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All Together Now

What’s the difference between distributed gaming and skill games? Miles and miles and lots of lawyers.

All Together Now

Pennsylvania has evolved into a melting pot of slots. Larger casinos like Live! Casino & Hotel Philadelphia feature banks of traditional games. Truck stops carry up to five video gaming terminals, or VGTs, each. They look like slots. They play like slots. They are slots. But in industry parlance, they’re dubbed distributed games. And they’re completely legal.

Here’s where the melting pot gets a little dicey. Established companies such as Golden Entertainment, which handles distributed games in Nevada and Montana—and also operates casinos—have lobbied the state to expand the VGTs to bars, taverns and fraternal organizations, to replace the “gray” games that aren’t quite legal.

Casinos aren’t crazy about that idea, but they’re even more worked up about “skill” games, which on the surface also look like typical slots. Companies such as Pace-O-Matic design the software for these games and distribute them to bars, taverns and the like under the name Pennsylvania Skill. To the Pace people, the skill part is what it’s all about. Despite their appearance, they are not slot machines because slot machines depend on luck and Pennsylvania Skill games depend on, well, skill. Mostly skill, or so they say.

Casinos and VGT operators don’t buy it. They want Pennsylvania Skill banned since they are not regulated, do not pay gaming taxes, and take business away from operators that do, thus reducing the amount of tax revenue, thus reducing the amount available for worthwhile programs. The Pennsylvania Lottery echoes these complaints.

So far, courts have not ruled them illegal, but at the same time, they’re not strictly legal.

For Pennsylvania Skill and Pace-O-Matic, it’s us versus them, but the us part wants to join the them. Become regulated. Pay the gaming tax. Be just like the big boys of slots.

Born in the USA

If it sounds like this gaming stew is a microcosm of gambling’s future in the U.S., you may be right.

Nevada has more casinos than any place in the country, and lots of slots within the confines of these casinos. But visitors and locals could also play slot machines in grocery stores, taverns and other non-casino locales. Such distributed games have coexisted with casino slots for years. Golden Entertainment has carved out a nice business in both worlds.

Pennsylvania shares the slot duality with Nevada, but in limited doses. The addition of VGTs at truck stops was part of the Gaming Expansion Act, passed by the legislature and signed into law in 2017. To date, the Pennsylvania Gaming Control Board has approved 44 locations, each with a maximum of five games. There are nine others licensed and ready to go, and 24 applications in process. “Any truck stop that meets the qualifications is permitted,” says Doug Harbach, communications director for the board.

How well do they do? The Bald Eagle Truck Stop in Lock Haven produced revenue of $263,216 between January and April on a handle of more than $3 million. The store declined to comment for this story.

Golden Entertainment wants a piece of that pie by extending VGTs to bars, taverns and fraternal organizations—the kind of establishments served by Pennsylvania Skill.

“Golden is pursuing an expansion of the regulated VGT industry,” says Blake Sartini II, senior vice president of distributed gaming for the company. “It would add substantial tax revenue along with the casinos.”

This has not been met with enthusiasm from the casino industry. “Casinos have certainly expressed displeasure with elected officials on the original approval in the gaming act of 2017 and any movement toward expanding where these games can be placed,” Harbach says.

But the concern goes beyond Pennsylvania.

“We’re opposing the distributive gaming model in multiple states where it’s being considered, including Missouri, West Virginia and Ohio,” says Eric Schippers, senior vice president, pubic affairs and government relations for Penn National Gaming. “Expanding VGTs in bars and taverns across the state will have a profoundly negative effect on the existing casinos there, as we’ve seen in Illinois.”

Bad Actors

While lobbying efforts from Golden Entertainment are not a lock to succeed, the problem with Pennsylvania Skill is perhaps more complicated. They’re here already, by the thousands. Make no mistake. Pennsylvania Skill and Pace-O-Matic have few, if any, friends in the industry: Those friends do not include the Gaming Control Board, the casinos, the Pennsylvania Lottery, VGT supporters, the American Gaming Association (AGA) or the Association of Gaming Equipment Manufacturers (AGEM).

“Casinos are definitely on board with getting rid of unregulated games and machines that siphon off revenue from their locations and tax dollars for the commonwealth.” —Marcus Prater, Executive Director, Association of Gaming Equipment Manufacturers

No matter. They don’t see their product as games of chance, but games of skill. That distinction is what they hang their hats on to remain in business. But the distinction doesn’t hold much sway with the rest of the industry.

“Unfortunately, these machines are being placed in locations consumers are already visiting, like gas stations, convenience stores and bars or taverns,” says Jessica Feil, vice president of government relations and gaming policy counsel of the American Gaming Association. “They can prevent consumers from seeking out casino gaming for entertainment, which in turn undermines regulated gaming’s ability to grow tax revenue for states.”

Could the same be said for expanding VGTs to many of the same locales? Golden Entertainment has straddled two worlds. The company owns 10 casinos, nine of them in Nevada; the other is in Maryland. It owns over 16,400 slots, 120 table games, and 6,200 hotel rooms. Through its distributed gaming business in Nevada, Golden Entertainment operates video gaming devices at over 1,000 locations and owns some 60 taverns.

“We’re one of the largest distributed gaming operators in the country, operating more than 10,500 gaming devices across Nevada and Montana,” says Sartini, whose father launched the business. “Pennsylvania hopes to be added to the list. We are pushing for full expansion—bars, restaurants, fraternal organizations. It’s a very good opportunity to grow and help small businesses.”

Golden distributes games by IGT, Aristocrat and other traditional manufacturers.

Konami Gaming Inc. has a rich game heritage with a lot to offer this segment of the industry, especially for operators looking to diversify their portfolio, says Steven Cushing, senior product manager for the company. Konami views VGTs as an area for strategic growth.

“Distributed games are usually associated as residing in several venues, maintained by a route operator, depending on jurisdictional regulations. The route operator is responsible for game maintenance and updates. In most cases, VGTs have several titles in one cabinet, as space in these venues is often limited,” Cushing says.

Some markets offer progressives. “Must-hit-by” or “mystery” progressives are the most common, he says. “There is a trend toward more progressive jackpots. Larger wide-area jackpots across all venues also offer a new area of expansion.”

While Sartini wants his company to put games in many of the same kinds of locations as Pennsylvania Skill, he thinks the skill games should be stopped. “They’re deemed illegal and unregulated. If we did that our license would be in jeopardy.”

That whole “deemed illegal” thing has not yet been decided by the courts; Pennsylvania Skill and Pace-O-Matic have scored some victories.

“Regulated slot companies that have a presence at both casino and VGT locations are most certainly not the problem,” says Marcus Prater, executive director of the manufacturers association. “It’s the unregulated companies that continue to prey on the people of the commonwealth.”

To President Joe Lupo of Hard Rock Hotel & Casino Atlantic City, skill games are still gambling.

 “Any type of wagering should be regulated and approved through the regulatory body of the state,” Lupo says. “The wagers and the needed oversight of gambling ensures integrity; therefore, this type of game needs to go through the same methodology as any other wagering unit.”

Luck Versus Skill

Pace-O-Matic has so far succeeded in convincing courts they are not illegal because they are games of skill. Casino slots and VGTs rely on random number generators for the outcome. Luck, in other words. Pennsylvania Skill games do not, something executives point out as a reason they are not subject to gaming laws in the commonwealth.

A 2014 Beaver County case ruled in the company’s favor for that reason. A Commonwealth Court decision reinforced that decision. “The final decision on upholding our game’s legal status is currently in the Commonwealth Court. It is important to note that Pace-O-Matic is the entity that took action to uphold our legal status,” says Paul Goldean, chief administrative officer for the company.

The indecision in the courts over whether they are or aren’t games of chance sows confusion, Prater says.

“It leaves law enforcement confused on how to crack down on these machines,” he says.

Pennsylvania Skill games remove the element of chance and replace it with what spokesman Michael Barley called predominant skill. “Our games require the player to use the skills of patience, hand-eye coordination, memory and speed. Our games present options and choices,” he says.

Players have a number of combinations for puzzles to choose from. “You have the ability to preview the puzzles to see the combinations before completing the play,” Barley says.

They also have a timer to consider.

“Dragon Ascent” is more of a first-person shooter game where dragons fly in a pattern, Barley says. “The bigger the prize, the less time you have to complete the play. You have to pay attention.”

“Graveyard Gold” is played like tic-tac-toe, with graveyard icons instead of Xs and Os. The goal is to get three of a kind in a row—like tic tac toe. If the screen doesn’t show two of a kind across, down or diagonal, press a button for the next puzzle. Keep calling up a new screen until you reach a puzzle with two icons.

“If you can’t win every time, it’s not a skill game,” says Rick Goodling, compliance supervisor for Pace-O-Matic.

What Pace-O-Matic seeks is to have these games become a regulated part of the industry. A stamp of approval from Pennsylvania.

“We are engaging with members of the General Assembly in an effort to implement regulations and greater enforcement along with paying additional taxes to the commonwealth,” Barley says.

Pace-O-Matic operates in multiple states and is regulated in Wyoming, Georgia and the District of Columbia.

“Our estimate for state tax revenue from skill games in 2021 is close to $50 million, and $80 million if the economy opens fully,” says Peter Zaleski, a professor of economics at Villanova University and a consultant for Pace-O-Matic. Zaleski testified before the legislature last year in opposition to SB 1256, a bill that would all but stop Pace-O-Matic.

SB 1256 would prohibit skill games from offering cash to winners, just merchandise or food and beverage—as long as the value of said prize does not exceed the cost of playing the game.

“It would kill the skill game industry,” Goldean says about the legislation. The bill would ban skill games, legalize VGTs and prioritize the interests of large, out-of-state companies over Pennsylvania small businesses and manufacturers.

This year, SB 212 would do the same.

The Pennsylvania Lottery and the casino industry consider the games to be an unfair competitor that uses loopholes to avoid gambling taxes by claiming their games are skill-based when the skill doesn’t go much beyond the tap of a button. The lottery and casinos say Pennsylvania Skill also cuts into their business.

Pace-O-Matic disagrees on both assessments.

“We looked at annual lottery sales growth in Pennsylvania compared to a control group of New York, New Jersey, Delaware and Massachusetts, states where there are no skill games,” Zaleski says. “In 2018 and 2019, as the presence of skill games grew, lottery sales growth in Pennsylvania exceeded lottery sales growth in the control group states by an average annual rate of 2.2 percent.”

Zaleski says the introduction of Pennsylvania Skill games in 2015 also grew slot revenue in the casinos by 2 percent through FY 2019. But Gaming Control Board figures suggest otherwise. In FY2015/16 slot revenues topped $2.39 billion. While the revenue stream remained somewhat constant in the subsequent years, the revenue for FY2018/19 decreased to $2.38 billion.

Casino Control

“We would support legislation that makes clear slot machines, as defined in Pennsylvania’s Gaming Act and which includes skill games, are only legal in licensed casinos.” —Joe Billhimer, Executive Vice President, Cordish Gaming Group

Still, when it comes to casinos, the comparison with skill games is like comparing oranges and cherries.

“The typical skill game player is not a casino patron. Going to a casino is a different type of experience,” Zaleski says. On that point, Golden Entertainment’s Sartini agrees. Casinos offer an entire package while VGTs offers convenience.

The casino industry has helped investigators understand the difference between regulated and unregulated machines, connecting local prosecutors with expert witnesses and more, Feil says. “We also are striving to educate consumers and the media about legal gaming, so they understand the consumer protection and tax revenue benefits of legal, regulated gaming.”

Joe Billhimer, executive vice president, Cordish Gaming Group, which runs Live! in Philadelphia, says skill games and expansion of VGTs pose a threat to Pennsylvania’s gaming industry, cannibalizing the existing market.

“We would support legislation that makes clear slot machines, as defined in Pennsylvania’s Gaming Act and which includes skill games, are only legal in licensed casinos,” Billhimer says. “The integrity of gaming in the commonwealth has been maintained through some of the most stringent regulations in the country, and as such has resulted in more tax revenue than other businesses combined in Pennsylvania.”

Pace-O-Matic wants to see legislative efforts aimed at regulating its industry, not eliminating it. “Allow us to provide additional tax revenue, at a fair rate, based on the revenue our games generate. We also welcome additional enforcement and penalties aimed at cleaning up the illegal games and bad actors,” Goldean told a Senate committee.

But if regulated, Pace-O-Matic favors a tax rate close to that of table games at 16 percent rather than of slot machines in a state that charges online slots and sports betting at the slot tax rate.

“Our games do not rely on the utilization of random number generators and compensating algorithms to control the ultimate result of the game play. The play is slower and requires skill, much like a table game at a casino,” Goldean says.

State Senator Robert Tomlinson, primary sponsor of SB 212, wrote there is no consumer protection provided through monitoring, to assist problem gamblers, regulate payout rates or ensure collection of taxes.

Sartini sees VGTs as an additional alternative avenue for much-needed revenue for the commonwealth. “An expansion of the regulated VGT industry would add that chance,” he says.

Prater was more blunt in his assessment. “Casinos are definitely on board with getting rid of unregulated games and machines that siphon off revenue from their locations and tax dollars for the commonwealth. But ultimately, there needs to be clarity from both the legislature and the courts so the tools are in place for law enforcement to eliminate the scourge of unregulated so-called skill games once and for all.”

Bill Sokolic is a veteran journalist who has covered gaming and tourism for more than 25 years as a staff writer and freelancer with various publications and wire services. He's also written stories for news, entertainment, features, and business. He co-authored Atlantic City Revisited, a pictorial history of the resort.

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