Internet Gambling Consumers Industry and Regulation

Internet Gambling: Consumers, Industry, And Regulation

Business Management

Final Year Project

Online gambling is a large and growing industry. Estimates from an industry consulting group indicate that as many as 2,000 firms worldwide are involved in offering a number of different types of online gambling, resulting in an estimated $25.4 billion in winnings and as much as twenty times that in revenue. Why is online gambling so popular, and what does this imply for society? This research was aimed at exploring the scope of internet gambling industry, the methods of internet gambling, as well as current state of regulation towards gambling industry. The author then considered implications for the industry as a whole. Findings of the research indicate that there are a wide range of people involved in online gambling, and that online gambling's ease of access plays a significant role in the industry. This is a significant problem because this allows for easier access for problem and potential gamblers, who are at significant risk from online gambling and who make up a large portion of its customers. The online gambling industry is structured primarily as small firms, and is spread thinly around the world. Regulatory approaches vary widely, ranging from attempts at prohibition in the United States to legalization and regulation in the European Union. Another factor in the industry's impact is the ongoing conflict between online gambling and traditional forms of gambling such as land-based casinos, which has resulted in significant industry pressure group focus on the online gambling industry. In the end, prohibition approaches tend not to be highly effective due to the structure of the Internet, allowing growth of the industry despite attempts to regulate This indicates that online gambling is likely to continue to be problematic in terms of increasing access to gambling for problem gamblers, but that there is no clear way to regulate this problem and thus the industry is likely to continue to grow in popularity.

Table of Contents

Abstract 2

Chapter- I Introduction 5

Background 5

Problem Statement 6

Purpose of the Study 7

Chapter-II Current Status of Online Gambling Industry 8

History 8

Industry Structure 8

Competition and Strategy 10

Marketing in the Online Gambling Industry 14

Intra-Industry Conflict and Its Effects 16

Chapter-III-Why Online Gambling is becoming Popular 17

Reasons People Gamble Online 17

Why Online Gambling is appealing to consumers? 19

How Individuals gamble online? 21

Chapter-IV Impacts of Gambling Popularity & Regulatory Approaches 23

Effects of Online Gambling on the Individual 23

Regulation of Online Gambling 24

Why Regulate? 25

Prohibition 26

The Regulatory Approach 27

Responsible Gambling and Harm Minimization 28

Chapter-IV Conclusion and Recommendation 30

Implications of Online Gambling for Society 30

Conclusion 32

Bibliography 34

Chapter- I Introduction

Background

Within the past two decades, gambling accessibility and availability have increased considerably (Gupta & Derevensky, 2008). Various gambling outlets including casinos, slot machines, lotteries and internet gambling have become increasingly more popular. Similarly, the legalization of many gambling outlets has helped influenced its popularity (DiClemente, 2000)

Internet gambling is big business. Since its beginnings in 1995, the industry has grown substantially, and now includes several listed firms. A recent estimate from the American Gaming Association (2010) suggests that there are as many as 2,000 firms involved in Internet gambling and betting, including games such as bingo and casino games as well as gambling on sporting events, lotteries, and other forms of gambling. These sites are registered in at least 47 different jurisdictions (Monaghan, 2009). A broader estimate indicates that 2,316 sites are currently in operation (The Economist, 2010).

The estimated size of the industry is $25.8 billion in worldwide gross winnings as of 2009 (American Gaming Association, 2010). Estimates from the American market produced by industry sources indicate that turnover in the industry is some twenty times that of the gross winnings (H2 Gambling Capital, 2010). The legal status of the industry varies widely depending on the jurisdiction. There have been numerous attempts in American law to outlaw online gambling, although given that approximately 20% of worldwide online gambling revenues stem from the United States this cannot be considered to be a particularly successful regulatory move (American Gaming Association, 2010). However, in many other regions the practice remains entirely legal and does not face any significant barriers (McGowan, 2008). The popularity of the online gambling industry poses a particular problem for regulation of business. In particular, there is evidence that the use of online gambling is associated with higher levels of problem gambling than land-based casino gambling or other forms of gambling, due to the ease of access and privacy associated with it. Thus, there is the real potential for harm to customers, even though the industry offers ample opportunity for gain. Why is Internet gambling so popular, and how does this popularity affect the ability to mitigate potential harm? This paper discusses online gambling and considers issues such as who uses online gambling, the business structure of the online gambling industry, and the effects of online gambling in an attempt to find a balance between corporate and social needs.

Problem Statement

Gambling traditionally has been defined in research as "wagering of money on the outcome of a game or event, with the hopes of winning larger sums of money" (Gupta & Derevensky, 2008, p. 207). Newer definitions of gambling however are broader and include any valuable, to convey that gambling does not necessarily have to involve the wagering of money, but rather, can include the wagering of other items that hold value to the individual (Ontarion Problem Gambling Research Centre, 2007). Consistent with the definition provided by the Ontarion Problem Gambling Research Centre (2007), the present study broadly defined gambling as the betting or wagering of money or valuable on games or events with uncertain outcomes to capture a comprehensive representation of gambling.

The problem with Internet gambling is not in finding something to talk about, but to determine what issues are truly relevant. Internet gambling touches on so many areas, including psychology and mental health, cultural norms and values, morality, business values, and conflicts between industries, that it proved to be difficult to identify key issues in identifying why Internet gambling is so popular as well as what implications this had for the development of industry regulation. There is also a significant problem of conflict between online gambling and traditional gambling industries, such as land-based casinos and betting parlours, that has clouded the issue due to control of research and media sources by these existing industries. However, a number of key issues have been identified in the question of gambling popularity. These issues are:

Who is gambling online, and how?

What are the impacts of online gambling at the personal level?

How is the online gambling industry structured?

What forms of marketing and other practices are used to bring new customers into online gambling?

How does intra-industry conflict between online and traditional gambling affect regulation, research, and other ways of understanding the impact of online gambling?

What regulatory approaches have been taken to online gambling?

What does the popularity of online gambling imply for society as a whole?

Purpose of the Study

The purpose of this study is to explore the reasons why internet gambling is being popular and how this popularity impacts the society. For this purpose the author used a variety of sources, including peer-reviewed journals, industry and government reports, and news sources. An inductive approach has been taken to determine what the underlying causes of internet gambling popularity are, moving backward from observations to a firm understanding of the underlying causes (Trochim, 2006). However, it should be noted that given the multiplicity of jurisdictions, generalizations regarding regulatory approaches and other issues cannot truly be made; as a worldwide phenomenon, online gambling has had a range of different impacts and implications, and as such it can be extremely difficult to generalize. This difficulty is noted where it has been encountered.

Chapter-II Current Status of Online Gambling Industry

History

The online gambling industry has experienced slow but steady growth over the past ten years. Estimates of industry revenues were around $12 billion in 2005 (McGowan, 2008). By 2009, the industry had approximately doubled in size to $25.4 billion in revenues (American Gaming Association, 2010). Thus, there is a significant (though not explosive) growth rate to be seen within this industry. What has been driving this industry growth and how can it be addressed in terms of the industry structure and business aspect? This section explores the structure of the online gambling industry and the impacts of marketing and intra-industry conflict on the industry. It also discusses approaches to regulation that have been taken in order to compare the overall outcomes of these regulatory approaches.

Industry Structure

As noted above, the online gaming industry is a globalized and widespread industry, with some 2,000 firms operating in 47 jurisdictions (American Gaming Association, 2010; Monaghan, 2009). In absolute terms, the online segment of the global gambling industry is around 8% of the total (The Economist, 2010). The current revenues of $26 billion are expected to rise to $36 billion by 2012, continuing a trajectory of 13% growth from the past several years (The Economist, 2010). This is significantly faster than the growth in the remainder of the industry, which has stagnated during the economic downturn (The Economist, 2010). However, the online gaming industry is not known for rapid growth or innovation; the majority of innovation that occurs is limited to back-end processing and management activities, with most firms retaining known games and gambling activities in their front-facing operations (The Economist, 2010).

The top ten online gambling sites according to Alexa rankings are shown below, along with their daily traffic rates. Although this is not directly connected to the revenues grossed (which is often unavailable due to many firms being private), it does allow for understanding the size and scope of the industry. (State lotteries and sites of primarily offline lotteries have been excluded from this list, because these sites do not represent online gambling.) All sites except for one (Free Lotto) showed a primarily male audience aged 25-34, which confirms the academic research discussed above in regard to the demographic characteristics of the industry's customers. The majority of these sites also showed increasing visitors during the past three months, which is consistent with arguments that the interest in online gambling is increasing (The Economist, 2010). Ultimately, however, these sites do not generally rank as any of the top sites, and receive extremely small portions of overall Internet traffic, showing that online gambling is still a minority pursuit among Internet users.

Site

Ranking (Global/UK)

Inward Linking Sites

Page Views (3-month average of total Internet page views, percent)

Audience Demographics

Age

Gender

PartyCasino (Casino games)

1,308/75

0.00158%

Younger than average (most under 34)

High male visitors

BetFair (Sporting bets)

1,482/157

1,093

0.00471%

Younger than average (most under 34)

High male visitors

888 (Casino games)

1,318/297

2,085

0.00177%

Younger than average (most under 34)

High male visitors

Free Lotto (Bingo and lottery games)

2,014/2,256

0.00156%

Older than average (most over 34)

Almost even between male and female visitors

Full Tilt Poker (Poker)

2,638/903

3,517

0.00176%

Younger than average (most under 34)

High male visitors

* This site also has extremely high higher-education visitors

Poker Stars (Poker)

4,348/1,956

4,253

0.00088%

Younger than average (most under 34)

High male visitors

Ladbrokes (Sporting bets, casino, scratch games)

6,486/336

2,028

0.00095%

Younger than average (most under 34)

High male visitors

SportingBet (Sporting bets)

8,205/2,609

0.00090%

Younger than average (most under 34)

High male visitors

PaddyPower (Sporting bets)

8,474/479

1,206

0.00116%

Younger than average (most under 34)

High male visitors

* This site also has extremely high higher-education visitors (graduate and above)

PKR (Poker)

8,340/1,009

0.00064%

Younger than average (most under 34)

High male visitors

Table I Top ten online gambling sites according to Alexa.com (2011)

Competition and Strategy

In order to consider competition and strategy issues, two common strategic frameworks have been considered for this industry. The five forces model of competition identifies five underlying conflicts that can determine the competitive environment of a given industry (Porter, 1998). The Ansoff matrix identifies the ways in which a firm can compete given its current marketing environment (Meldrum & McDonalds, 2007). These two frameworks have been used to compare the potential for outcomes within this industry, as well as consider the competitive conditions the industry operates under.

The five forces competitive framework considers five elements of competition, including buyer power, supplier power, threat of substitute products, threat of new entrants, and overall competition within the industry, to determine where a given industry's competitive position is. The five forces model is shown in the figure below.

Figure 1 Porter's five forces model of industrial structure and resulting competition[footnoteRef:1] [1: Figure from http://www.valuebasedmanagement.net/images/porterfiveforces.gif]

These five issues can be summarized as follows for the online gambling industry:

The online gambling industry acts as a service provider for an intangible service and as such is a primary supplier; the supplier power levied by providers of support technologies is negligible.

The buyer power, on the other hand, is extremely high, due to lack of effective marketing strategies (discussed below) as well as broad choice of substitute products.

Threat of substitute products is encompassed in the division of the gambling industry into online and offline components and the fierce competition from land-based competitors (as discussed below).

Given the low entrance barriers and the number of jurisdictions that allow registration of online gambling companies, the threat of new entrants is high.

With a large worldwide market and a large number of mostly small competitors, the overall industry environment of the online gambling industry is very competitive, but it is not dominated by a single company or set of companies.

The second tool used to understand the industry is the Ansoff matrix, which identifies opportunities for market growth in a given industry (Meldrum & McDonalds, 2007). The Ansoff matrix identifies four market growth opportunities based on characteristics including new or existing products and new or existing markets (Meldrum & McDonalds, 2007). The figure below shows the Ansoff matrix and its relationship to product and market development. As will be discussed, the online gambling industry does not tend to innovate on products it offers consumers, instead sticking to known games and betting opportunities (The Economist, 2010). Furthermore, there is little evidence that the industry goes out of its way to seek out new markets, instead relying on existing gamblers for new customers (LaBrie, Kaplan, LaPlante, Nelson, & Shaffer, 2008). This indicates that the product strategy most consistent with the industry is market penetration using a new distribution channel.

Figure 2 Ansoff Product-Market matrix of product development[footnoteRef:2] [2: Figure from http://www.franteractive.net/resources/Ansoff-Matrix.GIF]

In addition to general competition, there are a number of potential dangers within the online gambling industry that can affect how well individual firms operate, as well as the industry as a whole. Many of these challenges, as with the land-based gambling industry, are related to organized crime (McMullan & Rege, 2010). McMullan and Rege (2010) have found evidence of different levels of organized crime syndicates at work in the online gambling arena.

Some of the criminal activities found in the gambling industry included hackers and malware that steals players' financial information, inside theft of data by the companies and their employees, phishing and identity fraud, and money laundering (McMillen, 2000; McMullan & Rege, 2010; McMullan & Rege, 2007; Schopper, 2002). This is a significant concern and one that has led to much stricter regulation than might have otherwise been seen had the industry not been such a significant target for abuse.

Marketing in the Online Gambling Industry

Marketing in the online gambling industry is inherently problematic. It is governed by the marketing rules of other gambling practices, which are routinely highly restricted and must comply with government requirements (Zangeneh, Griffiths, & Parke, 2008). Of particular concern is the impact of gambling marketing on children and adolescents, who do not possess the critical thinking faculties of adults and thus may be excessively influenced by marketing (Monaghan, Derevensky, & Sklar, 2008). The problem with management of gambling advertisements is that it is difficult to directly target consumers that may be appropriate targets (such as adults that are not problem gamblers) while still avoiding targeting marketing to underage individuals and other unsuitable targets (Monaghan, Derevensky, & Sklar, 2008). However, marketing also provides governments with revenues (through taxes and in some cases, such as lotteries, direct revenues from the game sales) (Zangeneh, Griffiths, & Parke, 2008). Thus, there is a conflict in achieving effective marketing for online gambling practices, which has impeded its general development. There are further problems in online marketing of gambling, particularly the issue of cross-border laws regarding gambling marketing and the technological challenges of restricting marketing activities from specific jurisdictions based on those laws (Hornle & Zammit, 2010). Given these conditions, it is perhaps not surprising that many online gambling sites do not engage in significant non-Internet marketing, choosing instead to stay with traditional Internet-based marketing techniques such as site optimization, keyword search and banner advertisements, and word of mouth or viral marketing techniques (Wesley & Barczak, 2010).

One approach that has been taken in marketing online gambling is relying on established brands in order to bring in existing customers, although this has not proved to be a very popular approach (McGowan, 2008). The short-lived Web site playmmirage.com, a site that was established by MGM Mirage on the Isle of Man, used the existing MGM Mirage brand in order to attract customers that had previous experience with the industry (McGowan, 2008). This marketing campaign used existing trust between the company and its customers in order to establish a marketing relationship and draw in consumers (McGowan, 2008). However, this attempt was abandoned shortly after its establishment, due in large part to MGM Mirage's status as an American company and the uncertainty of online gambling legality in the United States (McGowan, 2008). The majority of online gambling sites do not rely on the use of existing land-based casino brands in order to draw in customers.

The use of marketing in the online gaming industry is not necessarily the same as other industries, because of the differing relationship between continued use of online gambling services and satisfaction (Jolley, Mizerski, & Olaru, 2006). Customer satisfaction is typically centralized in marketing practices, because it is considered to be the most important element in continued use of a given service; given that most companies rely on repeat customers in order to build brand loyalty as well as provide an ongoing revenue stream, this is considered to be quite important (Jolley, Mizerski, & Olaru, 2006). However, Jolley, Mizerski and Olaru's (2006) online experiment in gambling found that customer satisfaction was not the main driver in repeated use of online gambling sites. Instead, the major factor in the continued use of the experimental subject was habit -- that is, participants continued to use the service because they were in the habit of doing so, rather than because they were satisfied with the experience (Jolley, Mizerski, & Olaru, 2006). Thus, the use of marketing and branding may be incidental to the actual growth of the online gambling industry, although it may play an incidental role.

Regardless of the inherently problematic and possibly useless nature of marketing, online gambling sites, particularly those run by operators that may not have the best interests of their customers in mind, pay significant attention to retaining the customer's attention. Some of the techniques that have been used by operators include: embedding of innocuous keywords in order to draw attention to the site from unrelated searches; telescoping windows that continue to draw the attention of the customer who is trying to leave the site; and tracking customers' online (Griffiths, 2003). Some of these tactics have been stymied by increasing technology and regulation associated with these sites. For example, search engines like Google have become increasingly fine-tuned in order to weed out unrelated results and eliminate link spamming, which reduces the ability of the site to bring itself to the attention of those that were not looking for it (Miller, 2011). However, other technologies have become increasingly common, such as the use of third party tracking cookies to track visitors across multiple sites (Avcock, 2010). Thus, the potential for exploitation within the industry remains relatively high.

Intra-Industry Conflict and Its Effects

One of the notable features of the debate surrounding online gambling is the impact of its major competitors, the traditional land-based casino and gambling industry. In particular, American land-based casino industry groups have played a lead role in driving the attempt to outlaw online gambling in the United States (McGowan, 2008). This has been driven not by concern for the customers of the online gambling industry (as one might posit from the discussion above regarding the effects of gambling) but is instead driven by the desire to protect the industry's own revenue stream (McGowan, 2008). Thus, disentangling the effects of online gambling from the claims of its major business competitors can be a significant factor in determining reasons for popularity as well as effects on the overall industry. According to McGowan (2008), traditional casinos in the United States did consider entering the online industry, but the combination of the potential for loss of revenues to offshore gambling operations and the potential for cannibalization from the casino's land-based operations moderated against this. Only one American casino, the MGM Mirage, made significant attempts to enter the online gambling business (McGowan, 2008). However, this competition must also be viewed in light of the American history of gaming, which has routinely positioned land-based casinos as negative social factors and imposed a moralistic determination of lack of value on gambling activities (Eadington, 1999). Although casino gambling has been an enormous industry in the United States despite this prohibitive nature, there are still significant rivalries and tendencies within the land-based casino industry to defend its own existence (Eadington, 1999). Thus, the rejection of online casinos may be as much culturally based as it is based in business decision making.

Chapter-III-Why Online Gambling is becoming Popular

Reasons People Gamble Online

The first and most obvious question that can be asked in determining the overall popularity of online gambling is: who gambles online? This is a question that has been asked by a number of academic researchers as well as gambling interest groups and non-profit groups dedicated to problem gambling. Other questions to be addressed include how individuals gamble online and what affects this has on the individual in terms of psychological well-being.

Gambling sites are a means of entertainment that can alleviate boredom (Derevensky & Gupta, 2007). Such sites offer various benefits including twenty-four hour access seven days a week, access to credit, and anonymity (Brown, 2006) Furthermore, many authors have argued that younger populations are drawn to Internet gambling because of their comfort level with technology (i.e., computers and Internet) and newly emerging popular media (i.e., televised poker tournaments and television series that capture the glamour of the gambling world in Las Vegas) (Brown, 2006; Woodruff & Gregory, 2005). Wood, Williams, and Lawton (2007) conducted an online survey identifying the reasons why Internet gamblers prefer Internet gambling over land-based casinos. Respondents consisted of 19, 20 Internet gamblers across North America. These respondents most often reported convenience (12.9%), ease (12.2%) and comfort (11.7%), distance from a casino (10%), and privacy (9.8%) as reasons for gambling on the Internet. Moreover, many respondents did not like land-based casinos for reasons such as aversions to the noise levels (4.1%), crowded environments (4.7%), and disliking the "kinds of people' found in casinos (5.7%).

There is a wide range of estimates for the number of online gamblers, although demographic characteristics are relatively well-known. One estimate indicates that between 1.3% and 6.5% of American adults gamble online (Monaghan, 2009). A second study of British adult gamblers indicated that around 6% gambled online (although this study did not indicate the overall percentage of gamblers to non-gamblers) (Griffiths, Wardle, Orford, Sproston, & Erens, 2009). Online gamblers studied in the 2007 British Gambling Prevalence Survey were found to be young (the majority 34 and younger); more educated than non-online gamblers; most commonly in managerial and professional job roles; male; and most likely to bet on spread-betting (most commonly sports related) (Griffiths, Wardle, Orford, Sproston, & Erens, 2009).

Although Monaghan (2009) did indicate that online gambling was primarily restricted to adults in most jurisdictions, there is also significant growing concern regarding adolescent online gambling (Messerlian, Derevensky, & Gupta, 2005). However, no firm estimates regarding the use of online gambling by adolescents could be found. There has also been an upswing in online gambling on college campuses in recent years, which could be indicative of growth in late adolescent online gambling (Brown, 2006). Men have been found to be more commonly involved in online gambling than women, and a higher proportion of men than women involved in online gambling fall into the category of problem gamblers (Griffiths & Barnes, 2008). However, although research shows that women participate in online gambling less (as well as in land-based gambling), actual patterns of behaviour between men and women were similar (LaPlante, Kleschinsky, LaBrie, Nelson, & Schaffer, 2009).

Why Online Gambling is appealing to consumers?

Internet gambling is appealing to consumers for various reasons. However, several authors have identified concerns regarding Internet gambling (e.g., Brown, 2006; Griffiths, 2001; Messerlian & Derevensky, 2005).

1. Minors are able to engage in Internet Gambling (Smeaton & Griffiths, 2004). Legal gambling age for land-based casinos in most countries is 19 or 18 years of age. Gambling websites have few, if any, safeguards to prevent under-age youth from gambling on the Internet. Unlike land-based casinos, individuals are not asked for photo identification at the front door. Under-age youth participating in Internet gambling face the risk of developing a gambling problem along with the negative consequences associated with gambling behaviours (Messerlian, 2004).

2. Gambling while under the influence of alcohol or other drugs (Griffiths, 2001). Findings suggest that individuals often engage in problem gambling while under the influence of alcohol (French, Maclean, & Ettner, 2008). Land-based casinos can monitor the alcohol consumption of their patrons, while Internet casinos cannot. Individuals gambling on the Internet are free to consume large amounts of alcohol or other drugs, causing impaired judgement and likely influencing gambling behaviour.

3. The use of credit. Credit cards provide Internet gamblers with access to money they do not have (Brown, 2006). It is likely that internet gamblers, who are gambling on credit, will spend more than intended because the psychological value of credit is less than actual material cash (Griffiths, 2001). Internet gamblers can gamble themselves into excessive debt.

4. Unlimited access to Internet Gambling. Given that internet gambling is accessible twenty-four hours a day, seven days a week, Internet gamblers have no limitations on when they can gamble (Griffiths, 2001).

5. Practice sites may encourage Internet gambling. Many Internet gambling sites give access to practice gambling where the money exchanged is not real, yet the games played look identical to the real thing. These practice gambling sites have been shown to have higher payouts providing the individuals with an unrealistic view of payouts in real Internet gambling (Sevigny, Cloutier, Pelletier, & Ladouceur, 2005). It is believed that practice sites may entice individuals, to begin Internet gambling (Derevensky & Gupta, 2007).

The growing concerns around Internet gambling speak to the importance of conducting research in this area. However, only over the past decade has Internet gambling substantially increased in popularity and as a result, research in this area has only recently begun to emerge.

How Individuals gamble online?

Determining how individuals gamble online is a problem that is plagued with methodological problems, leading to a multiplicity of responses to this question within the literature (Wood & Griffiths, 2007). In particular, gamblers may not accurately self-report gambling activities, motivations, or wins and losses due to a variety of cognitive biases against recognizing these issues accurately (Wood & Griffiths, 2007). This can make determination of reasons for gambling in some study designs problematic. However, studies that have relied on observation or experimental approaches to determination of online gambling behaviours have proved to be highly useful.

Online gambling is thought to have a number of characteristics that contribute to its use. These characteristics include easier access and convenience in the sites themselves, as well as the increased psychological rewards associated with a shorter interval between bets and more rapid placement activity as compared to land-based gambling opportunities (Griffiths & Barnes, 2008). This does offer the potential that individuals will find online gambling to be more rewarding, and thus engage in it more frequently, than non-online gambling. However, there are also other reasons that may not be directly connected to the psychological experience of gambling. Another study of 1,920 online gamblers who were directly asked why they would rather gamble online than in a land-based casino found that convenience and pacing were important (Wood, Williams, & Lawton, 2007). However, this study also found that a significant number of participants expressed an aversion to the environment of the land-based casino and its clientele, although they enjoyed gambling (Wood, Williams, & Lawton, 2007). The online gambling environment allowed these individuals to avoid contact with undesirable social elements while still engaging in gambling. The study also found that there was a perception that online gambling offered the potential for higher winning rates than land-based casinos (Wood, Williams, & Lawton, 2007). There has not been any research that could be found that would verify whether the online winning rates are in fact higher than land-based casinos, but particularly in light of the intra-industry tensions between online and land-based gambling firms, this is an aspect of online gambling's popularity that should be considered.

Despite the potential for misuse, many studies have found that online gamblers are actually rational and moderate in their approach. One study of 3,455 online poker players, which followed the participants for two years, found that the majority (around 95%) of players played an average of twice a week, with a median spend of around €12 per session (LaBrie, Kaplan, LaPlante, Nelson, & Shaffer, 2008). These players played for a median of six months, and based their play behaviour on rational assessment of current wins and losses (LaBrie, Kaplan, LaPlante, Nelson, & Shaffer, 2008). Thus, the use of online gambling did not lead to direct consequences for the majority of participants, although as discussed below a small number of participants did experience problem gambling. These findings have been echoed in other studies of online casino gamblers and online sports betting participants, although only around 1% of the gamblers in this study were found to be in the most involved group (LaBrie, LaPlante, Nelson, Schumann, & Shaffer, 2007; LaBrie, Kaplan, LaPlante, Nelson, & Shaffer, 2008). Thus, the model of moderate frequency and spending as well as activity moderation by perception of wins and losses appears to be consistent for the majority (although not all) online gamblers. However, this is somewhat higher than estimates of problem gambling in the general population, which range from 1.2% to 4.9% with a median of 2.9% (Orford, 2003).

Chapter-IV Impacts of Gambling Popularity & Regulatory Approaches

Effects of Online Gambling on the Individual

The major effect of online gambling, as well as its major cause, is problematic Internet usage (Yellowlees & Marks, 2007). However, this is not considered in isolation; instead, the majority of research supports an understanding that individuals that are already prone to problematic behaviour, such as those with poor impulse control or existing addictive or problematic behaviours will use the Internet problematically (Yellowlees & Marks, 2007). This perspective is somewhat different from that in the remaining literature, which holds that individuals may suffer from Internet (or online gambling) addiction caused by contact with the experience itself (Yellowlees & Marks, 2007). However, the perspective of problematic behaviour helps to divorce behaviours (such as use of online gambling sites) from underlying pathologies (such as problem or pathological gambling behaviours), thus allowing for some regaining of perspective. This perspective also implies that the effects of online gambling will not be ubiquitous, and in fact many individuals are likely to engage in Internet behaviours such as gambling without further problematic behaviour emerging (Yellowlees & Marks, 2007). Thus, this is the most useful perspective for this question.

Estimates of problem gambling are fairly consistent. One study among college students indicated that 5.5% of online gamblers were problem gamblers (Griffiths & Barnes, 2008). A second study of online poker players found that around 5% of players, categorized as the most involved players, had significantly higher monetary involvement and failed to moderate their play based on wins and losses (LaPlante, Kleschinsky, LaBrie, Nelson, & Schaffer, 2009). These players played an average of five times more sessions per week, with about 7.5 times more spent per session, than the majority of players in the study, indicating a high probability of problem or pathological gambling. Other studies have found similar patterns in online sports and casino gamblers; although the percentage of highly involved gamblers was lower in these populations (1% to 2%) (LaBrie, LaPlante, Nelson, Schumann, & Shaffer, 2007; LaBrie, Kaplan, LaPlante, Nelson, & Shaffer, 2008). Finally, findings from the 2007 British Gambling Prevalence Survey found that 5% of the 9,003 respondents to this survey that gambled online were classified as problem gamblers according to DSM-IV diagnostic criteria (Griffiths, Wardle, Orford, Sproston, & Erens, 2009). This indicates that an estimate of 5% of online gamblers being problem gamblers is likely to be accurate.

Although a relatively small number of participants are at risk for problem gambling, the effects on these participants can be devastating. Some of the psychological characteristics associated with problem gambling include irritation, moodiness, depression, and in extreme cases suicidal ideation and suicide (Meyer, Hayer, & Griffiths, 2008). Problem gambling is also co-morbid with a number of other mental health issues, and may exacerbate these issues (Meyer, Hayer, & Griffiths, 2008). Individuals may also experience life effects including problems in personal relationships (sometimes leading to divorce), problems with work performance and absenteeism, and financial problems including increasing debt; in some cases individuals may engage in fraud or other crime in order to cover losses (Meyer, Hayer, & Griffiths, 2008). Thus, even though there is a relatively small portion of the online gambling customer base that is at risk for problem gambling, it is a significant reason for concern both in regard to individual costs and societal costs.

Regulation of Online Gambling

The size of the online gambling industry and its scope of operations clearly indicate that government involvement would be expected in order to control the industry. The two major approaches to online gambling have been prohibition and regulation. As of 2008, 64 countries had introduced legislation intended to regulate and control the online gambling industry (McGowan, 2008). The major proponent of online gambling regulation has been the Great Britain, and a number of other European Union countries have followed suit (McGowan, 2008). The opposing approach of prohibition has most notably been tried by the United States, although the success in this area has been less than perfect (McGowan, 2008). These two approaches and their impacts have been discussed at length within the literature.

Why Regulate?

There are a number of reasons that governments would choose to regulate online gambling industries. Most of the reasons discussed above, such as the potential for organized crime involvement and the potential for harm to individuals (particularly problem gamblers) fall into the category of social regulation. However, there are also a number of other reasons why the use of regulation might come about as a means of controlling the online gambling industry.

One issue is the fundamental issue of national sovereignty and cross-border economic and social impacts (McMillen, 2000). The nature of online gambling (particularly in earlier periods when it was not as simple as it is now to determine the probable location of a Web browser) is that it crosses national borders easily (McMillen, 2000). However, a fundamental tenet of national sovereignty is control of gambling within their borders. Thus, governments choose to regulate online gambling (either consistently with land-based gambling or in ways that are inconsistent with land-based gambling) as a response to the challenge of sovereignty (McMillen, 2000). The precise range of regulation, however, ranges from total prohibition to complete open market treatment of gambling; thus, national sovereignty is insufficient to encompass all possible reasons for the use of regulatory approaches.

A second reason is the problems such as crime and problem gambling associated with online gambling (McMillen, 2000). As McMillen (2000) points out, even though gambling sites have the ability to reach across international borders, this cannot be said for the negative effects of online gambling. Thus, social regulation of online gambling helps to address and mitigate negative social effects of the practice, even if the companies offering services are not located within the legal jurisdiction of the country itself (McMillen, 2000). This provides a significant reason for regulation of online gambling.

Prohibition

The United States has been the leader in the attempt to prohibit online gambling within its borders. It must be stated up front that this effect has not been particularly successful. In fact, despite a decade of attempted prohibition, U.S. customers contribute approximately 25% of revenues to the global online gambling industry (The Economist, 2010). Estimates indicate, however, that if this prohibition were removed, the total contribution of the U.S. economy to online gambling could by several times due to the increased availability (H2 Gambling Capital, 2010). Thus, the use of prohibition has at least somewhat prevented the spread of online gambling practices. There have been a number of attempts to prohibit online gambling in the United States. One of the most recent such efforts is the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA) (Schmitt, 2008). However, this bill has a number of failings. First, it does not actually criminalize online gambling or provision of online gambling services, but instead criminalizes the transfer of money for the purposes of online gambling (Schmitt, 2008). Legal commentators indicated at the time of its passage that its influence would be negligible in terms of actually preventing online gambling (Tripoli, 2007). A further problem is that there is general confusion within UIGEA as to what forms of online gambling are illegal, since there are multiple different types of gambling treated within this law (Schmitt, 2008). Overall, this creates a confusing regulatory environment that is actually extremely difficult to enforce, and is unlikely to lead to successful prohibition of online gambling. Furthermore, trying to prohibit online gambling rather than focusing on harm prevention (discussed below) actually inhibits the ability to reach those individuals that are at risk for problem gambling (Watson, Liddell, Moore, & Eshee, 2004). Overall, prohibition is not likely to be a successful approach.

The Regulatory Approach

Rather than prohibiting online gambling, a large number of countries have chosen instead to legalize and regulate the practice (Eadington, 2004). Regulation has a number of advantages, including the ability to use social regulation to address potential harms and the ability to recoup some of the costs associated with these harms through licensing, regulation, and taxation fees (Eadington, 2004). Thus, the regulatory approach has been one of the major approaches that have been adopted for the control of online gambling. This movement has particularly been led by the Great Britain and the European Union, in contrast to the United States' prohabitionary approach (Hornle & Zammit, 2010). Although there has been a great deal of research performed in regulated environments, there is no indication that legalization and regulation increases the number of problem gamblers or that it has increased the potential for their development (Schmitt, 2008). Thus, this does provide support that regulation is an effective approach to harm mitigation.

Regulation of gambling sites is not without its own difficulties. In particular, the third-person effect means that many individuals may perceive an increased influence of online gambling on others, rather than themselves (Wan & Youn, 2004). This can lead to conditions where online gambling regulation is targeted to those that may be seen as particularly vulnerable, such as children or the poor, without consideration that problem gambling has more to do with psychological makeup than it does with issues such as age or economic conditions (Wan & Youn, 2004). However, these problems do not tend to prohibit the overall utility of regulation, as well as the control of gambling sites those results. While it is important to keep in mind in terms of the use of regulations and their structure, it does not poorly reflect on the potential outcomes of the regulation process.

It is simply not possible to provide an overview of the full regulatory approach to online gambling for all countries that have chosen this approach. However, a brief summary of the Great Britain's approach to regulation is as follows. Online gambling in Great Britain is governed by the Gambling Act 2005, which also regulates all other gambling activities in Great Britain including land-based casinos, betting parlours, and lotteries (Hornle & Zammit, 2010). The Gambling Commission is the regulatory body that is tasked with overseeing all gambling activities other than the National Lottery, and there are no restrictions on the number of licenses that may be issued to online betting operations (Hornle & Zammit, 2010). Section 4 regulates remote gambling, which refers to all online gambling as well as betting via telephone or other non-land-based means (Hornle & Zammit, 2010). Operators receive a remote betting or casino operation license, and are held to the same standard as land-based operators in terms of maintaining their business practices (Hornle & Zammit, 2010). In other words, regulation of online gambling in Great Britain treats online gambling as functionally identical to land-based gambling, and uses the same regulatory structure for both.