Skill Games Create Regulatory, Consumer Confusion In Key U.S. Gaming States

November 3, 2023
Unregulated skill-game machines are competing with legal gambling operations in several U.S. states, reducing state tax revenue from licensed gambling.

Unregulated skill-game machines are competing with legal gambling operations in several U.S. states, reducing state tax revenue from licensed gambling.

“Why it is an important topic, is that they have been around, but they continue to be around, and they continue to grow alongside the regulated gaming market,” said Daron Dorsey, executive director of the Association of Gaming Equipment Manufacturers (AGEM).

Dorsey said legal gaming is offered in almost every jurisdiction in the U.S., which is a major shift in the public’s attitude towards gaming over the last two decades. Over that time, he said, technology also has improved.

“So has the gaming technology in the regulated space improved,” Dorsey said. “So has the look, feel of the unlicensed or illegal machines in those markets.”

“It has blurred the lines because the public may not understand the difference,” Dorsey said Thursday (November 2) during an International Association of Gaming Advisors (IAGA) webinar focusing on the legal, grey, and illegal markets.

Dorsey added that many people see skill games, also known as grey-market machines, and notice they look just like the slot machines they can play at a regional casino or on a video lottery terminals (VLT) at a local tavern.

Jeff Morris, vice president of public affairs and government relations at Penn Entertainment, and Dorsey agreed that allowing a regulated gaming market brings jobs, tax revenue and direct and indirect economic impact.

“It’s a highly regulated, privileged environment” that continues to grow and “provide consumers a fair, integrity-filled product,” Dorsey said. “Those other machines don’t play in the same channel and so it has grown larger and larger.”

Dorsey said it will “only continue to become more of a problem than it is already unless and if something is done about it.”

Morris stressed that Penn Entertainment remains supportive of new legislation introduced in both chambers of the Pennsylvania legislature that would ban so-called Pennsylvania Skill machines by incorporating all forms of skill games under the definition of a slot machine in the state's Gaming Act.

On the opposite side, Senate Bill 950, sponsored by Republican Senator Gene Yaw, would require skill games to be licensed, regulated and taxed at 16 percent, or significantly less than the 54 percent rate applied to casino slot machines.

“They’ve become sort of a wild west and lawless environment. We are seeing this in multiple jurisdictions,” said Morris, adding that there are more than 80,000 unregulated machines in Pennsylvania.

Dorsey and Morris were joined by Michael Pollock, senior policy advisor at Spectrum Gaming Group, for the discussion moderated by Bill Gantz, a partner with Duane Morris. 

Gantz asked Morris if he had seen any efforts by regulators, law enforcement, or lawmakers in tackling the issue of skill games.

“It is a little bit of a mixed bag,” Morris said. “On the regulator and law enforcement side, some of them have their hands tied without any legislative action so that makes things a little difficult. Others have a little bit more leeway and have been proactive.”

Morris cited recent seizures of machines in Michigan and Missouri, specifically Platte County, as examples of regulators being able to confiscate the illegal machines. He also said the recent decision by the Virginia Supreme Court to lift an injunction on a ban on skill machines was a positive development.

“The tricky part here is that these are some litigious operators who have filed numerous lawsuits and have threatened to file lawsuits against a lot of folks,” he said.

On the legislative front, Morris highlighted Kentucky's earlier banning of the machines, even though Pace-O-Matic, one of the largest distributors of skill games, responded by filing a lawsuit claiming the ban passed in the last legislative session was unconstitutional.

Morris added that he thought it was the wrong solution to reward “bad behaviour and folks that have been operating outside the confines of the law by legalizing and regulating them, while all of us have been playing by the rules for decades.”

Gantz responded that there was an argument that given the expansiveness of the unregulated machine industry that has been allowed to proliferate, it may make more sense to legalize them. Estimates put the total number of grey-market machines operating in the U.S. at 580,000.

“I don’t think so,” Morris said. “You end up rewarding folks for operating outside of the confines of the law in this space. Where does it stop? Legislators have to make tough decisions and that’s why they are elected to the positions that they are in. The legislators in Kentucky show it can be done.”

“It’s not going to be easy. It’s an uphill fight,” he added.

Pollock told Gantz that the short answer to his question of whether they should be regulated was no.

Pollock said casino operators apply for licenses so under certain conditions that are laid out in advance, including the assurance that there are going to be a limited number of licenses that are granted and regional protection. He stressed that licensees lose their regional protection when unregulated machines can operate.

“I think this is the biggest threat to the licensed, regulated gaming industry because it undermines the core principle that a gaming license is a revocable privilege,” Pollock said. “Without that, you lose public confidence, and you lose a lot here.”    

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