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A New Threat

Internet sweepstakes cafes have none of the safeguards of the gaming industry

In the midst of traditional and online gaming expansion taking place across the country, a relatively new phenomenon known as internet sweepstakes cafés is growing rapidly in various states. Sweepstakes café proprietors claim that these under-the-radar businesses don’t constitute gambling, and would like to continue to operate without the accountability of normal gaming establishments.

But as the old saying goes: If it walks like a duck and sounds like a duck, it’s a duck. These facilities are the latest in a long history of attempts to pass off a gambling product as non-gambling, at the cost of putting consumers and the gaming industry’s reputation at risk. If they aren’t controlled, states, existing gaming businesses and consumers all stand to lose—and lose big.

Often existing in a legal gray area or under the guise of charitable gaming, internet sweepstakes cafés undermine existing state gambling policies and pose a threat in a number of ways.

First, there are no standards or regulations in place to ensure the integrity of internet sweepstakes games, including the odds. Neither are there standards in place to prevent underage gambling or promote responsible gaming.

Additionally, sweepstakes café revenues are not subjected to separate gaming taxes that apply to other forms of privately owned and state-licensed gambling businesses.

Finally, these businesses, whether intentionally or not, have the very real potential to cannibalize the market for existing state-sponsored and regulated gambling of all types, from lotteries to tribal and commercial casinos.

Here’s how they work. At a typical internet sweepstakes café, usually located in a strip mall storefront, a customer might walk in and buy a phone card with prepaid minutes at a discounted rate. In addition to the minutes, the phone card is loaded with points—points that are then used as credits when the customer sits down at a computer or console to play games such as video slots, keno or poker.

The customer may win points at the conclusion of the games, though the outcome of the game is predetermined by the card, not anything the customer does. These points can eventually be redeemed for cash or used to buy more phone cards (with more points to continue playing).

The setup varies by state—available games may differ or some other form of credits or coupons may be sold instead of phone cards—but the overall structure is the same: Customers play games and redeem cash payouts that may reach into the hundreds or thousands of dollars. In most cases, the phone cards or other accompanying “products” are generally discarded or unused.

Internet sweepstakes cafés are proliferating quickly, and have become quite lucrative. Florida has more than 1,000 establishments. Ohio alone is home to 772, and North Carolina has more than 1,000 machines at 34 facilities. Bloomberg Business Week recently estimated that national revenue for the cafés exceeded $10 billion in 2011.

In all, sweepstakes cafés likely exist in well over two dozen other states. Political action committees representing the businesses are being formed as the industry becomes more entrenched.

By and large, law enforcement, courts and legislatures have not yet adequately addressed the legality of internet sweepstakes cafés. In places where local governments are licensing them, they do so with widely varying standards. In some states, local law enforcement has tried to shut down the facilities, only to have judges later say they are legal.

In the meantime, new sweepstakes cafés continue to pop up in new states and localities at alarming rates. If proper steps aren’t taken to reverse this growing trend, the growth of

sweepstakes cafés will continue, putting government-sponsored gaming and consumers at increasing risk.

The AGA is taking a number of steps to address the proliferation of internet sweepstakes cafés. First, the AGA is publishing a detailed white paper on the topic. The paper will include thorough information on the history of sweepstakes cafés and how they operate. It also will outline legislation and legal activity that already has taken place.

Finally, it will address the legal arguments against sweepstakes cafés and offer expansive definitions for the prohibition of the machines through state law. The paper will be distributed to industry leaders and key decision-makers across the country, including lawmakers and regulators.

In addition, the AGA will work with our member companies and state associations to educate state lawmakers and other stakeholders about internet sweepstakes cafés and the risks they pose.

We will encourage states where sweepstakes are currently present to outlaw them and states where they are not currently present to enact laws and regulations preventing them from opening. Pennsylvania is an example of a state that has passed an admirable, thorough statute prohibiting internet sweepstakes, proving that there is a model of effective legislation for achieving our goal.

I encourage all those working in the existing gaming industry to be mindful of the growth of internet sweepstakes cafés and to join our efforts to stem the growth of these unregulated establishments. They threaten our business and consumers alike, as well as the reputation for integrity and compliance our industry has worked hard to earn.

Be on the lookout for our white paper coming soon, and I look forward to keeping you abreast of our activities as this coordinated effort continues.

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