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Issue Date: Vol. 51, No. 1, January 2011, Posted On: 1/31/2011


Budding Sweepstakes Viddies Confront Uncertain Future In 2011


Marcus Webb
electronic sweepstakes games, sweepstakes video games

Sweepstakes Videogame

There are three key facts to know about Internet-based sweepstakes video­games, the popular devices that are typically played in Internet cafés on commercial desktop computer terminals.

No. 1. Sweepstakes videogames are highly profitable. Some Internet cafés award top prizes between $1,000 and $5,000, and the results are encouraging customers to flock to locations that have the games. As a result, sweeps games may already be grossing billions of dollars nationwide.

Sweeps operator Chase Brooks, owner of Front Edge Marketing (Chapel Hill, NC) and president of the Internet Based Sweepstakes Organization (IBSO), estimated that North Carolina's sweeps game industry alone currently generates gross revenues of $500 million to $1 billion a year.

This figure is understood to be conservative. Brooks declined to estimate a weekly per-game or per-terminal earnings figure.

No. 2. Sweeps games are highly confounding. Confusion is especially widespread among government officials. The legal status of these devices continues to flummox state legislators, judges, local prosecutors, state attorneys general and police from coast to coast. That's because sweepstakes videogames simulate slot machine play -- but they are not games of chance as defined by most states' gambling laws.

Instead, sweeps games are technically a form of promotion. Typically, the operator sells phone cards or Internet time on the terminals, and also may award cash prizes based on a predetermined sweepstakes model.

As a result of this conundrum, many officials who are certain that sweeps games are illegal gambling devices, and other officials who are confident that sweeps games can be made illegal by passing a simple law or local ordinance, have consistently found themselves overruled by judges -- and sometimes by juries.

No. 3. The market for sweeps games is exploding nationwide. In both Internet cafés and in traditional street locations, sweeps games are proliferating from Maine to California, operated both by traditional street operators and also by industry newcomers. North Carolina alone may have had up to 50,000 sweeps games on location at the peak of the market in 2010, Brooks said.

Patchy law enforcement policies for sweeps games is also a nationwide phenomenon. In some jurisdictions, games and Internet cafés are shut down or legally challenged almost as quickly as they open.

Yet operators often see Internet cafés being shuttered in one town while being granted licenses in the next town just a few miles away. In some cases, sweepstakes cafés in the same town may receive drastically different legal treatment.

Most confusing of all, some Internet cafés with sweeps games are granted licenses, pay high taxes and fees, then have their licenses pulled and their terminals confiscated.

JOBS CREATOR
Sweepstakes videogame operators say their machines make a powerful, positive contribution to local economies.

"Our operators support 10,000 jobs in street locations in North Carolina, plus another 20,000 jobs in Internet cafés," said IBSO's Brooks. "Our lawmakers don't realize how much locations rely on sweepstakes business to keep their doors open." And it's not just dedicated Internet cafés, he insisted. "Even many street locations keep an extra person on the payroll to serve the additional customers who come in just to play," he said.

Brooks said data from North Carolina's state government show 958 Internet cafés were running in fall 2009. Each of these venues supported an average of 20 terminals and was staffed by 20 people on average, he said. Many of these stores not only run sweeps games, but also provide office services such as photocopying. Internet cafés also sell time on Internet terminals, of course, which customers can use for anything from Facebook to online banking and more.

Sweeps devices are also found in thousands of bars and convenience stores around North Carolina, said Brooks.

"It frustrates me when our state lawmakers scream what a tragedy it is when they lose 200 Dell computer jobs, but they have nothing to say about the fact that our state stands to lose tens of thousands of jobs if they close us down," Brooks said.
North Carolina's potential economic losses from shutting down sweepstakes games will go far beyond jobs, Brooks said. The state also stands to lose billions in income over the next few years without sweepstakes games, he said.

In addition, if the state eliminates operator-run sweeps games and hundreds of rental spaces close their doors as a result, officials will find there are usually no replacement tenants to open new businesses in that real estate, Brooks argued.

SMALL STAKES, NOT BIG LOSSES
The typical sweeps player spends $25 to $27 for 60 to 75 minutes of play on a terminal, Brooks said. "People are not losing thousands of dollars playing sweepstakes games," he said. "This kind of spending is in line with what people spend for dinner or a movie these days."

Anti-sweepstakes videogaming politicians take a very different view. North Carolina state senator Martin Nesbitt (D-Buncombe) told local newspapers that "A family member, a mother or father, would get hooked on those things and would come home and had lost everything they had."

Sentiments like these drove North Carolina's General Assembly to pass "An Act to Ban the Use of Electronic Games and Devices for Sweepstakes Purposes" (HB 80) last summer. It was signed July 20, 2010, by Gov. Bev Perdue and took partial effect on Dec. 1 -- with much of the law's teeth removed by judges who found parts of it unconstitutional.

Anti-sweeps accusations like Nesbitt's, as well as the government's passage of HB 80, were based on sheer ignorance, according to Brooks. "Most of our legislators voted to ban something they have no knowledge of," he said. "They never stepped in an Internet café. They have never played a sweepstakes game."

According to Brooks, Internet cafés with sweepstakes games are a long way from dens of iniquity.

"This is modern-day bingo," he said. "We have moved this out into the light. If my grandmother can't play in one of my cafés, I won't keep the doors open. Our rooms are alcohol-free. About 80% of our customers are women. Also, 80% are above age 30. The fastest-growing demographic is women over 50 and many of them in South Carolina don't have a computer at home.

"We offer a comfortable, safe environment where people relax and catch up on their social life," he continued, "but with a different agenda than a meet-up market like a bar where ladies get hit on. We educate our customers about new social media and get them on Facebook. My company just hired a new marketing director to make us more electronic media-friendly because that is the need of my customer."

What follows is a state-by-state review of the sweepstakes videogame market.

NORTH CAROLINA: COURTS, LAWMAKERS AT ODDS
The sweeps ban law, HB 80, was the target of civil lawsuits by the industry even before it took effect. The industry claimed victory on Nov. 22 when Greensboro Judge John Craig III found that sweepstakes videogames deserve at least some First Amendment protection in a case that pitted Hest Technologies and Internet International Technologies against the State of North Carolina.

However, Craig's Nov. 22 ruling also said sweepstakes videogames may not emulate casino-type game presentations as part of their award reveal. On the other hand, arcade-style gameplay is acceptable in connection with sweepstakes award reveals, the judge ruled.

On Nov. 29, Wake County Superior Court Judge Paul Ridgeway ruled that the First Amendment of the U.S. Constitution does not protect sweepstakes videogames.

Most of North Carolina's Internet cafés with sweepstakes videogames have reportedly remained open after implementation of the Dec. 1 ban. Brad Crone, a spokesman for IBSO and the more traditional state operator association, the Entertainment Group of North Carolina (EGNC), said operators launched a new type of sweepstakes videogame that conforms to the law by using amusement-style games instead of casino-type games as the mechanism to reveal the outcome of the sweepstakes.

On Dec. 2, the office of state Attorney General Roy Cooper issued an advisory letter informing law enforcement that most of the ban remains in effect and that police are free to crack down on sweepstakes videogames that feature casino-style gameplay such as poker, keno or slots simulations in the reveal phase.

Surprisingly, the letter also said that police might shut down sweepstakes games that are "not dependent on the skill or dexterity of the player." This proviso appears to undermine the very concept of a sweepstakes, which by definition has nothing to do with skill.

Cooper's office is appealing a Nov. 22 ruling that sweepstakes videogames warrant some First Amendment protection. Cooper followed up his office's advisory letter by releasing a prepared statement: "The courts and the Legislature need to give local law enforcement clearer direction so they can enforce the law effectively. Attorneys with my office will continue to defend vigorously the ban on video gambling."

Crone, Brooks and EGNC leaders have all stated repeatedly that lawmakers will never succeed in outlawing sweepstakes videogames because the industry can keep adapting new technology faster than government can keep updating the laws.

EGNC is friendly to sweeps games, but prefers reinstating North Carolina's traditional video poker market, a $2 billion industry that was outlawed in 2006. For the past two years, EGNC has been lobbying for a well-regulated video lottery system, saying taxes on the machines could add $500 million a year to state coffers.

In a similar move, IBSO will introduce a bill in the legislature's 2011 session to explicitly legalize, regulate and tax operator-run sweepstakes games, said Brooks.

On Dec. 16, Gov. Bev Perdue told reporters that to resolve North Carolina's 2011 budget deficit, expected to be $3.1 billion, she might support legalization of Internet sweepstakes videogames. But she also seemed to indicate that she is leaning against legalization for now.

Meanwhile Rep. Chris Heagarty (D-Wake) said he expects state lawmakers to pass yet another law in 2011 aimed at shutting down all sweepstakes videogames for good.

VIRGINIA: SWEEPS GAMES MAY BE BANNED
More than a dozen Internet cafés have been raided and closed in Virginia because of sweeps games, and some of their operators have been indicted on gambling charges.

Nevertheless, a number of Virginia sweeps operators said the governor, the attorney general and the state law are all on their side.

Some operators claim a new state law signed in May 2010 by Gov. Bob McDonnell protects sweepstakes videogames because it amended the state's gambling statutes to protect sweepstakes promotions as "safe havens" for Virginia businesses, particularly in cases where customers have a chance to win without buying anything.

Attorney General Ken Cuccinelli issued two separate opinion letters about sweeps games in 2010. In July, he wrote that retail Internet providers offering sweepstakes games are not necessarily engaged in illegal gambling as long as patrons can win without buying anything. Accordingly, he said, Internet cafés must be evaluated on a case-by-case basis by local law enforcement.

In October, Cuccinelli issued a second letter stating that if a customer purchased a product or service such as time on the Internet, then ignored the product while the purchase price was used to play a game of chance and win prizes, such a transaction would constitute illegal gambling.

Some operators affixed copies of Cuccinelli's first letter to their Internet terminals, but this did not prevent local police from raiding the venues and shutting down Internet cafés in cities from Roanoke to Virginia Beach. The most recent raids occurred Dec. 22 in Pittsylvania County, where three sites were closed. Sheriff Mike Taylor said the operators might be arrested.

Operator Ronnie Bennett, a North Carolina citizen who operated three videogame sweepstakes parlors in Roanoke in 2009 and early 2010, sued the city to regain 42 machines and nearly $12,000 in cash seized by city police. The outcome of the suit was unknown at press time.

State delegate Clifford L. "Clay" Athey Jr. (R-Front Royal) said he would introduce legislation in the 2011 session of the Virginia General Assembly to ban Internet cafés that allow gambling.

Despite the raids and this possible ban on sweeps games, City Capital Corp. (Raleigh, NC) said its sweepstakes subsidiary Clean Sweeps Holdings planned to open six new sweeps parlors across Viriginia starting in Norfolk in November 2010.

City Capital Corp. calls itself "the industry leader in sweepstakes manufacturing and distribution with over 100 locations and 3,000 machines." Clean Sweep's stores are located in Arizona, Florida, Georgia, Louisiana, Massachusetts, North Carolina, Texas and Virginia; plans are in development to expand to three more states.

OHIO: NEW GOV HAS YET TO WEIGH IN
Local press outlets estimate that several thousand sweeps games are operating in perhaps 300 Internet cafés in at least a dozen Ohio towns. Some of the cafés include up to 60 terminals each.

As occurred in North Carolina, judges in the Buckeye State have issued contradictory rulings on the status of sweeps games. In 2009, the 6th Ohio District Court of Appeals in Toledo ruled that sweepstakes are not gambling devices. But in 2010, an Akron Municipal Court convicted a different sweepstakes game operator on gambling charges, resulting in a six-month jail sentence.

Cleveland's police intelligence unit declared sweepstakes machines to be illegal gambling devices. At least half a dozen city councils passed moratoriums on sweepstakes videogames in October and November. Several more cities were considering similar action.

Parma officials said before they make a final decision whether to lift their ban or make it permanent, they planned to ask the Ohio attorney general if sweepstakes games are legal or not.

Other jurisdictions permit Internet cafés with sweeps games. But they require operators to pay a $5,000 annual licensing fee and $30 a computer terminal on a monthly basis.

A new Republican governor, John Kasich, will take office in January. The Cleveland Plain Dealer declared that he will "inherit the messiest gambling landscape that Ohio ever has seen" due to the confusing situation with sweeps games and other forms of risk-reward entertainment, including casinos and such skill games as Tic Tac Fruit.

The newspaper said sweeps games represent "perhaps the most vexing challenge" for officials. At press time, Kasich had issued no clear signals on his sweeps game policy.

MASSACHUSETTS, CALIFORNIA, FLORIDA: MORE CONFUSION
The situation for sweepstakes videogames is equally unclear in several other states. In Massachusetts, some police departments have announced sweeps games are illegal gambling while others appear to tolerate them.

Meanwhile a Charlotte, NC-based company, Internet Sweepstakes Network, said it has registered with Massachusetts and plans to operate a chain of sweeps cafés on a franchise basis statewide.

In California, sweeps games are operated in Internet cafés around the Bay Area, with some targeted by law enforcement while others are let alone.

Officials from the Oakland City Attorney's office said they would ask state attorney general Jerry Brown for guidance on sweeps game legality, along with the city district attorney and various law enforcement agencies. Brown takes office as governor in January.

In Florida, Assistant Attorney Mark Simpson began 2010 with tough talk against sweepstakes videogames. He said his office had already worked with local prosecutors to target sweeps operators and will continue mounting prosecutions against them.

Some county attorneys have also announced plans to regulate sweeps cafés out of existence locally.

But in October, jurors in a Marion County court took just one hour to acquit sweeps operator Jeaneen Crisante of Marion Internet Services of felony gambling charges. She was also cleared of a misdemeanor charge of possessing a slot machine. Jurors cheered and clapped for the operator as the "not guilty" verdict was announced.

By the end of 2010, the Florida State Attorney's Office had reversed course. Officials said they have decided to drop criminal charges against two sweepstakes video operators accused of violating state gambling laws. Additional "clarification" is needed from the Florida Legislature, prosecutors said, before they can go forward with cases against sweeps games operators.

2011 FORECAST
What will occur with sweepstakes videogames in 2011 is anyone's guess. But in the state that started it all, IBSO president Chase Brooks said he is willing to venture several bold predictions.

First, Brooks predicted that state budget crises will force lawmakers to accept and regulate sweeps games. North Carolina's own budget shortfall in 2011 will be closer to $4 billion than the publicly reported figure of $3.1 billion, he said. When this reality sinks in, public officials will "start to think more positively" about sweeps games, he said.

Second, strong public sentiment in favor of harmless risk-reward entertainment will make itself felt at the ballot box in future elections. Arguably, this has already occurred in Alabama, where both parties ran pro-electronic bingo candidates for governor last November.

Sweeps games exercised clout at the ballot box last fall in North Carolina, Brooks said. "In the recent election, a lot of our Internet cafés did active campaigning against public officials who said our customers are idiots who can't handle their own money," he said. "We flipped about 45% of anti-sweepstakes seats. We did not accomplish this with negative ads but with grass roots, people to people conversations."

Third, Brooks said the First Amendment bulwark -- recently erected by a North Carolina Superior Court judge on the industry's behalf -- will continue to protect sweepstakes videogames.

"Lawmakers are getting close to a brick wall they can't get around -- and that is the First Amendment," he said. "Sweepstakes games manufacturers are loading up their production lines and getting ready with amusement-style software that is protected by the U.S. Constitution."

Brooks' fourth prediction may be the most surprising of all. He said that sweeps games absolutely will be legalized in North Carolina -- but he also warned that the market may be taken away from operators and reserved for the state lottery.

This is a pattern that was set by video poker in Oregon some 15 years ago, where operators supported VLT legalization only to be double-crossed by the state government, which awarded the market to a single operator.

According to Brooks, "The state government here is looking at taking sweepstakes games away from the business community and putting it under the lottery. But money paid to the North Carolina's contract lottery operator goes overseas," he charged.

It could be an explosive charge in an era when exporting jobs and money is highly unpopular because voters believe those resources are desperately needed here at home.

If Brooks is correct, the outcome of America's sweepstakes videogame experiment may have a palpable effect on the nation's economic and political "sweepstakes," too.


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