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This Week in Gambling
Several months ago, I wrote a post about the Brendan Sorsby situation. That same week, the Pennsylvania Supreme Court issued a ruling that prohibited PA Skill Games. Tomorrow, all such games must be removed from establishments that operated them, and enforcement is expected to be thorough and severe. First, some background. In 2006, the state legislature passed a bill legalizing gambling in the state. This was largely a response to West Virginia having legalized slot machines some years prior. Large casinos had been built at Mountaineer Racetrack outside Weirton and Wheeling Island, both a short drive from Pittsburgh, and lawmakers saw the number of PA plates in the parking lots as tax money that could be staying in the state. West Virginia offered a cautionary tale, however. While the racetrack casinos drew the tourism, there were also slot machines in bars, gas stations, and dedicated "hot spots" throughout the state. The legislature did not want this outcome, and the slot machines were strictly regulated, with license eligibility limited to existing racetracks and a few preselected locations. For example, in the western part of the state, The Meadows in Washington and Presque Isle Downs in Erie would get licenses for casinos at racetracks, and a license for a casino in Pittsburgh would go up for bid.
Since this was sold to the public as a revenue thing, the slot machines were heavily taxed; 52% is the going rate. The money was supposed to go to property tax relief, but in typical PA fashion it just went to the general fund. West Virginia responded by authorizing table games, and PA quickly followed suit. Addicted to the revenue, further expansions were in the offing. There was also a Class 3 "resort" license that was only available for resorts, with patronage limited to resort guest. The definition of "guest", however, meant someone who spent at least $10 at the resort, and Nemacolin Woodlands in the Laurel Highlands opened a casino that simply charged a $10 admission fee to confer guest status on anybody. When the US Supreme Court allowed states to implement sports gambling, PA was among the first states to do so, in a bill that also legalized online gambling for good measure. Then they dropped the resort farce (so Nemacolin could stop charging admission) and authorized a new stand-alone casino in an old Sears store at Westmoreland Mall in Greensburg. And this is just what affected the western part of the state.
Meanwhile, "PA Skill Games" became a thing. These had been operating to a limited extent for a while, but became especially prominent after the pandemic. A PA Skill Game is a machine similar to a slot machine but which includes a skill element so as to obviate the need for a slots license. These popped up like weeds in bars, private clubs, gas stations, and even grocery stores, some of which rely on them for a substantial share of their revenue. For all intents and purposes, they're slot machines. They look like slot machines, they play like slot machines, and they pay like slot machines. The only difference is the "Follow Me" feature. The way this works is on a losing spin, a small button that says "Follow Me" appears somewhere on the screen. Pushing the button leads into a mini-game where you can win 105% of the amount bet. This consists of a Simon-like memory game that involves memorizing a progressive sequence of 25 steps. Since this feature ensures that a sufficiently skillful player can win every time, the manufacturers argued that it was not a game of chance, like a typical slot machine, but a game of skill.
Regardless of the general public's opinion on the proliferation of what were essentially gambling devices, those who took the greatest offense to the situation were the licensed casino operators. Here they were paying 52% tax and operating expensive casinos, only to have their customers stolen by mom and pop operations that weren't paying a dime to the state. No license, no tax, no regulation. So they sued. Lower courts, however, ruled that since they were incorporating a skill element that allowed players to theoretically win money on every spin, no license was needed. The case made it to the state supreme court, however, and on June 15, they issued a long, reasoned opinion that effectively boils down to "Are you fucking kidding me?" They first went back to an old case and noted that just because a game involves some element of skill doesn't mean it isn't a game of chance. The case involved video poker, whose manufacturers argued was a skill game because the player had to pick which cards to draw. True, the court had ruled, but the outcome was still determined by the initial deal, so no dice. The skill games tried to get around this, however, by making it so that, with sufficient skill, one could win every time, where one couldn't guarantee a payout on a video poker machine.
The court was not impressed with this argument. The Follow Me feature was so obscure that most players didn't even know it existed, and it was rarely used. To give a sense of what was involved, getting through the whole sequence took approximately 15 minutes and included several mandatory break periods. If a player made it through to the end and "won", he'd recover 105% of his bet; since the maximum bet was $4.00, one would be betting $4.00 to win $0.20. Betting the max and successfully playing the skill portion every time, the expected payout was less than a dollar an hour, assuming, of course, that you aren't expected to hit one in every four spins or more. On the other side of the coin, the minimum bet was 8 cents, and most players were risking nowhere near $4.00/spin. As the court put it, the Follow Me feature was implemented for the lawyers, not the players. The entire concept was ridiculous, a blatant attempt at circumventing the state's gambling laws.
Sensitive to the fact that the machines were everywhere, the court stayed enforcement of the ruling for 120 days. At the least, this would give businesses time to comply with the ruling before they got busted. At the most, it would give the state legislature time to legitimize the machines. I spoke with a number of bar owners who told me of several proposals that were in the works. The most common one involved an annual $1,000 fee per machine (in some versions of the story it was $500). The problem was that this was evidently nothing more than bar gossip. No bills had been introduced, and I couldn't even find a quote from a lawmaker suggesting that as a solution. It was anticipated that legislation would make its way into the annual budget bill, the most obvious place for it. The state typically passes a budget at the beginning of July for the following fiscal year. By "typically passes", I mean there's usually a budget impasse that takes months to figure out. Maybe Republican lawmakers would reach a compromise on PA Skill Games so the Democrats could get spending increases? Turns out we had the rare year where a budget sails through without controversy. Shapiro signed the budget bill into law on July 12, and the legislature (whose term technically doesn't end until December) went on vacation.
When they returned in September, there was still nothing in the offing, not even statements from legislators. The local news would interview bar owners who would whine about the lost revenue if nothing was done, but nobody was willing to put a proposal on the record. As the deadline drew near, a few bar owners held out hope that the imminent enforcement would spark the legislature to get off their ass, but at this point they seem resigned. Last week, a bar manager told me that they were leaving the machines in until they had to be gone, not because a couple days worth of the revenue would mean that much, but because the degenerates who played them would go to another bar that still had them, and might not come back. Last night, the owner of a different bar I was at got a call tipping him off that the law will be vigorously enforced tomorrow and that if he thinks he can slip under the radar, think again (before PA Skill Games, plenty of bar owners had illegal slot machines for years without being caught). He had already removed his.
I'm generally against the way those machines have proliferated and turned Pennsylvania into something we were promised it wouldn't become way back in 2004, but I'm still sympathetic to the small businessmen who are losing revenue. That being said, the question arises of why the legislature was so hesitant to do anything. I didn't necessarily expect them to pass legislation legalizing the machines, but I did expect some kind of concrete proposals, some suggestions, something. The best I got was from bar owners who told me what they heard from other bar owners. My theory is that there's no obvious partisan position on this issue, and a number of traps for legislators to step in. Back in May, Camera Bartolotta was defending her state senate seat against challenger Al Buchtan in the primary. I did a writeup here after the election about how they were still trying to out-Trump each other (which seems to have backfired since Bartolotta, who is one of the more effective members of the Senate, is now in danger of losing her seat to an Independent in a heavily Republican district). What I didn't mention is that the attack ads also focused on who was in whose pocket. Buchtan ran ads attacking Bartolotta for taking money from the casinos. These ads were, of course, funded by Pace-O-Matic, a PA Skill Game manufacturer. The court that ruled the games illegal is majority Democrat, but Republicans on the court went along with the decision, and the AG promising vigorous enforcement is a Republican.
After the election, Bartolotta made her stance clear, that she was against the skill games that proliferated in low-income communities and took advantage of the poor, but her dirty laundry had already been aired. The same can't be said for the rest of the incumbents facing reelection. Any lawmaker who takes a stance on the issue will immediately be accused of being on the payroll of one side or the other. With no default ideological angle to fall back on, such accusations will be difficult to dispute. It may not be the hottest-button issue—Bartolotta is vulnerable due to her past support for data center tax breaks—but it's still an unnecessary risk. The most we got was a statement from Senator Wayne Fontana in September proposing that clubs and fraternal organizations be permitted to keep up to 5 machines until the end of next year. A weak proposal for an extension from a Democrat who is running unopposed. It's telling that Fontana never actually introduced this legislation and instead proposed it during a radio interview. During the same issue, he said that it was unlikely that the legislature would take up the issue before the stay expired, though they may take it up next year, which explains the sunset provision in his proposal. It also explains that they don't want to go on the record regarding the skill game issue. As the Attorney General's warning indicated that the machines must be returned to the vendors and not merely unplugged, the PA Skill Game era is now over, as I doubt any bars are going to risk having them on-site tomorrow. Whether a new era will dawn remains to be seen, but I'm not holding my breath.
Thought this was going to be an article on PA doing something to get rid of gambling. I don’t know anyone intelligent who thinks what we’ve created is a good thing. It’s just a waste of resources that ruins the life of 1% of the population. On the real resources side it pulls out like 500-1k MIT math whizzes profiting from online market maker who could be do something like working for SpaceX.
The founding stories of the main firms is interesting because the best I can tell they were guys who read Robin Hanson papers and thought maybe we can be a useful product for society. The companies do very little for a decade and then suddenly they can be used for gambling and their like well let’s just get rich.
I mean it was kind of a snowball effect where the concept has been tried a lot historically in other areas and just kinda fails since the vast majority of the money that fuels the gambling industry is the 'idiot rube' money and your Fanduel/Draftking can issue significant bonuses to the idiot rubes (since it's them versus idiot rube meaning they get say 50% of deposits once the state has had their levies) which a Prediction Market/Exchange can't really do due to only receiving a comparatively tiny slice of the turnover. Polymarket got some attention off the Trump phenomenon, then Kalshi essentially decided to wade into a space that previously everybody assumed was completely verboten due to the Wire Act (Betfair New Jersey existed in the 2010s but they weren't brave enough to merge the pools) and the legislators didn't move with anywhere near the coordination and vehemence that they would have a decade ago.
Now the major flows are essentially people from states that don't offer legal Online Sports Betting (California, Texas etcetera) offering their 'idiot rube' money onto Kalshi and Polymarket. However increasingly lax interpretations of what defines a 'prediction market' has resulted in the Draftkings of the world essentially aiming to replicate their offering through a 'We are a prediction market but we have a privileged relationship with our one marketmaker (who is also Draftkings) which allows us to vertically integrate and offer the bells and whistles we'd offer to OSB customers' model which is forcing the hand of the state legislators to actually litigate. Which suits the OSB-providers since they want either 'DK-Predicts is legal so we can redesign our business to sit on Prediction Market rails' or 'Prediction Markets are now banned/heavily-taxed so we go back to the historical status quo.
A lot of the initial employees of the Polymarket/Kalshis/earlier PMs of this era in the world were frankly over-optimistic idiots trying to make a product that has already failed on multiple occasions that just lined up with the perfect spot in regulatory half-assedness that allowed it to be viable for a couple years. This has also played out where a lot of those initial employees have now been sidelined inside of the businesses in favor of 'wagering people' who are a lot more familiar with the marketing abilities required.
Given that Robin Hanson worked at Oxford for a long time, I find the complete absence of discussion of the UK experience bizzare. The UK has always had much more legal access to less-harmful forms of gambling (primarily sports betting and low-stakes slots) than the US, and legal UK sportsbooks have always been allowed to take bets on almost anything. With the introduction of betting exchanges like Betfair, the UK has had fully legal prediction markets since 2000. And the only non-sports markets with enough liquidity to work were politics and "celebrity specials" like royal baby names.
Yeah I worked at the exchange for a bit. Love the product and the dream of it but I think they essentially already expressed everything a Prediction Market can be without very weird regulatory distortions like the current US situation
Above you said “over-optimistic idiots”. The amount of times I’ve thought that in tech and been wrong has been a lot. Sometimes right. The amount of societal value for real prediction markets seems high to me but I don’t see a customer. NGDP markets could be hugely valuable to the Fed, but who’s the customer? It’s more of a commons surplus.
Do you have any ethical issues being in gambling? I don’t hate all gambling - friendly poker games and fantasy football needs a little gambling to make it fun. Physical casinos seem to limit a lot of the negatives. The apps seem awful for society to me.
Corporatization of gambling seems like it’s been a bad thing to me.
I honestly started in the industry as a Betfair Exchange person who thought that the format just needed its time in the sport, but then I worked in a bunch of other parts of the industry and I came to understand more of how everything actually clicks together. The fundamental issue with Prediction Markets is that without 'idiot flow' there's no good incentive for anybody to participate at scale against other rational actors, and 'idiot flow' would generally be happier on other forms of Online Betting since they get substantial rebates for the same losses.
I was on the committee of the Cambridge University Poker Society during the Poker Boom, and a few online poker execs came to speak to us - partly to identify potential future employees (though none of us wanted to work for them), and partly to pitch sponsorship deals to the club. At the time the sites definitely wanted to sign up smart players and things like rakeback were set up in a way which would preferentially keep non-degens on the site. I think the realisation that the flow of money into the ecosystem is fish-limited and that the rake is competing with the pros to get the fishy money came when the overall market got worse post-boom.
Also, in the era of a small number of networks and many skins, a skin that preferentially attracted smart players would be able to free-ride off other skins on the same network signing up the fish, although that wasn't obvious to me at the time. The best sponsorship offers we got were from obscure sites feeding the Party Poker network.
Poker and horse racing are different than most casino games since they make their money from the rake and not from people losing. Since poker has a positive expectation if you're good enough, it will attract professionals who will bet larger amounts of money than the typical schlub looking to gamble. There are definitely high rollers who will drop large amounts on craps and whatnot, but unless you're operating a high-end casino you can't count on them the way Vegas seems to be doing these days. Poker sites keeping rakes low is just basic cost competition.
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