As one digs deeper into the innovation ecosystem in the gaming industry, the challenges presented by policies and regulations become more evident.
Gambling policies established by legislators form the framework on which the regulators build the rules that operators and suppliers need to adhere to. This is the case in every jurisdiction and it’s sometimes misunderstood by those in the industry, particularly startups who may be new to such a highly regulated environment. These policies and regulations apply to almost all aspects of the gaming process from gaming platforms to marketing to payments.
Let’s take the U.S. as a case study. Like many other countries, legalization and regulation for the gambling industry is done on a state level with little to no federal overlay. Tribal gaming is an exception due to the Indian Gaming Regulatory Act. In addition, the federal Interstate Wire Act, which prohibits interstate wagers from taking place, remains in force.
Rise in compliance costs a struggle for small companies
What that creates is a patchwork system of rules which has proved problematic, especially for those operators and suppliers who are now licensed in multiple jurisdictions. This is particularly challenging for internet gaming entities. Over the last decade, this has led to an influx of required compliance staff positions in private-sector companies and even the emergence of a whole new sector within the gaming industry. A number of compliance companies are now in place to make that job easier.
But, for a startup, that means not only additional staff but serious budget requirements for multiple state licensing fees and background checks in various jurisdictions. This represents a cost too high for many startups trying to get a foothold.
Attempts to get this centralized among a variety of jurisdictions is a topic for another article.
Well-intentioned regulations deter innovation
There are some ways to cut these costs. There was interesting discussion on this at the recent North American Gaming Regulators Association conference. For example, a game developer could enter into a commercial arrangement with another licensed gaming platform or aggregator to offer their games, which would possibly allow them to ride along on that umbrella company’s license. But, that startup game developer probably already had to spend money with a game testing company, for example, to get their game(s) tested, so they can’t dodge all of these required costs.
Another minefield that can stymie innovation is on the investor side. Many jurisdictions have thresholds that investors with “beneficial ownership” over 5% of the company must be licensed. For anyone who has gone through licensing, you know the cost, time and intrusive nature of the personal licensing process. That could hinder or limit qualified investors from putting in funds for a startup to get off the ground.
For some sectors of the industry like affiliate marketers or fantasy sports operators, they may choose to concentrate their efforts on jurisdictions that don’t require licensing, stepping into the breach of regulation but limiting the markets they reach.
I bring up these points to show that, if the industry is serious about fostering innovation, we may need to collectively look at tweaks to the current systems that are palatable to both the private sector and government regulators. Could a tiered system of licensing fees, for example, help startups manage their capital, allowing them to pay more as their company grows? This is all fodder for discussion and problem-solving to see how we can make some changes that will foster growth for innovation.
The stratification debate will never die
One other observation that I would throw into the mix on this topic. Having been in the iGaming/sports betting industry since 1995, I’ve always been intrigued by what I’d call the “stratification” in the industry.
Even when there was no regulation at all, there’s always been this phenomenon where one aspect of the industry feels that they’re more legitimate than another. At one point in the mid-2000s, some online casinos proclaimed that they were more legal than the sportsbooks. I usually countered by telling them to ask any state attorney general which they considered more legal or illegal. Take, for example, the Kentucky case in 2008 when the state came after online casinos and poker sites, which led to Flutter eventually settling for $300 million. It’s been an interesting trend to watch over the years.
Today, the heated debate over prediction markets seems to be history repeating itself (less so for sweepstakes, which clearly seem to be exploiting a loophole). The prediction market debate pits the regulatory systems of the federal government for “commodities futures” trading against the traditional state government regulation. This offered an end run around the Interstate Wire Act.
The point being, are these new activities flouting the law, exploiting a loophole or simply a new product innovation? We won’t know until the dust settles but we can already see that the patchwork will continue as different legislative efforts and gaming board actions play out.
