An American Gaming Association report on the extent of illegal gambling in the U.S. and the harm from its unregulated nature has highlighted Pennsylvania’s “gray market” skill games industry as a primary example.
The “Sizing the Illegal and Unregulated Gaming Markets in the United States” report released last week by the AGA, which is the casino industry’s trade association, estimated that Pennsylvania has 67,000 of the unregulated gambling machines as a subset of more than 580,000 that exist nationwide.
The study compiled for the AGA by The Innovation Group, a national consulting firm, estimated that illegal machines played in person are generating revenue of some $27 billion a year nationally. That is far more than the report estimated is derived from either non-sanctioned online slots and table games play by Americans, which adds up to an estimated $13.6 billion in lost revenue, or illegal sports betting, with estimated revenue of $3.8 billion.
“Tucked inside gas stations, restaurants, and bars, these pervasive unregulated gaming machines look and act like slot machines but lack any of the regulatory oversight of the legal industry,” according to a report summary.
The study estimated the unregulated machines are costing states some $8.8 billion in lost tax revenue.
An unsettled issue in Pennsylvania
The question of how to handle skill games proliferation across Pennsylvania has been an ongoing issue for lawmakers and the courts in recent years. The legislature has failed to reach consensus on whether to ban or regulate the games, and a Commonwealth Court ruling is awaited on whether they represent a form of gambling that is legal or illegal.
The games, marketed most commonly under the “Pennsylvania Skill” brand, are available in bars, clubs, convenience stores, and elsewhere. They have the appearance of slot machines, but their manufacturer maintains they have a skill element involved in winning money that negates the random chance definition of illegal gambling.
Because there is no regulation and no one tracking them, no reliable estimate exists on how many of the devices are in operation across the state. The AGA report attempted to fill that void with its 67,000 figure, while citing varying estimates that were presented in a 2019 report by the Virginia Joint Legislature Audit and Review Commission and a July 2022 article in the Pennsylvania Bar News.
The problem, however, is that neither of those sources cited any sound basis of their own for their estimates. It’s uncertain that 67,000 is a better number than any other for how many unregulated devices are being played in the state.
What seems likely, however, is that — even in their small numbers at each location — there are more skill games than the 26,000 slot machines being played legally inside the state’s 16 casinos. Those legal slots generate about $2.4 billion in annual revenue, with 54% siphoned to the government as taxes.
The report also makes clear that Pennsylvania is among the states with the biggest number of unregulated devices. It compared Pennsylvania to other states where the games are common but are not legal, including Kentucky with an estimated 12,269 machines and Virginia with an estimate of 8,194.
Each machine might generate $50,000 a year
Bars and clubs in Pennsylvania, which host the machines without taxation and suffer only rare enforcement actions by police confiscating them, have been quite satisfied with the status quo. The AGA report helps explain why.
It stated that based on what has been reported about the devices in Virginia and Georgia, the average annual revenue per machine is $46,270. Furthermore, the AGA reported that Pace-O-Matic, the developer/operator of games commonly used in both Virginia and Pennsylvania, has advertised that locations “can make $20,000 per year with their machines and our research indicated that the operator takes a 40% share of machine revenue, placing yearly machine revenue at approximately $50,000.”
The downside of unregulated devices comes for customers, the report stated, in that the average hold on the machines — meaning what they retain from players’ losses — stands at 24.6%. For casinos in Pennsylvania, their hold from legal slots is generally 10% or less, and the casinos in ultra-competitive Nevada retain even less, the report noted.
In a statement accompanying the report, AGA President Bill Miller said, “Illegal gambling is arguably the greatest threat to our industry. The unfortunate reality is about a third of the U.S. gaming market is being captured by illegal or unregulated gambling. We will use this research to strengthen our case to federal and state policymakers and law enforcement agencies for the need to act now.”
Photo: Gary Rotstein