Skill Games an Industry Keen to De

Jul 31, 2023

There may not be two words more lacking in clarity these days than “skill games”. The phrase gets thrown around to describe a number of different ideas ranging from skill-based slot machines to the contentious land-based “gray” machines and online sites like Skillz, which allow users to bet on their own skill sets in various competitions.

SBC recently hosted a webinar to clear up some confusion around the term and the legal standing of these various games entitled Skill-Based Gaming: An Expert Panel on Navigating a Changing Business and Regulatory Landscape.

Moderated by SBC Americas Editor Jessica Welman, the panel was comprised of:

The lack of clarity around skill games, particularly online skill games, is something that Chafkin and Skillz care about.

“I say this as a platform operator. Our interest has always been in the consistency of the definition [of skill]. So we don’t particularly have a vested interest in a single game being a game of skill versus chance. Our sole purpose is to create clarity,” Chafkin explained.

For thos unfamiliar with what Skillz offers, Chafkin described the nature of the company.

“Think of us as the competitive organizer for everything from pickup basketball to the NBA everything from casual game of tennis, between friends, to professional levels of play, and everything in between,” he said. “Basically, what we build is competitive software that can be integrated into virtually anything to operate both those free-to-play competitions, the paid entry competitions that are akin to road races or recreational basketball leagues or test tournaments in the professional competitions.”

The question of if a skill game is gambling is a difficult one to answer because even the most skill-heavy endeavors can have elements of chance. As Chafkin explained, there are three different things to consider when you think about skill vs. chance.

One is programmatic randomness, which is the natural chance baked into a game. That can be something like a random number generator in a slot machine, but Chafkin notes it also can arise in real-world situations. The example he offered was the bluster of the wind on a golf course. It is a random factor thrown into a game of skill outside of a player’s control.

The second thing to consider is the concept of imperfect information. The example Chafkin offered here would be going to a trivia contest and you may have a specific sphere of knowledge, like Star Wars trivia, but are unsure how many questions related to that subject there will be.

Finally, people need to be mindful of negating skill factors, or, to put it another way, if a game is sufficiently easy or so impossible that perceived edges in skill are negated. An example would be a hole-in-one contest on the golf course.

As Ifrah explained though, the legal opinions on what exactly constitutes skill vs. chance have varied wildly across the states. Ifrah was part of the legal battle to get poker recognized as a skill game and drew comparisons between the two verticals.

“Prior to the federal government getting involved in prosecuting poker, there were a series of state cases and court of appeals cases that said poker is a game of skill. The federal government went forward challenging that assumption, in some regards, and now poker is regulated in the United States as a game of chance. Is that the correct outcome? I don’t think so.”

Meanwhile, Ifrah said “there isn’t a lot out there” when it comes to legal clarity on the nascent skill games industry and other upstart online games that involve real money.

“That’s what we’re dealing with his lawyers, you’ve got to take the statute, the standard, you’ve got to take into account AG opinions, and you have to take into account court opinions. And you have to try to somehow distill all that, filter the game in front of you through all of that, and then come up with an analysis to provide the client.”

One area Ifrah is not really looking to is the land-based debate around what some call skill games and others call gray machines. They may both invoke the word skill, but the ventures are incredibly different. While Skillz is a contest between two people, the machines in Kentucky, which prohibited the games earlier this year, are person vs. machine and many say bear a strong resemblance to actual slot machines.

“Well, “I don’t really think it’s relevant to the online skill-based gaming industry,” Ifrah said of land-based skill games. “They look like slot machines, and [casino operators] feel like they are cannibalizing their land-based revenue. And as a result, there’s been a push by the land-based casinos, as well as opponents of unregulated gambling generally, to outlaw these machines. But the approach in the States, it’s all inconsistent.”

Ifrah cited the VLTs in states like Illinois and Ohio but outright prohibitions in states like Kentucky. There is inconsistency across the country in how each state is handling these machines. While Chafkin and Skillz are monitoring the situation, so far, there has been minimal overlap from land-based skill games to online operators.

When asked if Chafkin wants to be regulated, he explained that more than wanting regulation, Skillz is striving for clarity and certainty around the operation.

“As an industry, you want investment to a nascent industry, and certainty in the laws and legal frameworks that exist in an industry are facilitators and drivers of capital investment being put into the business. The reason that we did so much due diligence before investing our time before raising venture capital dollars is because we wanted to create certainty for ourselves.”

Slader echoed Chafkin that the legal murkiness doesn’t help anyone but also added that, as vendors, GeoComply is really leaving it to operators and, in some cases, investors to lead the charge about what kinds of frameworks need to be in place.

“It’s really tricky as a vendor, to even be getting into those types of judgment calls. Ultimately, we would be geo-compliant as a geolocation provider, for example, we’d be looking to a particular operator’s own assessment, legal opinion, modeling of their business for them to ultimately determine what is it the need in their particular use case, and we in turn, would deliver the service. So there are definitely rules of the road that need to be dictated not by a supplier, but by the partners that are using technology that might support their business,” she explained.

However, Slader did note that investors are always keen to minimize risk and there are things people can be doing in the space to establish itself as a legal, upstanding venture, especially when it comes to banding together and establishing internal standards and controls.

“Venture capital, any kind of private equity firm also is going to be looking to de-risk their business for investors. Any kind of alignment from within the industry, I think, is going to provide greater confidence,” she argued. “The way that we have seen different trade associations, different industry organizations come together on other topics, like responsible gaming, for example, or advocacy around the expansion of sports betting. All of these can build confidence but also introduced best practices for what these types of organizations can do.”

Ifrah suggested that skill games companies can create their own internal controls rather than seek state regulation. Creating that layer of accountability also helps when dealing with groups like payment processors and investors seeking to de-risk with more internal controls.

Skillz has already put in those kinds of measures. The site is age-gated and goes the extra mile on fraud detection, as people misrepresenting who they are fundamentally undermines the integrity of the company’s competitions.

Chafkin noted they even have responsible play controls in place, though he did question the ultimate goal of these as it pertains to the games they are offering.

“When we started this business, we, we assumed that we would get asked this question, but it is, it is always funny to me when it gets asked because I don’t think [people] would ask the US Chess Federation if they have a responsible play page, even though the way that you earn a living as a professional chess player is by competing in paid entry test tournaments,” he pointed out.

Nonetheless, those controls are there. Better to have clarity then none, especially given how the legal landscape continues to come to different conclusions about how skill games should be handled.