What we can learn about the future of skin betting from the death of online poker
From 2010 to early 2011, I worked as a professional poker player. When I told people how I made my living, they’d either think it was the coolest thing ever, or ask something like “I know you won that much, but how much did you lose?”
Many in the second camp were unable or unwilling to understand that online poker could be beaten over large sample sizes for enough money to make a living, that strong players could do this consistently, and that the sites, as long as they stayed in business, paid out in hard currency with little hassle.
Billion-dollar gambling markets that no one has heard of don’t come along that often.
Poker surged in popularity after 2003. The World Series of Poker overflowed its venue with excess registrants, poker TV shows proliferated, poker players became minor celebrities, major advertisers flooded in, and the secondary market spread the real money around to broadcasters, pundits, managers, coaches, and others, creating a professional class. In these ways, poker was an important precursor to another, more recent boom market: esports, and specifically the hugely popular shooter Counter-Strike: Global Offensive (CS:GO).
But for poker, it all came to a quick end.
Online poker clients failed to obtain explicit legalization within the U.S.—and so, when Congress passed legislation three years later, the “poker boom” ended. The game’s cultural relevance waned, its growth slowed, and its online markets turned into a legal gray area. For the next five years, online poker in the U.S. was in a state of limbo, only to end entirely in April 2011, on “Black Friday.” The websites left the U.S., the growth rate slowed to a trickle, and I had to find another career—even though it still wasn’t actually illegal for me to play online poker.
The online-poker industry, profitable, popular, and lucrative, had squandered its moment. Will the same happen to CS:GO?
“Billion-dollar gambling markets that no one has heard of don’t come along that often,” says Chris Grove, a publisher of two large websites on gambling. Grove isn’t talking about online poker, in 2003. He’s talking about skin betting, in 2016.
It makes no sense for the industry to gamble on skin betting—even by doing nothing
Skin betting refers to Internet-based wagers that use Dota 2 or Counter-Strike: Global Offensive items with purely collectible and cosmetic value in lieu of currency. The biggest skin-betting market by far exists for CS:GO, where the introduction of skins was instrumental in its rise to the top tier of esports. CS:GO is the Cadillac of first-person shooters, earning some $131 million in revenue in 2015. Valve, the game's developer, has cannily poured some of these profits into regular pro-level tournaments, which sell out arenas from Columbus to Cologne, and—like the poker tournaments of yesteryear—draw huge live video audiences and drive interest in the game.
But much of the money made from CS:GO changes hands as far as possible from the arena’s bright lights, behind the Internet’s anonymity and complexity. And CS:GO’s pro-circuit cash prizes—which recently increased from $100,000 to $500,000 for the winning team—are still small change next to the semi-legal “billion-dollar gambling market” that is skin betting.
As with high-level tournaments, skin betting has certainly made CS:GO more popular, filling a demand for players and spectators and indirectly enriching Valve by thickening its revenue streams. But not only does skin betting threaten the integrity of these tournaments, it also threatens the entire secondary market on which the game depends, the company that runs it, and possibly the future of some esports titles as legal and profitable enterprises.
If CS:GO only made $131 million last year, how could skin betting, with a large presence in CS:GO and a small one in Dota 2, be at least a “billion-dollar market”?
I’m a private tutor, and I work with a lot of teenage boys. Most of them play esports. I asked one, a 14-year-old, if he knew about skin betting. “Duh,” he said, “everyone does.” Another, a 16-year-old, was kind enough to take me through the basics.There are two main types of skin betting. In one, bettors stake their skins on pro CS:GO matches: an esports bet. The other type of skin betting is closer to straight-up gambling, where bettors pool their skins with random people on a third-party site and just flip a coin or spin a wheel to determine a winner. This variant, which has no element of skill and little waiting time between wagers, is more perilous to inexperienced gamblers. The 16-year-old told me he knew people who'd lost “thousands of dollars” on skin betting.
These “thousands of dollars” aren’t exactly real money, though. They’re skins that can be sold for close to that amount of money. The abstract value of skins makes skin betting a legal gray area that’s hard to evaluate, and even harder to regulate. Skin betting is big business—big enough to fuel CS:GO’s rise in popularity, but also big enough to instigate a notorious match-fixing scandal, and to attract attention from mainstream media and betting-industry analysts.
This raises a question about skin betting critical to the future of CS:GO: Will it be regulated by the industry that understands it, before it’s regulated by lawmakers who don’t?
Accounts of just how big the skin betting industry is, and how the sites profit, vary from source to source. A recent Bloomberg article estimates that “more than 3 million people wagered $2.3 billion worth of skins on the outcome of esports matches in 2015.” Gambling analyst Luke Cotton puts the figure at a high of $4.5 million per day, while another recent piece claimed $800 million for 2015, but $5 billion for 2016. (For comparison, the total esports market in 2015 is estimated to be worth about $750 million.)
There is also the distinction between sites like csgolounge.com, where participants wager skins on the outcome of CS:GO matches; and sites like roulette.csgoroyale.net, where the bets are as random—and as addictive—as a slot machine.
Poker’s cultural relevance is fading away.
Match-wagering sites and pure-gambling sites differ in their economic models. Csgolounge takes a small commission (2.4 to 2.8 percent) from bettors, while roulette takes the cheapest skin wagered on a spin in place of a percentage commission. Some sites encourage watching ads to generate free “betting points,” which can turn into bettable skins. A Google search for “free csgo skins” brings up a wealth of clients, many of which have been shut down (as scams, or in fear of regulation), or rebranded in an effort to not get shut down.
The glut of secondary-market actors and player options in skin betting (something for everyone, from casual player to pro!) mirrors the numerous customization options of esports themselves. They are also part of the reason skin betting remains, perhaps deliberately, opaque to the non-gaming world, beyond the reach of its oversight—for now.
The lack of meaningful oversight makes skin betting legally perilous. Of course, this same lack of oversight also feeds into the industry’s size. Skin betting is huge because it is easy. Even in places where poker is legal, depositing money on online casinos or poker clients is laborious, requiring a bank account, a credit card, and often a linked address or proof of residence. By contrast, csgolounge.com lets you trade items through connecting with the gaming marketplace Steam, or keeping an on-site inventory.
This makes skin betting appealing to those who want to place bets, but don’t have money. As my 16-year-old student told me, “You can never spend a dollar and accumulate hundreds of dollars worth of skins.” The eSports market brief from Superdata Research declares: “Fans remain more comfortable wagering virtual gaming content over cash.” Convenience, opacity, and thrift are hard to resist. To the small-time bettor, skin betting is as cheap as play-money poker and as thrilling as real-money play.
In poker, the connection between play money and real money was more tenuous. There were “freerolls” that took entries in points and paid out in cash, but the points took hours to accumulate and the payouts were in pennies. On the poker clients’ real-money sides, not only were all the wagers conducted in cash, the game was nothing but a bunch of cash wagers.
This made poker tremendously exciting, and popular. All it needed to grow from a niche subculture into a huge fad was a convenient online platform and an everyman champion.
In 2003, when Chris Moneymaker won the World Series of Poker Main Event off a PokerStars satellite, poker exploded. The 2004 Main Event had three times the entries as in 2003, with attendance peaking at 8,773 in 2006—a growth rate of more than 900 percent in four years. Online poker also got huge. Billion-dollar gambling markets that no one has heard of don’t might not come along that often, but this was one of them. The poker sites and their best players became very rich. To fans of esports, this should sound familiar.
During its boom, poker made powerful enemies at both the national and state levels.
But in 2006, the U.S. Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA), an attempt to catch up to new technology. Prior to the UIGEA, online poker was neither illegal nor regulated: some conservative jurists theorized the old Federal Wire Act forbade it, but in practice it fell outside the scope of existing legislation. After the UIGEA, this was still arguably true. You could still play online poker in the U.S., it was just harder.
So what did the UIGEA do? The scope of the law continues to be debated, but in the years following its passage, sites and players still weren’t prohibited from facilitating or playing online poker in the U.S. However, financial institutions were forbidden from taking payments from U.S. players, or issuing payments to them. Poker champion and Yale Law alum Vanessa Selbst called the legislation "ambiguous, overly burdensome, and disingenuous.”
The UIGEA’s ambiguity let some payment processors, and the sites that used them, continue to operate. Most of the burden fell on the players. You could still play, but the process of getting money on and off the sites went from “almost as easy as skin betting” to “fraught with difficulty.” Since the payment processors had to conceal their relationship with online poker, users would incur mysterious charges from offshore corporations, then struggle to explain to their banks that the charges were legitimate. That’s not to say that real credit-card fraud didn’t also happen—but, more frequently, the sites just wouldn’t take your card.
This changed everything. Recreational players, the livelihood for every poker pro, shied away. And with their departure, the “poker boom” was over. The biggest sites left the U.S. market, live tournament attendance regressed, and TV viewership, ad revenue, and general interest declined—in other words, the secondary market tanked.
In spite of this, online poker continued to grow worldwide, albeit at a slower clip. CS:GO, younger and less established than poker in 2006, might not be so lucky. It needs higher viewership and market penetration to fuel the kind of stratospheric growth online poker experienced from 2003, when it was a $300-million-a-year industry, to 2005, when it grossed $2.6 billion. Poker’s much slower growth from 2006 onward, which could have been avoided had the online giants made greater efforts to coexist with laws and governments, represents a tremendous missed opportunity for the industry.
Esports, like poker, will seek to capitalize on secondary markets—and online betting is a part of that. Legal esports gambling predominantly takes the form of either fantasy esports, at sites like Vulcun and AlphaDraft, or bets on professional matches, at both conventional sportsbooks like Paddy Power and Pinnacle, or esports-dedicated books like Esportgaming and Unikrn.
The number of sites and the diversity of their offerings indicate that competitive play is part of what incentivizes viewers, professionals, speculators, and advertisers to invest in and engage with each game. That, in turn, impels the esports industry’s torrid growth rate. “It is no coincidence CS:GO exploded at the time that skin betting became prevalent,” says Luke Cotton. In the case of CS:GO, the Arms Deal Update, which introduced skins, immediately caused the number of active players to spike, before plateauing at a higher level than before the update; each successive skin update has led to higher spikes, and higher plateaus.
Speedy growth in any industry also incentivizes capitalization outside the system—skin betting, as opposed to skins. Skins are not a legal problem. Online RPGs and other genres have been dishing out in-game rewards at random for over a decade, with no controversy. By contrast, legal opinions on skin betting vary.
“Whether it is legal or not depends on whether you view skins as having a monetary value,” Cotton says. “Some people claim they are only virtual items with no value, and that they are all owned by Valve anyway.” But since the third-party sites are making a ton of money, Cotton doesn’t buy it: “To us, it is clear that skins do have a monetary value.” They can be used, for instance, to purchase unrelated games on Steam, or sold for cash on sites like OPSkins. “If it holds true that the items have monetary value,” Cotton says, “then running a skin betting website that is unlicensed is illegal in most countries.”
Even if skin betting isn’t explicitly illegal—the current climate makes it more of a “gray market” or “informal economy”—some inside the esports and betting industries fret that skin-betting in its current form carries too much risk of regulation or outright prohibition to justify its promotional benefits.
“Skins are a big market and it’s not what esports betting should be,” says Rahul Sood, CEO of Unikrn. Sood’s site, Unikrn, presents one model for what fully legal esports betting can look like. Unikrn contrasts with skin-betting sites in several ways: it deals only in currency; it has no “roulette spins”; it operates only in markets where online sports betting is explicitly legal; and it verifies the ages of its customers in those jurisdictions. (To engage U.S. players, Unikrn has promotional giveaways, but these circumvent illegality by lacking liquidity.)
From a legal and moral perspective, Sood continues, the most troublesome aspect of skin-betting sites is their failure to screen minors—kids like my teenage students and their friends, who have “lost thousands of dollars” worth of skins. That lack of meaningful oversight means nobody knows how many minors are placing bets. But, to some in esports, any amount of minors is too many. And my experiences as a poker player have taught me political attention, and legislation, are things to be feared.
During its boom, poker made powerful enemies at both the national and state levels who employed hyperbolic rhetoric like “Click the mouse, lose the house.” In my home state of Washington, which is often at the vanguard of socially liberal causes like same-sex marriage and weed decriminalization, lawmakers banned online poker. That law’s sponsor, state senator Margarita Prentice, justified her position in this way: “When it comes to gambling, if it isn’t permitted, you can’t do it. It isn’t legal just because it isn’t mentioned. We were attempting to be consistent with the federal law.”
Prentice’s position is extreme, but revealing. To her, wagering is prohibited unless explicitly permitted. In other words, under her interpretation skin betting wouldn't be explicitly allowed, so “you can’t do it.” Though no other state agreed with Prentice—the two biggest poker clients served 49 states up until Black Friday—why risk losing a lawsuit, or provoking more explicit legislation? Rule-makers fear what they don’t understand. And if legislators don’t get online poker, a simple and popular game that’s part of the American mythos, how can they get skin betting, an emergent market within a pair of two newfangled video games even Bloomberg seems confused about?
By the time I started playing online poker, three years after the UIGEA, everyone said the game had “gotten harder”—less profitable. The salad days of putting money on, crushing fish at high stakes, and connecting two apartments with a slide were long-gone. This was a result of a lucrative market becoming more efficient over time, but also an uncertain legal climate that made casual and recreational players reluctant to deposit. In esports terms, online poker was failing at “new-player acquisition." The lack of new players and the ubiquitousness of good players reinforced one another.
In spite of this, I made a decent living from the game, until my career ended abruptly on April 15, 2011: Black Friday. That morning, the Department of Justice filed a federal case against the remaining clients serving the U.S., alleging bank fraud and money laundering, and seizing their domains. Americans couldn’t play online poker anymore, except on tiny and shady small-scale sites. We professionals lost our jobs. And the online-poker industry lost its biggest market.
The UIGEA left the poker sites that remained in the U.S. market (the biggest of which were PokerStars and Full Tilt) and their payment processors no choice but to commit crimes: bank fraud and money laundering, through enabling players to get money on and off the sites, and misrepresenting the source and legitimacy of those funds. But it’s worth mentioning that the poker sites’ payment-processing shenanigans scarcely harmed the players until the sites shut down. Remember: playing online poker was never illegal, and a few sites, operating offshore and under the radar, still accept U.S. players today. But the big ones are gone, and with them, most of the game’s culture and secondary market.
For the players, this was a tragedy; for the legislators, it was nothing. When I emailed Margarita Prentice’s successor after the Washington law was passed, he repeated her same line about “attempting to be consistent with the federal law”—even though federal law is inconclusive. Thousands of people and dozens of organizations launched more visible campaigns to resuscitate online poker.
We thought it would be back in six months, then within a year, then within another year. It still isn’t. All the combined efforts of poker sites and poker advocates have, in the face of inertia and opponents like Vegas plutocrat Sheldon Adelson, amounted to a few piecemeal measures at the state level. Prohibition has become the status quo. Poker’s cultural relevance is fading away. I don’t think about the game much anymore. Neither do the legislators. For esports, this would be a nightmare.
Online poker was, with some notable exceptions, a trustworthy industry for players. We had to believe we could play and profit as long as the sites stayed up, and so they made it so we could. The biggest clients spent millions of dollars on external audits from white-shoe firms like PricewaterhouseCoopers and faced wall-to-wall statistical scrutiny from customers operating third-party data-mining and data-analysis software. They were hugely invested in keeping their business legitimate. The same is true for Valve, esports-betting sites like Unikrn, and sports-betting sites that also spread esports—which is a lot of them.
Skin-betting sites don’t have the same incentive, though, instead cloaking themselves in the thinnest veneer of legitimacy. When I visit Luke Cotton’s csgobetting.com, I read a pop-up: “Are CS:GO Skin Jackpot Sites Rigged?” I have no idea, even after reading this notice from csgojackpot.com, titled “Provably Fair.” Its topmost assertion, “To prove that the system is truely [sic] random and fair we utilize a provably fair system,” does not inspire confidence. Even sites like csgolounge, which my 16-year-old student called “as legit as it gets,” aren’t incentivized to follow or enforce the rules of normal sportsbooks, like forbidding employee bets, or preventing insider tipping. And there’s no chance they go to the trouble or expense to hire independent auditors.
Valve has a huge incentive, and a responsibility to its customer base, to be as transparent as possible.
When there is a lot of money at stake and a lack of accountability and regulation, scams are almost inevitable. With skin betting, this could take a similar form to last year’s DraftKings scandal, where an employee of a daily-fantasy-sports site used confidential information to win $350,000. DraftKings is still around, but the scandal blemished its image and advertising prospects, and triggered an ongoing investigation by the New York Attorney General.
Esports, of course, have not been immune from their own scandals. For a nascent market, these are standard growing pains. But they should be addressed more vigorously, because they destroy confidence in the market for two critical segments: bettors and viewers. After a 2015 StarCraft 2 match-fixing scandal, a manager wrote that the Korean SC2 economy was in the hands of gambling interests, adding that it was worse than even CS:GO.
CS:GO’s own first big match-fixing scandal, in 2014, arose from skin betting, and caused Valve to hand down seven bans among the implicated players.
Esports prizes and salaries, compared to its viewership numbers and skin-betting markets, are still very small, and this creates hospitable conditions for match-fixing: There can be much more money in throwing a match than winning one. A close analogue to the StarCraft 2 and CS:GO hoaxes is the Black Sox Scandal, where bettors paid eight baseball players to throw the 1919 World Series. Such a situation is unthinkable in today’s MLB—the players make too much—but smaller sports leagues are rife with allegations of fixes. These fixes directly harm viewers, which are the the jewel of the secondary market, and can have far-reaching regulatory implications. Baseball is, of course, still legal in the U.S., but online sports betting is not.
CS:GO’s first match-fixing scandal might have been inevitable, and Valve’s decisive justice was an attempt to promise that “It won’t happen again.” Of course, it has already—not just in CS:GO, but other esports, too. It would be more surprising if there weren’t another scandal, then another, then another. A month after the first fix story broke, Valve handed down 19 more bans. But compared to the regulatory threat skins pose, these are tempests in a teapot. Valve’s decisive action against match-fixing contrasts with its failure to address one of its direct causes: skin betting.
If Valve continues to do nothing about skin betting, Cotton foresees a bleak future for not just the skin-betting sites, but also bettors, fans, and the rest of the secondary market, in the form of legal action.
“I think it is only a matter of time before a government body in a major country decides to put its resources into shutting down skin betting,” he writes. It might already be happening. According to Cotton, the U.K. Gambling Commission is already investigating esports out of the public eye, causing the quiet shutdown, without prosecution, of some skin-betting sites.
If all the sites close, Cotton says, “The value of skins will evaporate, and people who use this as a currency to bet with will be wiped out. Skins that are currently worth thousands of dollars would be worth pennies if people were unable to bet with them.” He speculates the massive risk this represents may be preventing Valve from acting. (Valve’s representatives did not respond to multiple requests for comment on this article.)
What happens if the lawmakers act first? “The external regulatory solution is that all the sites get shut down,” Cotton writes. “It's hard to see another outcome.”
Online poker, all but extinct in the U.S., is unequivocally legal or treated as such throughout most of the world. It has been able to cut deals with, or avoid prosecution at the hands of, the majority of governments. Skin betting, less regulated and more esoteric, would not be so fortunate. Cotton raises the possibility of sanctions against Valve, too for not preventing illegal activity. That could in turn impact CS:GO and Dota directly. From there, it’s not hard to imagine investigations into other esports, conducted by governments unsympathetic towards new and complicated technology, hellbent on finding something possibly illegal, and prosecuting lawsuits that would be costly for the esports industry to defend, and devastating for them to lose.
How do esports like CS:GO avoid this fate? Getting rid of skins outright isn’t a possibility—users would hate it. Other developers seem to be staying away from skin betting, perhaps because they recognize the risk. Blizzard's popular new release, Overwatch has skins but not skin trading, much like plenty of other popular esports, like League of Legends. But how does Valve, whose marketplace infrastructure and tolerance of bots that load players’ items on and off the third-party sites enabled skin betting, clean up the mess?
The lack of meaningful oversight makes skin betting legally perilous.
The skins themselves suggest one solution. Virtual currencies and items are not only effective promotional tools, they’re also a terrific hedge against strict gambling laws when used properly. Magic: the Gathering Online, for example, pays prizes in one-dollar “event tickets” and virtual cards, allowing it to operate in Washington state and the rest of the U.S. Esports abound in such solutions, and Valve is remiss for not implementing them.
Ryan Morrison, a video-game lawyer, also puts the onus for skin-betting regulation squarely on Valve: “I am shocked that they let this go on,” he says, alleging that Valve acts “as if [it's] a 10-person indie company.” Of course, this is true only with respect to skin betting. Between constant balance updates, a burgeoning pro scene, a high player-retention rate, and skins minus the betting, Valve’s skillful management has made CS:GO the biggest FPS in esports.
Cotton has a proposal for keeping it that way: “I hope Valve shuts off the bot mechanism that allows the sites to operate, so that there is no longer a need for any government body to investigate such wagering.” No more skin betting would end the legal liability in a pinch.
But such a solution still runs the risk of devaluing skins and ending the CS:GO boom. However passively, Valve has still tied CS:GO’s fortunes to skin betting. This suggests another possibility: Valve taking control of the whole skin-betting industry, through buying out the third-party sites, launching its own platform, and verifying age and jurisdiction. With skin betting firmly under Valve’s thumb, skins could retain their value, which would now be backed by a rock-solid company, and CS:GO could get even bigger.
How much bigger? Skin betting is a gambling market measured by the billions, but Chris Grove points out that “there’s the open question of how much of the volume is genuine.” Much of skin betting’s revenue is inflated by uncertain numbers of underage players, as well as possibly “house players”—gamblers under the employ of the third-party sites—“as a way to generate liquidity and impressive jackpots.”
Even so, $1.5 billion of legitimate bets at 10 percent commission would generate $150 million in revenue, exceeding CS:GO’s $131 million figure from 2015. Luke Cotton’s estimate for legitimized skin-betting revenue was much lower, coming out to $1.35 million per year, “And then [Valve] would have to liquidate the skins,” he says, meaning selling the skins back to players at a loss. This "would take another huge chunk out of that.”
Would the money be worth the trouble? Cotton says maybe, with some caveats: eliminating the current form of skin betting could “kill CS:GO’s popularity in the US and possibly with minors at the same time.” It might not even be an option, he says. Even if Valve were to pare down its markets, it would still have to “pass the [gambling] licensing conditioning, which their previous skin-related activities may prevent." As with post-UIGEA online poker, it may be too late to fully legitimize skin betting from the inside.
Since esports engage the secondary market too, legal betting sites could also help legitimize skin betting. The eSports market brief pegs the 2015 market value of eSports betting and fantasy sites at $55.8 million—much smaller than skin betting. But bringing skin betting into a fully legal “white space,” Unikrn’s stated goal, could give this figure a big boost, draw more attention and capital to cash bets, make both markets more sustainable and transparent, and pre-empt ham-fisted or far-reaching legislation.
“I think Valve should work with good operators to help bring regulation to the space,” says Rahul Sood, the CEO. “We would love to help them think through how to do this.” Mainstream betting sites might be interested, too. It would make sense for big-name bookmakers to move into skin betting in the near future.
In the meantime, Valve has a huge incentive, and a responsibility to its customer base, to be as transparent as possible. The fate of online poker suggests regulating skin betting and other gray markets, is, in the long run, an excellent investment. You know, because billion-dollar gambling markets that no one has heard of don’t come along that often.
Skin betting at present is in the same spot as online poker between the UIGEA and Black Friday: you can’t not do it, so you can do it. This is the opposite of Prentice’s anti-poker argument. But history should make us cautious: online poker felt legit and then, one day, it wasn’t anymore. “I hope we do not see another online poker-esque ‘Black Friday,’” writes Luke Cotton. “Given the volumes of money being wagered, I find it difficult to see another outcome if nothing is done to address it before the U.S. government takes interest. And if the U.S. government investigates, I don't really see them doing it half-heartedly.”
All my students, from elementary school through college, play games. Most play esports. Companies like Valve and Unikrn are an integral part of the economy in this region—and beyond. A few afternoons ago, I saw a commercial on ESPN advertising a TBS CS:GO league. Esports are growing by 40 percent a year. If the potential loss is that blazing growth rate and the current gain is a few million a year from untrustworthy sites, it makes no sense for the industry to gamble on skin betting—even by doing nothing.
CML, a writer in Seattle, has written for Gawker, the Seattle Weekly, and several other publications. He maintains a website at cmlwrites.com and a Twitter at @CMLisawesome.