followed by rounds of betting.But for anyone who was not already a pok­er fan it seemed boring.

I know something you don’tHowever, in 2003 the WPT borrowed atechnique from a British poker programmecalled �Late Night Poker�, showing eachplayer’s two individual cards, thus allow­ing viewers to see the game from the in­side. This proved a great success. WPT alsoedited ruthlessly. The staple of thrilling

At war with luck

Is poker a game of skill or chance?

Suitably inscrutable

4 A special report on gambling The Economist July 10th 2010

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televised poker is the showdown, in whichplayers bet against each other all the wayand a winner is determined only by turn­ing up all the cards and comparing hands.In practice, this rarely happens.

Most experienced players insist thatsuccess at poker is not about luck. DavidSklansky, author of �The Theory of Poker�,the best and most thoughtful of the manybooks on poker strategies, writes that �ex­pert players do not rely on luck. They are atwar with luck. They use their skills to min­imise luck as much as possible.� In poker,as in life, luck can happen to anyone; it isevenly distributed. Skilled players knowhow to take advantage of it when it hap­

pens to them, and get out of the way whenit is someone else’s turn.

This is not a theoretical point; it is at theheart of a dispute about poker’s future inAmerica, the country of its birth and itslargest single market. UIGEA (the enforce­ment mechanisms of which have only justcome into e�ect, even though the act waspassed in 2006) bans �nancial institutionsfrom transferring funds for bets in which�opportunity to win is predominantly sub­ject to chance.� Poker has been judged tofall into that category (though the act ex­empts stocktrading and horseracing), sosites that o�er Americans the opportunityto play online poker have to duck and dive.

Yet the view that poker is indeed agame of skill is gaining traction. A 2009study carried out by Cigital, a softwareconsultancy, analysed 103m hands of oneof the main varieties of poker, Texas Hold’em, played at Pokerstars.com, and foundthat over 75% of them were decided beforea showdown. They thus depended farmore on the players’ betting decisions thanon the cards dealt. The Poker Players’ Alli­ance, a million­strong group of a�ciona­dos, argued in the South Carolina SupremeCourt that �the structure and rules allowsu�cient room for a player’s exercise ofskill to overcome the chance element inthe game.� And The Global Poker Strategic

CHECKERS (or draughts, as it is knownin Britain) used to be a fun game of

chance. But in 2007 a group of computerprogrammers, systems analysts and chessenthusiasts, led by Jonathan Schae�er atthe University of Alberta, published anarticle in Science magazine with the boldtitle �Checkers Is Solved�. Using a com­puter program called Chinook, which wasable to crunch through the 500 billionpossible positions on a checkerboard, MrSchae�er and his colleagues proved thatthere was a way to play checkers thatwould ensure either a win or, if the oppo­nent was another theoretically perfectplayer, a draw.

With checkers thus conquered, MrSchae�er moved on to poker. The Univer­sity of Alberta’s Computer Poker Re­search Group (CPRG) was building a pro­gram called Polaris, which was trying todo for one variety of poker, heads­up limitTexas Hold ’em (with just two players andlimited betting amounts), what Chinookdid for checkers. Michael Bowling, theCPRG’s head, says that although the os­tensible goal was to build a winning pokerprogram, the real aim was to �study howto build computers to make decisions indi�cult circumstances, especially wherethere is missing information�.

It is this missing information thatmakes poker so complex. Unlike checkersor chess, at which machines have also hadnotable success, poker is a game of incom­plete information. You do not know what

cards your opponent holds; informationis revealed as the game progresses. A goodplayer’s tactics will involve deceptionsuch as blu�ng and slow­playing, both ofwhich create more complexities.

Soon after the article was published,Polaris took on Phil Laak and Ali Eslami,both poker professionals. Each played aseparate Polaris programme running in adi�erent room, using notional money. Thehuman players could not communicatewith each other. To control for luck, thegames were identical and reversed: what­ever cards the computer got in one roomthe human got in the other. The humansthen switched rooms and played thehands previously played by the comput­ers, for a total of four 500­hand sessions.The results were surprising: a draw in onematch, a resounding win by Polaris in an­other and two narrow victories for the hu­mans in the remainder.

In 2008 the human �eld was expandedto six professionals. Out of six matchesthe humans won two, Polaris won threeand one was drawn. Mr Bowling attri­butes Polaris’s stronger performance to acrucial modi�cation that allowed the pro­gram to adjust its strategy in response toits opponent’s behaviour during a match.

Polaris has not competed against hu­mans since then, but the CPRG has donesome work on another poker variety,heads­up no­limit Hold ’em. Jack Strauss,a prominent poker player in the 1970s and1980s, famously described the di�erence

between limit and no limit: �In limit youare shooting at a target. In no limit the tar­get comes alive and shoots back at you.�Mr Bowling says his no­limit Polaris cancompete �at a low professional level�.

The more interesting work, however,may be in spin­o� applications. Mr Bowl­ing says that the ability to solve largegames in which participants value similarthings di�erently has some applicationsin auction and negotiation settings. Someof the game­theory aspects of Polarishave been found to improve networks ofsensors that measure variable environ­mental information, such as heat in abuilding or chemicals in lakes.

And yet for all its prowess, Polaris isunlikely to become the Chinook or DeepBlue of poker, making humans obsolete.For one thing, heads­up poker is only oneof many kinds of poker played. A �rst­ratehuman player can hold his own in any va­riation; a machine might �nd the transi­tion harder. Second, most poker is stillplayed socially, whether in casinos or athome, and you can’t have a beer and anatter with a bot. Online an intelligentmachine might have a better chance. Butmost sites have rigorous anti­bot policies,particularly when it comes to transferringmoney. And creating a bot that can defeatmultiple layers of security may be harderthan playing �rst­rate poker. As Mr Laaksays, �anyone smart enough to put a botdown would make way more money op­erating above board.�

Will Polaris do for poker whatDeep Blue did for chess?Bet on the bot

The Economist July 10th 2010 A special report on gambling 5

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Thinking Society, founded by Charles Nes­son, a Harvard law professor, takes a simi­lar view. Mr Nesson sees in poker �a lan­guage for thinking about and anenvironment for experiencing the dynam­ics of strategy in dispute resolution�.

Similarly, Garry Kasparov, a chessgrandmaster, argues that poker o�ers les­sons on chance and risk management thateven his beloved game cannot. He alsonotes that many chess professionals aremoving into poker, not least because the

money is better. Jennifer Shahade, whotwice won the American Women’s ChessChampionship and is now a semi­profes­sional poker player, thinks that chess andpoker rely on similar skills�a sort of calcu­lating game­savviness�and that chessplayers are likely to succeed at poker be­cause �they focus on �nding the rightmoves, rather than having fun or howtheir ego feels.�

Yet perhaps the clearest argument in fa­vour of poker being skill­ rather than

chance­dependent comes from Mr Sklan­sky, and it has to do with losing rather thanwinning. Imagine trying intentionally tolose at a game of pure chance, like rouletteor baccarat. It would be impossible. At thebeginning of a deal or a roll you have to beton something. You can no more deliberate­ly play badly than you can deliberatelyplay well. The same is not true for poker,which o�ers multiple opportunities tomake sure you lose. Still, America’s Con­gress seems unconvinced. 7

WHEN George Bush, then America’spresident, signed the Security and

Accountability For Every Port Act into lawin 2006, parts of America’s online­gam­bling market retired hurt. That was be­cause attached to the port act was the Un­lawful Internet Gaming Enforcement Act(UIGEA), which prohibited �nancial insti­tutions from transferring funds from punt­ers to gambling sites (though it made ex­ceptions for horseracing, fantasy sportsand stocktrading).

The act re�ected prevailing public opin­ion in America: surveys show that morethan two­thirds of the population are op­posed to legalising online gambling. ButBarney Frank, a congressman who has in­troduced legislation to repeal UIGEA, de­scribes its enforcement mechanisms as �apain in the ass of the highest magnitude�.Many companies, including PartyGaming,the world’s largest online­gambling com­pany, abandoned the American market assoon as the act was passed.

In absolute terms online gambling re­mains a small part of the global bettingmarket: a mere 8% in 2009, with revenuesof about $26 billion, according to H2. Butlast year it rose even as the overall marketfell. In the coming years it is expected togrow even more: 13% a year, says H2, withrevenues rising to $36 billion by 2012.

Those revenues will �ow not merely towebsites taking bets but also to companieso�ering back­end services such as soft­ware design or proprietary gambling soft­ware. Yet online gambling presents thornyproblems as well as opportunities. Busi­nesses that want to o�er it have to dealwith a welter of di�erent regulations�oroperate semi­legally. Politicians have to de­

cide whether to allow open markets orprotect state­approved (and often state­run) monopolies. The �rst is hard to do; thesecond hypocritical.

The idea of using the internet for bet­ting is not new. Donald Davies, a Britishcomputer scientist and co­inventor of thepacket­switching technology that drivesdata transmission over the internet, �rstproposed using that technology for wager­ing in December 1965. The �rst commercialonline gambling sites appeared in themid­1990s, o�ering casino games andsports books. Online poker followed acouple of years later. Paradise Pokeropened in 1999, followed by PokerStarsand PartyPoker, the �agship product of Par­tyGaming, one of the �rst online­gamblingcompanies to go public and list on the Lon­don Stock Exchange, in 2005. In May 2010Casinocity.com, an independent online­gambling directory, listed 2,316 gamblingsites taking bets, excluding lotteries.

When PartyGaming and other listed

companies pulled out of America, others�lled the void. Bookies registered o�shore,notably in Antigua and the Mohawk Re­serve in Canada. PokerStars and Full TiltPoker, both of which accept Americanplayers, are now the two biggest onlinepoker rooms by a large margin, accordingto Pokerscout.com, an online poker forum.Thanks to UIGEA, those that cater to gam­blers based in America have had to rely onarcane money­transfer systems that fudgethe letter of the law and violate its spirit.

UIGEA’s main congressional defend­ers, Jon Kyl and Spencer Bachus, are bothavowed opponents of online gambling. ARepublican congressional counsel whohas worked in this area asserts that �therehas never been any doubt by any justicedepartment�the Clinton justice depart­ment, the Bush justice department, theObama justice department�that onlinegambling is illegal.�

Draconian punishmentsEric Holder, Mr Obama’s attorney­general,vowed in his con�rmation hearings to en­force UIGEA. He has kept his word. In Aprilfederal agents arrested Daniel Tzvetko�, anAustralian whose company, AutomatedClearing House, allegedly created shellcompanies to allow punters to transfer$584m from their bank accounts to gam­bling sites. He faces up to 75 years in prisonon bank fraud and money­launderingcharges. In May Douglas Rennick, a Cana­dian, was arrested on similar charges; hepleaded guilty to the illegal transfer ofgambling funds and awaits sentence.

All this re�ects a profound and multi­layered American scepticism of onlinegambling. In a 2004 report the State De­

Log on, ante up

Online gambling o�ers the greatest threats and the biggest opportunities

Rest ofEurope13.1

Rest of Asia8.4

%

3America leads the way

Source: H2*Forecast; includes both

on- and offshore gambling

Online gambling by country, 2010, % of total*

US17.2

Japan13.8

Britain11.5

Italy6.9

Germany5.0

France4.9

Sweden3.7

Australia3.4

Hong Kong3.3

Canada3.3

Others27.0

6 A special report on gambling The Economist July 10th 2010

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partment called gambling sites �the func­tional equivalent of wholly unregulatedo�shore banks�, giving warning that theymight be used not only for money­laun­dering but also for criminal activities rang­ing from terrorist �nancing to tax evasion.Online gambling companies reject suchclaims, pointing to the clear audit trails of­fered by e­commerce. They argue thatthanks to identity screening, online casi­nos are far less vulnerable to fraud thanbricks­and­mortar ones.

The wild webEurope has generally been more receptiveto the idea of legalising online gambling,though national and European regulationsoften con�ict. There is certainly no singleEuropean market in online gambling. InBritain it is allowed, though it requires a li­cence and is taxed and regulated. Italystarted issuing online­gambling licencesthis spring. France is due to follow suit on amore limited scale. Germany banned on­line gambling in 2008 but allows its citi­zens to play in state­run lotteries online.

In 2009 Santa Casa da Misericórdia deLisboa, a Portuguese charity that runs lot­teries, took bwin, an online­gamblingcompany based in Austria, to the Euro­pean Court of Justice, alleging that bwin’sactivities in Portugal infringed its nationalmonopoly on lotteries and gambling. TheECJ ruled in Santa Casa’s favour, statingthat �restrictions on the freedom to pro­vide services may be justi�ed by overrid­ing reasons relating to the public interest.�Gambling appears to fall within that cate­gory. But the ECJ had previously ruled thata country cannot prohibit its citizens frombetting online with private operators if it

allows them to take part in state­run lotter­ies. Michel Barnier, the European Union’sinternal­market commissioner, said in Feb­ruary that he plans to seek coherent Euro­pean rules on online gambling.

The laws may be muddled, but peopleare betting anyway, even where it is illegalto do so. America retains the lion’s share ofthe global market; its punters are expectedto bet $5.7 billion online this year, onlyslightly down from its 2006 level of $6 bil­lion. Germany and France account foraround 5% of the market each.

Clearly prohibition fails to prevent citi­zens who want to gamble from doing so.But legalising online gambling can expandthe market, as demonstrated by Italy. H2

predicts that that country’s gross gamingyield (which measures the amount of cus­tomer monies kept by betting operations)from online poker, casino and bingo willgrow from just over ¤400m in 2008 tonearly ¤1.6 billion in 2012.

Should America’s market ever open up,the e�ect would probably be similar butlarger. Whether and when this might hap­pen, though, is uncertain. Many in the on­line gambling industry think it inevitable,but opposition seems entrenched. It tookdecades to get geographically based gam­bling regulations right; for much of the20th century crime festered in Las Vegas. Inlaying out an online regulatory regimeAmerica is likely to err on the side of cau­tion. And since gambling is a state ratherthan a federal issue, any legalisation of on­line gambling is likely to be patchy.

Yet just because America remains a lag­gard does not mean the rest of the worldwill stop. Mitch Garber, who heads the in­teractive­entertainment division of Har­

rah’s, the world’s largest gambling com­pany, believes that the trend towardslegalisation across Europe will ultimatelyreach America and will eventually lead toa convergence between bricks­and­mortarand online businesses. More and moreland­based companies, like Harrah’s, aredipping a toe into the online market.

To do so they tend to use establishedback­end companies rather than reinvent­ing the roulette wheel. These companies�sell the picks and shovels but don’t pros­pect for gold�, as David Loveday, whoheads a gambling­software companycalled Orbis, puts it. This lowers barriers ofentry to the online gambling market for es­tablished names. For example, WilliamHill, a British high­street bookmaker, runsa poker room for the Sun, a tabloid news­paper; that poker room runs on softwaredeveloped by Playtech, a leading gam­bling­software developer, whereas Wil­liam Hill’s sports book is run by Orbis.

Such convergence is happening notonly online; it is also moving across plat­forms. Betfair, a betting exchange, haslaunched an application running the Ya­hoo! TV Widget Engine Program, which of­fers a range of interactive content. GigiLevy, who heads 888 Holdings, a large on­line­gambling �rm, has similar plans. Hesays that at the moment sports betting isnot �social�. A television­based applica­tion that allows punters to place a bet dur­ing a game with just a click is a logical de­velopment of the sort of in­game bettingo�ered by online bookies and exchanges.The idea sets sports­betting fans’ hearta�utter�and gives gambling opponentsnightmares. But it may come too late tosave the horses. 7

ON APRIL 9th nearly 45,000 peoplecrammed into Oaklawn, a 106­year­

old track nestling in the foothills of theOuachita mountains in central Arkansas,to watch Zenyatta, a spirited six­year­oldmare, win her 16th consecutive race. Thenext day’s event�the Arkansas derby,which in recent years has become a pre­view ground for the more famous derbyheld three weeks later in Kentucky�drewover 60,000 fans. In those two days punt­ers at the track bet nearly $6.5m. Atten­

dance was 38% up on the previous year.Neither the charming old track nor thetown itself, with a population of just under40,000, was built for such crowds. Enter­prising locals turned their lawns and shop­fronts into parking lots at $20­25 a go.

For racing fans everywhere such a turn­out is reason to celebrate; it shows that thesport of kings has not lost its attractions.And indeed attendance remains strong atmarquee events, such as the Arkansas andKentucky derbies or Britain’s Grand Na­

tional. But although sports betting doeswell online, horseracing has a particularproblem. The business model that has keptit going up to now is being superseded bynew and increasingly popular bettingmethods o�ered by the internet.

For all the national di�erences, racingin most parts of the world has two thingsin common. First, it has provided one ofthe few legal forms of wagering and book­making available to most of the public formuch of the past two centuries. Second,

Lengthening odds

New betting options imperil horseracing’s future

The Economist July 10th 2010 A special report on gambling 7

2 the sport depends on money from betting.Practically every national racing associa­tion the world over takes its cut from betsplaced on races. In Britain 10% of book­makers’ pro�ts go to the Horserace BettingLevy Board, a statutory body that distrib­utes the funds to British racing interests(mainly purses but also courses, breedersand veterinary science). The levy was putin place when punters had to bet throughparimutuel pools (in which odds dependon the number of punters backing a bet) orlicensed bookmakers. But now they haveother options, so in 2008­09 the total levycollected reached its lowest level in sixyears, at about £92m.

As other forms of gambling became le­gal, betting on racing fell. Between 2003and 2008 the amount wagered on racingdropped by 10% in America and close to athird in Britain. But betting at the track isfalling even faster. Punters in America haveturned to advance­deposit wagering com­panies (ADWs) such as Youbet, TVG andTwinspires, which combine the functionsof bookmakers and television networks,showing races from around the world.They allow punters to bet using a comput­er, mobile phone or television remote­con­trol. Dedicated race fans in America canbet on European races in the morning,American ones throughout the day andAustralian and Asian ones at night, allwithout having to leave home. And just ascasinos o�er free accommodation andmeals to big players, ADWs o�er redeem­able reward points as an added incentive.

Punters in Britain and Australia have aneven more attractive option: betting ex­changes. The largest is Betfair, whichbought TVG in January 2009. Betfair’s rev­enue last year was £303m, up 27% from theprevious year. Around 90% of bets placedthrough exchanges and more than half ofbets made online in Britain are through

Betfair. Exchanges allow people to bet witheach other, rather than going through a li­censed bookie or a parimutuel pool. Bet­fair makes money by charging a smallcommission, based on a user’s net pro�t ina given market.

Unlike traditional operators, the ex­changes also permit betting throughoutraces. Yet although Betfair’s model attractssavvy punters who understand how mar­kets work, its numbers­heavy interfacemay intimidate casual sport punters. Not­ing that the odds on Chelsea are 1.19 andwatching the market to see if they improverequires more e�ort than putting £10 onChelsea to win.

But some punters may want to o�erodds against Chelsea, which Betfair allowsand traditional bookies do not. There areworries that letting people bet on a nega­tive event will encourage corruption. In2004 Chris Bell, the then boss of Lad­brokes, a bookmaker, claimed that at leastone race a day was being �xed, andblamed betting exchanges. Yet a corruptjockey or trainer can always ride badly orhobble a favourite and then bet the �eld.Also, online commerce is far more readilyvetted and tracked than transactions byhigh­street or on­track bookies, so corrup­tion should be far easier to sni� out.

Neil Goulden, who heads Coral, anoth­er bookmaker, says the real problem is notso much corruption as licensed bookmak­ers shutting up shop and o�ering oddsthrough Betfair to avoid paying tax andlevy. Yet even if this is true, bookmakerswill �nd ways to get away from both any­way: Ladbrokes and William Hill havemoved their betting operations from Brit­ain to Gibraltar, where they are exemptfrom paying the levy and the tax on bettingpro�ts is 2% rather than Britain’s 15%.

The tap is also running weaker inAmerica. Between 1977 and 2006 parimu­

tuel betting on horses in America fell by52% in real terms. Whereas on­track bettinghas dropped every year since 1996, the o�­track variety over the same period has in­creased noticeably.

When o�­track betting was �rst intro­duced, it was seen as a boon to the indus­try. Races being run in di�erent locationswere screened at the tracks so that puntersat, say, Aksarben in Omaha, Nebraska,could bet on races being run at Los Alami­tos in California. The revenue from o�­track betting was split so that 80% of thepool went to the state’s horsemen’s associ­ation, 17% to the place where the race wasbeing screened and 3% to the track wherethe race was taking place.

As long as the screenings were track­to­track and most betting was done on­track,that made some sense. But as on­track bet­ting has fallen and the races are now beingscreened in all sorts of places that allowbetting but do not stage any races (such asgreyhound tracks, casinos and nowADWs), 3% seems a paltry reward for thee�ort of hosting a race. Yet �nding a newpayment model has proved tricky. In anumber of places ADWs have been forcedto pay a source­market fee: for instance,10% of all racing bets made in Virginia�that is, where the punter is in Virginia, re­gardless of where the track is�must go toColonial Downs, the state’s main track,and to the state’s horsemen’s association.

A downhill raceThe sport remains in decline. California’soldest thoroughbred track, Bay Meadows,closed in 2008; Hollywood Park, in south­ern California, is teetering; and Aqueduct,in Queens, was nearly sold to developersin 2007. New York’s racing authority,which runs Aqueduct, Belmont Park andSaratoga, emerged from bankruptcy in2008�only to have to take up a $17m emer­gency loan in April.

No doubt more casualties will follow.After all, the sport’s success depended onits monopoly status, and that has gone.Banner days still draw a crowd, but every­day racing��Wednesday afternoons atBeulah Park� (a track in Columbus, Ohio),as one insider calls it�is harder to sustain.

In more than a dozen states some trackshave added slot machines or card tables toattract those who want to gamble onsomething other than horses. These �raci­nos� funnel much of the money from slotsand tables to fund purses and subsidisebreeders. But cantering into that goodnight as an appendage to a slots parlourseems a sad fate for the sport of kings. 7

The glory days

8 A special report on gambling The Economist July 10th 2010

1

SOMETIMES the old games are the best.Take, for instance, the �reward­paying

punching bag�, one of the earliest attemptsat machine­based gambling. For a nickel apunch, punters could pound out their frus­trations. If they hit hard enough to move apointer to the right spot on the dial, theywon a prize. Or there was the �manila�, inwhich hopefuls could win a prize byshooting a nickel from a pistol into a slot.These days most casinos will not even letyou smoke, much less punch or shoot yourway to a prize.

The �rst machine to dispense coins asprizes was the three­reeled Card Bell, builtby Charles Fey in 1898. Slot machinesthrived in San Francisco. By the time thecity outlawed them in 1909, it was collect­ing $200,000 a year in taxes from 3,200slot machines. By 1931 Frank Costello, amobster in New York, raked in $25m a yearfrom his 25,000 slots. Today, betting ma­chines�slots in America, fruit machines inBritain, pokies in Australia�account formore than one­�fth of the global gamblingmarket. Their one arm may be vestigial,but they still make out like bandits.

Their appeal lies in their utter simplic­ity. You do not need to understand a com­plex system of betting, as in craps. You willnot hold up the action if you make a mis­take, as you might at a table game. You willnot get skinned alive by people who un­derstand the game better, as novices oftendo when playing poker at a casino. You donot have to interact with a dealer or re­member which hand is higher.

Slots are largely passive: feed themmoney (or cards, these days), press a but­ton, watch the wheels spin or objects alignon a screen and see whether you havewon, and how much. They demand noth­ing but cash and often promise payouts of95% or better. Las Vegas has around200,000 of them and America as a wholeabout 1m, taking in an average of $1 billiona day. Australia has around 200,000 po­kies, mainly in pubs and clubs, and Britainhas at least 250,000 fruit machines.

Alas, that 95% �gure does not mean thatyou personally will get back 95 cents forevery dollar you feed in; rather, it meansthat 95% of the money taken in will be re­turned to players over the course of the

machine’s lifetime. So you could have alucky streak and get back much more thanyou put in, or you could lose the lot. Tokeep the game interesting, most of it is paidout in dribs and drabs: a machine that re­turned $95,000 of every $100,000 in onehuge jackpot once in a blue moon wouldbe too disheartening to play.

When it comes down to it, over the lon­ger term slot machines keep 5% of yourmoney in return for a light show and aslimmish chance to win. But people keepplaying. Slots pit humans against maths,and the maths always win. But successfulslot machines get players to �like the feel ofthe maths�, explains Chris Satchell, chieftechnology o�cer for International GameTechnology. IGT, along with Bally Technol­ogies, Aristocrat and Novomatic, is one ofthe world’s leading slot­machine makers.Many people like the older, mechanicalmachines on which the reels are set in mo­tion by pulling a lever rather than pressinga button, which is why many casinos haveretained them. Where video machines areused, they sometimes feature displays thatallow the video reels to align imperfectly,as on an old spinning­wheel machine.

Whether the machine pays out lots oflittle prizes or a few big ones, the payout

level is generally set by law. And despite allthe myths that slots players like to perpetu­ate�coins need to be warmed up becausemachines hate cold ones; coins shouldnever be overhandled because machineshate warm ones; machines are more likelyto pay if you use a card rather than cash�itis determined by random draw. Over timethe amount the machine pays back to thecustomer will approach its average rate,but, at least in regulated markets, each spinis independent of the previous one. Yetslot­machine development, assisted by ad­vances in networking technology, involvesmore than simply tinkering with payoutalgorithms.

Killer heelsSlot developers understand the power ofbranding. The most popular machine inIGT’s history is �Wheel of Fortune�, basedon a long­running television game show.Coming hot on its heels is the �Sex and theCity� machine. Its reels depict diamonds,chocolates and strappy shoes. Since itslaunch in November 2009 it has provedpopular, earning up to �ve times as muchas the average slot machine on some�oors. Like the television show it appealsto women, which indirectly makes it at­

Cutting o� the arms

Slot machines are becoming mobile

Something for everyone

The Economist July 10th 2010 A special report on gambling 9

2

1

tractive to men too. In January IGT

launched a machine based on �AmazingRace�, a TV show. �American Idol� and�Alice’s Adventures in Wonderland�,based on another TV show and a �lm ofthe famous children’s book respectively,are on the way.

These games involve more than simplypressing a button and waiting to seewhether the reels align. The �Wheel of For­tune� machines have a spinning wheel ontop of the play area; another version fea­tures an immense wheel used for bonusspins. The �Sex and the City� machine of­fers video clips. �Amazing Race� will havethe show’s host guiding players throughbonus rounds. �American Idol� will allowplayers to judge performances shown on avideo screen. Many of these highlight ashift towards what Mr Satchell calls �com­munity­based� slots playing, designed toappeal to the Facebook generation.

Pick your appIncreasingly slots are linked not just toeach other but also to servers, whichmakes them far more �exible. Traditionalslot machines o�er only one game. If that

happens to �go cold� (ie, become unpopu­lar), they sit around uselessly or have to betaken away. With server­based games thehardware on the casino �oor is governedby software on a remote server. If a gamegoes cold the casino manager can change itto a di�erent one in seconds. Separatingthe hardware and the software also speedsdevelopment, making it much easier andcheaper to introduce new games. The bossof Inspired Gaming Group (INGG), LukeAlvarez, calls his company �the iPhone ofslots�. Instead of developing games in­house, it o�ers an open­source code andworks with around 30 game developers.

Server­based slots are still in a minoritybut growing fast. ARIA, the �agship casinoat CityCenter, on the Las Vegas Strip,opened last December with 980 such ma­chines. IGT’s server­based games can alsobe found in casinos in Italy, Finland andFrance. INGG operates 25,000 of themacross Britain and in smaller networks inCyprus, Italy, Australia, the Czech Repub­lic, Cambodia and Laos.

Yet moves towards faster play, biggerjackpots and more enticing machines arenot without their critics. Natasha Dow

Schull, a professor of anthropology at MIT,whose book �Addiction by Design: Mach­ine Gambling in Las Vegas� is due out laterthis year, found that 90% of people attend­ing Gamblers Anonymous meetings in LasVegas played only machines. Ms Schullsays the trend towards video slots that al­low gamblers to bet on as many as 100lines at once increase the frequency ofsmall payouts, making the experienceseem more rewarding. That encourages �aslow and gradual bleeding o� of yourfunds�. Leslie Bernal, who heads an orga­nisation called Stop Predatory Gambling,describes slots as �a huge part of our debtculture� and �the biggest something­for­nothing scheme ever invented�.

Yet slots spin on. In the past year IGT’sshare price has risen by 40% to take its mar­ket cap to over $5 billion. Gideon Bierer, thecompany’s vice­president in charge of de­veloping slots for online and mobile play,says this market has �brought a lot of newcustomers in who weren’t interested be­fore and didn’t have access�. That is clearlygood news for companies such as his. Tra­ditional betting hubs like Las Vegas take amore sceptical view. 7

GAMBLING centres operate at one re­move from their local communities.

Monte Carlo’s casino is in Monaco, sur­rounded by but independent from France.Monaco’s citizens are not allowed into thegaming rooms, but everyone else is en­couraged to open their wallets. Macau is at­tached to mainland China only by a nar­row isthmus. Until 1999 it was underPortuguese rule. Now it is a Special Admin­istrative Region of China, but visitors fromthe mainland need a special visa.

Las Vegas sits in a valley in some ofNorth America’s most inhospitable ter­rain. It was �rst settled in 1855 by Mormonsseeking freedom from American rule. Atthe beginning of the 20th century a mere30 homesteaders tilled the scrubby soil.But in 1911 the state government, seekingnew sources of revenue, o�ered divorcesin only six weeks, the quickest in the coun­try. It also scrapped taxes on sales, incomeand inheritance and repealed the ban ongambling passed in 1909.

By 1951 a congressional commission

complained that too many of the men run­ning gambling operations in Nevada wereinvolved with organised crime. Mobsters,notably Meyer Lansky, Benjamin �Bugsy�Siegel and Moe Dalitz, had gained controlof the state’s casinos, using them to laun­der drug money and other ill­gotten gains.

The road to respectabilitySiegel made the Flamingo into the �rst lux­ury hotel on the Strip in 1946. Today it isowned by Harrah’s, a listed company. TheStrip’s northernmost casino, the Strato­sphere, is the property of a Goldman Sachsa�liate. The Strip’s largest complex, madeup of the Venetian, the Palazzo and theSands Expo Convention Centre, is ownedby the Las Vegas Sands Corporation, an­other listed company that has a $16.7 bil­lion market cap.

Over the past half­century the city’spopulation has climbed steeply andsteadily. Today nearly 2m people live in theLas Vegas metropolitan area�a testamentperhaps as much to the miracle of modern

air conditioning as to the irresistible allureof gambling. But whereas the 20th centurywas good to Las Vegas, the 21st may provemore perilous.

Following a brief attempt at reinvent­ing itself as a family­friendly resort in the1990s, it has now tried to return to its rootsas Sin City; one of its more famous adver­tising campaigns promises that �what hap­pens in Vegas, stays in Vegas.� It remainsthe only place in America where punterscan legally bet on sports. Yet just as the riseof other forms of gambling threatenshorseracing, so Las Vegas now faces com­petition from other venues. Native Ameri­can casinos abound. And despite UIGEA,so do opportunities for online gambling.

The �nancial crisis has done its bit tomake life harder. In May this year Nevada’sunemployment rate had climbed to 14%,the highest in any state and far above thenational average of 9.7%. In 2008 hotel­ca­sinos provided only 16% of the state’sjobs�nearly seven percentage points few­er than at the peak, in 1994. The state has

When the chips are down

Competition and the economic downturn have hurt, but Las Vegas is �ghting back

10 A special report on gambling The Economist July 10th 2010

2 tried hard to diversify, but gaming and tou­rism remain a big part of the economy, sothe drop in consumer spending in the pasttwo years has a�ected Nevada more thanmost other states.

The crisis hit at the end of a long periodwhen visitor numbers were growing fasterthan the number of hotel rooms. In 2004MGM Mirage announced plans for a mas­sive complex on the Strip, CityCenter, tocash in on rising demand. The cost rosefrom an initial estimate of around $3 bil­lion to over $9 billion. It opened in Decem­ber last year, adding 4,800 hotel rooms to acity already struggling to �ll the rooms ithad. By the end of 2009 the number of visi­tors was down 3% from the previous yearbut room numbers were up 6%, slashingthe occupancy rate. Equally alarming,gambling revenues in Nevada as a wholefell by over 10%, the state’s steepest­everannual decline.

Much of this is due to the broader eco­nomic malaise, in particular the drop inconsumer spending that accompanied therecession. But competition is also to blame.In 1987 the Supreme Court ruled that Na­tive American tribes could establish gam­bling operations on tribal lands even ifthose lands lay within states that prohibitgambling. The following year Congresspassed the Indian Gaming Regulatory Act,which created a framework of regulationfor such businesses.

Today more than 200 tribes run casinosin 28 states, including Nevada and Califor­nia (which supplies many of the visitors toLas Vegas). The biggest casino in America isFoxwoods, run by the Meshantucket Pe­quot tribe in western Connecticut; thatand the Mohegan Sun casino, run by theMohegans in Connecticut, are botharound two hours’ drive from New York,and much of their business comes fromday punters. The Pechanga Resort and Ca­sino in Temecula, California, between LosAngeles and San Diego, is closer to boththan is Las Vegas. In 2008 gaming revenueat Indian casinos was about $27 billion, a1.5% rise on the previous year, whereas LasVegas saw a drop. Proximity seems tomake a di�erence.

In addition to this direct competitionthere are smaller foes, too. Around 15 stateshave �racinos�, or slots parlours attachedto race tracks; and many of them o�er vid­eo poker, blackjack or craps, which arecomputer­based versions of popular tablegames. The federal ban on sports bettingoutside Nevada is beginning to crumble atthe edges: Delaware lost its appeal to allowsports betting but retains the right to take

bets on multiple professional footballgames, and a New Jersey state­senate pan­el recently approved legislation to allowsports betting in Atlantic City.

Yet none of this may be as damaging toLas Vegas as it appears. For one thing, mostpeople do not go there just to gamble: in2009, only 13% of all visitors and a mere 2%of �rst­time ones said gambling was theirprimary purpose for visiting�fewer thansaid they were coming to see friends orfamily, or for a holiday.

Give me glamourCertainly, holidaymakers can and do gam­ble�83% of visitors did�but Las Vegas of­fers a �gambling plus� factor that the raci­nos and slots parlours opening all overAmerica cannot rival. Aside from attrac­tions such as theatre, comedy and golf, LasVegas is full of associations (mobsters, theRat Pack, the World Series of Poker and soon) that no other destination can o�er. It isthe strangest and most fantastic city inAmerica, glittering in the middle of thedesert like a neon mirage.

Mr Adelson, the head of Las VegasSands and for some years the world’sthird­richest person, insists that he is not inthe gambling business, nor even in thegaming business (a distinction he and Mi­chael Leven, Las Vegas Sands’s president,consider important; the di�erence be­tween gaming and gambling, according toMr Leven, �is the di�erence between hav­ing a cocktail and going out drinking�).

As far as Mr Adelson is concerned, he isin the integrated­resort business. His twinhotels on the Strip, the Venetian and thePalazzo, combine thousands of hotelrooms, upmarket shopping (some of it lin­ing a Venetian streetscape, complete with apainted blue sky, canals and gondolarides), restaurants, spas, banquet halls,

convention centres and, of course, a casi­no. The casino is necessary to drive rev­enue, just as the convention centres are es­sential to attract business travellers whomay then decide to return for a holidaywith their families. But around 70% of hisrevenue, says Mr Adelson, comes fromnon­gaming sources.

The model of using casinos as just oneof many revenue­spinners also works forLas Vegas as a whole. In 2009 tourists onaverage spent around $75 a night on ac­commodation and stayed for 3.6 nights.They shelled out about $250 on food, justover $100 on shopping, $53 on transportand $45 on shows and sightseeing. The av­erage gambling budget was $482 (downsharply from 2005, when the average punt­er bet $627). Some 17% of visitors do notgamble at all. But even those who dospend more on other activities combined.

Having begun as a secluded sinning ha­ven, tucked away in the desert, Las Vegashas had to face the fact that its chief sin ono�er has become much more widely avail­able. But for casino owners it still has a bigadvantage: its gambling­tax rate is cappedat 6.75%. New Jersey, home to Atlantic City,o�ers an 8% rate, but most other places aremuch greedier. Sands’s only Americanproperty outside Vegas is in Bethlehem,Pennsylvania, where the state taxes grossgaming revenue at 55%.

The state of Nevada is more diversi�edthan it was two decades ago, but it is likelyto return to strength only as Las Vegas does,and Vegas’s fortunes depend on America’seconomy. If people have money in theirpockets, some will inevitably �nd its wayto the Strip. But there may be no need fornew hotel rooms for some time, andgrowth is likely to be �atter than in thepast. For runaway expansion in the gam­bling market, look east. 7

The light fantastic

The Economist July 10th 2010 A special report on gambling 11

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LIKE its sister property in Las Vegas buttwice as large, the Venetian Macao is

built for MICE�meetings, incentives, con­ventions (or conferences) and exhibitions.It has 3,000 hotel suites, a 15,000­seat are­na that has hosted concerts by Lady Gagaand the Police, expensive shops and res­taurants and a warren of immense gamingrooms. Next door is the Plaza Macao, fea­turing yet more gaming, shops and spas, aswell as a Four Seasons hotel and the grandresidential Plaza Mansions.

Mr Adelson, the owner of the complex,rejects the traditional �hub and spokes� ca­sino­hotel design that forces guests to passthrough the gaming �oor to do anythingoutside their hotel room, just in case theyfeel a sudden urge to chuck some moneyinto a slot machine. His Plaza Macao has aseparate entrance to the Mansions andFour Seasons, a long way from the gaming�oor. This is for the bene�t of Chinese gov­ernment o�cials, who may not be photo­graphed in a gambling environment.

Macau is the world’s biggest gamblingmarket, and until 2001 it was entirely con­trolled by one company, Sociedade de Tu­rismo e Diversões de Macau (STDM), head­ed by Stanley Ho. Mr Ho’s garish pair ofcasinos, the �agship Casino Lisboa and thenewer Grand Lisboa, remain the mostprominent gambling establishment in cen­tral Macau, but he now faces sti� competi­tion from a pair of seasoned Las Vegascompanies, Wynn Resorts and Sands Chi­na, a subsidiary of Las Vegas Sands, as wellas China’s Galaxy Entertainment Group.

The contrast between Mr Ho’s �agshipsillustrates the way that Macau’s gamblingmarket has evolved. Casino Lisboa issmall, tightly packed, loud and smoky.Nearly all of the gaming �oor is taken upby tables o�ering Macau’s two most popu­lar games: baccarat�in which punters beton the turn of a card�and sic bo, in whichthey bet on the value of three rolled dice.Both involve about as much skill as bettingon coin �ips. The Grand Lisboa, by con­trast, has craps and blackjack tables, a pok­er room, a sports book, a number of restau­rants ranging from the upmarket to anexcellent noodle shop, and hundreds ofslot machines. However, on a recent visitthe sportsbook stood empty and unat­

tended; a single poker table was occupied;blackjack action was scant; four employ­ees stood around a craps table enticingpassers­by to try their luck. By contrast bac­carat and sic bo were going at full tilt. Oldgambling habits die hard.

The competition from Messrs Adelsonand Wynn ended Mr Ho’s monopoly(though his company still accounts forabout one­third of the territory’s gamblingmarket) and boosted Macau’s overall rev­enue. Last year the island’s 30­odd casinosgenerated income of around $15 billion.According to GBGC, a consultancy thatspecialises in the gambling industry, itsoverall gambling revenue in that year roseby nearly 10%, whereas North America’sfell by 7% and Europe’s by 12%. And Macaois going from strength to strength: in the�rst quarter of 2010 its gambling revenueswere 57% up on a year earlier.

Mainlanders’ playgroundThe Chinese are known as passionategamblers, and Macau is where they cometo play. Steve Jacobs, the head of SandsChina, reckons that four­�fths of his visi­tors hail from the mainland and the restmainly from other Asian countries, nota­bly Taiwan, South Korea, Vietnam and In­

dia. Most of the Venetian Macao’s revenuecomes from wealthy guests, many ofwhom are on junkets organised by busi­nesses in China that market them to visi­tors, plan the travel and extend credit togamblers. The casinos provide the gamingand generally split the proceeds with thejunket operators.

Chinese visiting rights, however, aretightly controlled by the government.Mainlanders need a visa to go to Macau,and the authorities are apt to change thefrequency and duration of permitted visitson a whim. Last year, after a number ofembarrassing stories about governmento�cials using public funds to bet in Ma­cau, mainlanders were limited to one visitevery three months. Even so, Mr Jacobssaid that visa restrictions are �one of thethings I think least about�: the Chinesegovernment is clearly happy maintainingMacau as a source of steady gambling rev­enue, close to but politically separate fromthe mainland. And with a population ofover 1billion, mainland China has enoughpeople to keep the visitors coming despitethe restrictions.

In fact, Macau draws so many puntersthat casinos are literally rising from the sea:the Venetian and the Plaza anchor a devel­

The dragon’s gambling den

Macau is only the start: all Asia is coming out to play

Gambling markets don’t come bigger

12 A special report on gambling The Economist July 10th 2010

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opment known as the Cotai Strip, built ona �ve­kilometre piece of reclaimed landthat links the two Macanese islands of Co­loane and Taipa. The �Cotai� part of thenew plot’s name comes from the �rst sylla­bles of the two islands; the Strip part of it isclearly meant to evoke Las Vegas. Galaxyopened the Grand Waldo, the �rst resortthere, in 2006; the Venetian and Plaza fol­lowed soon after and will be joined by twomore Sands developments. There will alsobe new hotels from Ra�es, Conrad, Hilton,Sheraton, Swissotel and St Regis.

Busting out all overThe Cotai Strip may be the most high­pro­�le gambling development in Asia, butthere are plenty of others. In the past fewmonths Singapore has seen the opening oftwo large integrated resorts, Resorts WorldSentosa and Marina Bay Sands, which cost

about $10 billion. The Philippines Amuse­ment and Gaming Corporation (PAGCOR)has launched a hotel­and­casino complexon a large chunk of reclaimed land in Ma­nila Bay. According to PAGCOR, its part­ners in the venture�Australia’s Blooms­bury Investments, Malaysia’s GentingGroup and Aruze, a Japanese companyknown mainly for its pachinko and slotmachines�each stand ready to invest $2billion­3 billion in the venture.

In 2008 the government of Vietnamgranted Asian Coast Development, a Ca­nadian company, the right to construct �veintegrated resorts on 169 hectares of beach­front land near Ho Chi Minh City. The �rstof them, the MGM Grand Ho Tram, isscheduled to open in 2013. In Bavet, Cam­bodia, south­east of Phnom Penh, the$100m Titan King Casino opened in Febru­ary this year. It joins a number of other

Cambodian casinos near the country’sborders with Vietnam and Thailand. In Ja­pan the only legal forms of gambling at themoment are pachinko, the lottery andhorseracing, but that could soon change.Mr Jacobs predicts that if the Japanesemarket were to open up, it would be �ve toten times the size of Macau’s.

Yet many Asian governments, for alltheir eagerness to get their hands on moretax revenue, still remain ambivalent aboutgambling. Singapore charges its own citi­zens S$100 ($72) to enter its casinos but for­eigners pay nothing. Only one of South Ko­rea’s 14 casinos is open to the locals.Egyptian and North Korean casinos toowill happily take foreigners’ money yet bartheir own citizens. China rations main­landers’ access to Macau. On the Chinesemainland the only legal form of gamblingis a thriving lottery. 7

ON A cool and clear spring Friday night,in the basement of an anodyne o�ce

building in the Paris suburb of Boulogne­Billancourt, about a dozen people tooktheir places to go through the weekly ritualof making one European rich beyond hiswildest dreams. Tumblers were spun,numbered balls drawn, pearly white teeth�ashed, breaths held�but in the end therewas no winner in that week’s EuroMil­lions draw. The ¤79m ($100m) jackpot wasrolled over to the following week, whenthe prize went up to just over ¤100m($125m) and the draw produced a singlewinner, from Britain. It was the biggest lot­tery windfall in British history, though stillnowhere near the world record, a stunning$390m split between two tickets in anAmerican Mega Millions draw.

EuroMillions is run jointly by the Fran­çaise des Jeux, Loterías y Apuestas del Es­tado and Camelot, which operate theFrench, Spanish and British lotteries re­spectively. It is open to players in Britain,Ireland, France, Spain, Luxembourg, Aus­tria, Belgium, Portugal and Switzerland;measured by the number of players, it isthe world’s biggest lottery. During theweek of the missed draw last spring some26m Europeans bought tickets. The drawtakes place in Paris every Friday night be­tween 9pm and 10pm; it is recorded and

sent to the participating countries, whichwork the footage into their own presenta­tions. The prizes are tax­free and handedover at once and in full, whereas in Ameri­ca the prizes are taxed and the winners aregenerally given the option of receiving thefull amount in yearly instalments or a por­tion of it as an immediate lump sum.

Like most modern lotteries, EuroMil­lions funds good causes of many kinds.But that is not what gets people excited.What the lottery sells, according to Chris­tophe Blanchard­Dignac, the head of Fran­çaise des Jeux, is a dream. That dream is ofgreat personal wealth, even if the lottery isperhaps the only game in the world inwhich your chances of winning are notgreatly increased by playing because theodds are so long.

Enduring allureAnd yet lotteries have been perhaps themost enduring form of gambling. Slot ma­chines are an outgrowth of the IndustrialRevolution; card and dice games go in andout of fashion (who now bets on Hazard orFaro, popular in the 18th and 19th centu­ries?); the patterns and subjects of sportsbetting vary widely between countriesand cultures; but the idea of taking a small�utter on a chance of immense richesholds almost universal appeal.

Historically, large­scale lotteries haveserved two purposes: encouraging com­merce in cash­poor societies and contrib­uting to civic welfare. In 1522 a Venetiandealer o�ered punters the chance to wincarpets in a draw for a small entry fee. Twocenturies later lotteries in colonial Ameri­ca provided a mechanism for selling indi­visible, expensive pieces of property.Thomas Je�erson approved of this meth­od �where many run small risks for thechance of obtaining a high prize�.

Proceeds from lotteries helped to fundrepairs to the Cinque Ports on the Sussexand Kent coasts, and to build WestminsterBridge. They also generated �nance forsuch notable American institutions as Co­lumbia and Yale universities and Williamsand Dartmouth colleges. George Washing­ton called gambling �the child of avarice,the brother of iniquity and the father ofmischief�, but Benjamin Franklin organ­ised a lottery in Philadelphia in 1746.

The modern French lottery began in1933 to help people who had been wid­owed, orphaned or injured in the �rstworld war. Today Française des Jeux �­nances French sports; its contributions ac­counted for more than 80% of the budgetof the Centre National de Developpementdu Sport in 2009. In Britain, where morethan 70% of the adult population play reg­

Come, all ye gullible

Lotteries are a bad bet, but everybody loves them

The Economist July 10th 2010 A special report on gambling 13

2

1

ularly, Camelot has distributed more than£24 billion to good causes since its �rst lot­tery draw in 1994, including sport, arts, her­itage and education.

Education is also a main recipient ofAmerican lottery largesse. California’s lot­tery has been giving 34 cents in every dol­lar to public schools since 1984. Arkansasstarted its lottery in 2009 with the expressaim of funding scholarships for the state’sstudents and universities. And in Georgialotteries have provided over 1m residentswith scholarships to go to college.

The respectable face of gamblingThis tradition of civic support may be onereason why lotteries are more widely ac­cepted, and therefore more accessible,than other forms of gambling. The WorldLottery Association has members fromover 90 countries. Most American stateshave lotteries, and even in some of thosethat do not, residents can still buy tickets inthe two multistate lotteries, PowerBall andMega Millions.

Lotteries also hold their appeal well intough times. They account for nearly one­third of the global gambling market, withsales expected to rise this year as the betson o�er grow more diverse: not just scratchcards and number draws but also onlineand mobile o�erings, a small but increas­ingly important business.

Money taken from the general popula­tion and used by the government as it sees

�t is also known by another name. HenryFielding hit upon it in his ballad­opera�The Lottery�, written in 1731: �A Lottery isa Taxation,/Upon all the Fools in Cre­ation;/And Heav’n be praised,/It is easilyraised,/Credulity’s always in Fashion:/For,Folly’s a Fund,/Will Never Lose Ground,/While Fools are so rife in the Nation.� Ac­cording to the National Conference ofState Legislatures, in 2006 American lotter­

ies generated nearly $17 billion in revenuefor state governments. The chance of win­ning the Mega Millions jackpot is aboutone in 176m. For comparison, an individ­ual’s chance of being struck by lightning isaround one in 750,000.

And if lotteries are a tax, they su�erfrom being regressive. A study carried outin 2009 by Theos, a British think­tank,found that poor Britons spent a greater partof their income on lottery tickets, particu­larly scratch cards, than rich ones. In SouthCarolina, households with incomes of lessthan $40,000 a year account for 28% of thestate’s population but more than half of itsfrequent lottery players.

More than one American in �ve thinksthat buying lottery tickets constitutes asound retirement plan, according to a TaxFoundation study. And research carriedout by the Federal Reserve Bank of St Louisin seven American states found that muchof the money spent on lottery tickets camefrom some form of government assistance(such as social security, unemployment ordisability bene�t).

Buying a lottery ticket may be a foolishbet, but given that people are so willing toplay, it is unrealistic to ask governmentsnot to back the game. European enthusi­asm for lotteries has already led Françaisedes Jeux, Camelot and MUSL, which runsMega Millions and Powerball, to start plan­ning for a global lottery, with a tentativelaunch date of 2012. 7

Highly improbable

IN 1950­51 a US Senate commission head­ed by Estes Kefauver, a senator from Ten­

nessee, investigated organised crime inAmerica. It came out strongly against lega­lising gambling. �The availability of hugesums of cash and the incentive to controlpolitical action result in gamblers and rack­eteers too often taking part in government.In states where gambling is illegal, this alli­ance of gamblers, gangsters and govern­ment will yield to the spotlight of publici­tyðbut where gambling receives a cloakof respectability through legalisation,there is no weapon which can be used tokeep the gamblers and their money out ofpolitics.� In other words, not only is gam­bling a vice; gamblers themselves are aninherently corrupting force.

That view has a long history. SomersetMaugham called Monaco �a sunny placefor shady people�. At the time of the Kefau­ver investigation the same could havebeen said of Las Vegas. Yet as Moe Dalitz, amobster from Cleveland who owned theDesert Inn, quipped when a friend askedhim about his clubs, �how was I to knowthose gambling joints were illegal? Therewere so many judges and politicians atthem, I �gured they had to be all right.�

Needless to say, betting is not limited toits legal enclaves; as with drugs today andalcohol in America 90 years ago, prohibi­tion largely fails. It is impossible to say howmuch Americans spend on illegal betting,but estimates run as high as $380 billion.The internet has made such betting easier,

though unregulated sites, often run by o�­shore crews, carry their own dangers.

Legalising gambling certainly has itscosts. Crime and pathological gamblingtend to be higher in areas with casinos.America’s National Council on ProblemGambling estimates that 1% of Americanadults are pathological gamblers and an­other 2­3% have problems controlling theirhabit. In Britain some 0.6% of the popula­tion are thought to be problem gamblers, astatus associated with being in poorhealth, single, separated or divorced and­having fewer educational quali�cationsthan others. Problem gamblers are alsomore likely to be unemployed and to com­mit crimes.

Gambling will always draw opposition

Sure thing

People will keep on betting, legally or illegally. It makes sense to tidy up the rules

14 A special report on gambling The Economist July 10th 2010

2

Previous special reports and a list offorthcoming ones can be found online

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Future special reportsEgypt July 17thLatin America September 11thForests September 25thThe world economy October 9thTurkey October 23rdSmart systems November 6th

on moral grounds. Taylor Branch, a histori­an and a supporter of the Stop PredatoryGambling coalition, argues that state­sponsored gambling (lotteries and slots) is�a corruption of democracy because itð[tricks citizens] into thinking they are go­ing to get rich, but they are really going tobe paying my taxes.� Opponents also ar­gue that it encourages addiction�a dispro­portionate amount of revenue from slotsand lotteries comes from frequent play­ers�and relies upon the immortal hope ofgetting something for nothing.

Yet arguing that states encourage addic­tion by legalising, taxing and regulatinggambling is akin to arguing that they en­courage alcoholism by legalising, taxingand regulating alcohol consumption.Some people bet too much, some peopledrink too much, but most are capable ofdoing both in moderation, and the stateshould not stand in their way.

Still, creating a regulatory regime willnot be easy, particularly given the rapidchanges now sweeping the industry. LasVegas took the better part of a century toextricate itself from the control of organ­ised crime. That history has colouredAmerica’s attitude towards online gam­bling and caused it to proceed more cau­tiously than most European countries.

But using that history as an excuse forinaction or blanket bans of online gam­bling would be a mistake. The days whenmobsters could �y planeloads of cash be­tween Las Vegas, Miami and Switzerlandare over. Unlike wads of cash, money wa­gered online leaves a clear audit trail. Cus­tomers are at risk today not from bettingonline but from betting through unregulat­ed sites located in foreign jurisdictions thatleave them no recourse when they arecheated, and which themselves have pro­ven vulnerable to cybercrime (notably ex­

tortion by botnets, which attack the siteand block bets during high­pro�le sportingevents). Properly overseen and regulated,online gambling should be no more sus­ceptible to fraud and money­launderingthan e­commerce in general.

The days of blanket bans in Americamay be ending anyway. There is growingdiscontent with federal interference inwhat should be an issue for the states. Del­aware challenged the federal ban on sportsbetting unsuccessfully; New Jersey is gear­ing up for another run, and is considering areferendum to make online gambling legalin that state for its own residents.

Attitudes in Europe have ranged fromthe permissive to the strongly opposed,which has made it hard to align gamblingrules to create more of a single market.There have been calls for harmonisation,but the European Court of Justice does notseem to have pursued a consistent line,which makes Mr Barnier’s call for a green

paper all the more welcome. China appears content to send its gam­

blers o� to Macau. The idea of fencing o�the activity appears to be gaining supportacross Asia, whether by placing casinos inremote places, as in Cambodia, or bycharging citizens for entry but allowing for­eigners in free, as in Singapore.

Look at it rationallyBritain seems to have found the right bal­ance between paternalism and permis­siveness, recognising that people whowish to gamble will do so�particularly to­day, when all they need is a computer, abroadband connection and a credit card.Ensuring that they are not cheated requiresregulation, rigorous oversight and a com­mitment to an open and competitive mar­ket. All of these things are to the good.

Many people would disagree. But theywould do better to try to persuade their fel­low citizens to spend their money morewisely than to appeal to governments toenforce crude bans. On the face of it thatshould be easy: the most popular forms ofgambling�slots, lotteries and casinogames�are simply bad bets which playersare likely to lose.

But rational individuals should not beprevented from indulging in the odd spec­ulative wager, whether on a lottery ticketor in the housing market. Governmentsaround the world increasingly seem to re­cognise this (or at least they seem to like therevenues that �ow from regulated andtaxed gambling). Globally, online as wellas in the world of bricks and mortar, thetrend is toward greater legalisation and reg­ulation. Civil libertarians will rejoice. Thehouse will still win. 7

A kingdom for a horse

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