Online casino game off to a rocky start

Steve Kane's Waltham start-up, GameLogic, was balancing on the thin edge of a poker chip with its first high-profile project in the United States, a partnership with Foxwoods Resort Casino that had its quiet launch last Monday. By Friday, Connecticut's Division of Special Revenue had issued a cease-and-desist order, and it seemed like GameLogic's luck had turned sour.

Called Foxwoods PlayAway, the new offering was an attempt to deliver casino excitement over the Internet, without straying beyond the bounds of the law. The site's clanging bells and spinning fruit replicated the experience of sitting in front of a one-armed bandit almost perfectly -- all that was missing were the roving cocktail waitresses. Friday's brouhaha may yet blow over, allowing PlayAway to return, but it shows the difficulty that start-ups like GameLogic face operating in the world of online gambling -- where the law is still hazy.

Here's how it was supposed to work: a Foxwoods patron would purchase a PlayAway ticket at one of three desks located around the casino, buying fifty $1 games for $50, for instance. At home, the patron visits the Foxwoods website, enters a code from the face of the ticket, and proceeds to play online games like ''Winsome Fruit" (a slot machine game), ''Money Hand Blackjack," or ''Royal Dragon Pai Gow Poker." To collect any winnings, the customer must return to Foxwoods.

Kane's 45-person company has been funded by venture capital firms Bain Capital Ventures and General Catalyst Partners, as well as Maveron, the Seattle VC firm started by Starbucks chairman Howard Schulz. (Previously, Kane was a cofounder of Gamesville, one of the earliest Web gaming sites, which was eventually acquired by Lycos for $207 million.)

GameLogic's strategy is to help US casino companies expand onto the Net, offering legal alternatives to burgeoning gambling sites like PartyGaming, which are illegal in this country. But that strategy could be derailed -- at least temporarily -- by last week's dust-up. The Division of Special Revenue said that the casino hadn't sought its approval for PlayAway, and the state attorney general's office issued a press release that flatly dubbed PlayAway illegal.

''The last few years have been really excellent for the casino industry," says Kane. According to PricewaterhouseCoopers, US casinos raked in $47 billion last year, a number that's expected to grow to $64 billion by the end of the decade.

''But you have to worry that your player is spending some of their gambling dollar and gambling hour with somebody else," says Kane, referring to illegal gambling sites. ''It's not about do you have the most dazzling casino, or the best entertainment, or the best buffet."

Foxwoods' marketing chief, Robert DeSalvio, denies the casino sees illegal gambling sites as a threat.

''I think there are people who want to come and experience the facility firsthand," DeSalvio says. ''I don't think that online gaming will ever replace that."

Still, PlayAway is a way for Foxwoods to maintain a link with its customers even when they're not on the Mashantucket reservation in Southeastern Connecticut. As Kane puts it, ''The casino relationship persists beyond the casino walls."

So how could they argue that this is legal?

When the patron buys that $50 ticket at the casino, a computer randomly generates the outcome of those fifty $1 games the patron will later play at home. All of the games -- even PlayAway's versions of blackjack and poker -- are games of chance, rather than games of skill. There's no reinvesting winnings in more games; once you've pulled the virtual slot machine handle 50 times, that's it.

In essence, you've bought the Foxwoods equivalent of a scratch-off lottery ticket, and used a series of flashy Web-based games, instead of a quarter, to uncover the results. That allows GameLogic and Foxwoods to argue that what they're doing doesn't violate the federal Interstate Wire Act of 1961, which outlaws ''the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers."

With PlayAway, the bet was placed in person, at Foxwoods, and at the moment of purchase, the software is ''playing those games online here on our server," DeSalvio says. The Internet is technically being used only to find out the result of the games, the same way you might use the Net to find out whether a horse you'd bet on at Foxwoods had won its race. (Unlike a horse race, however, a Foxwoods patron can cash in a Play-Away ticket one minute after purchasing it; it's not necessary to actually wait and play the games on a home computer.)

Anthony Cabot, a partner at the law firm of Lewis & Roca in Las Vegas, says, ''This is clearly within the bounds. Once you buy the ticket, you can't alter anything. Everything happens in the casino." (Cabot, a well-known attorney in the casino industry, has done some work for GameLogic.) Cabot compares PlayAway to the ''eGames" offered by the New Jersey Lottery, where a ticket buyer can play games like Tetris to reveal whether the ticket he has purchased is a winner.

Beyond the question of legality, though, there's the question of whether PlayAway will appeal to frequent Foxwoods visitors.

''There isn't anyone else doing this right now, so it'll be interesting to see how much consumer acceptance they'll receive," says Sebastian Sinclair, president of Christiansen Capital Advisors, an analyst firm in New Gloucester, Maine, that follows the casino industry. Sinclair says he's skeptical about PlayAway's potential.

''You're trying to create something that's kind of like gambling, but isn't gambling," he says. ''My point is, that's not entertaining."

But while PlayAway may not satisfy gamblers who spend their evenings participating in high-stakes online poker tournaments, it does offer a realistic slot-machine experience, and Sinclair says about 75 percent of a casino's revenue -- and an even higher percentage of its profits -- are sucked in by slot machines.

Before Foxwoods removed PlayAway from its site Friday (the official launch was supposed to be Aug. 1), I asked Kane whether some people might respond negatively to Foxwoods' Net initiative.

''It'd be wishful thinking that you could introduce any new product, let alone a gambling product, and not have some response from people who are not your best friends," he said.

Prescient.

After the cease-and-desist order was issued, he expressed confidence that GameLogic would be able to continue its negotiations with other prospective customers -- though he wouldn't say on the record whether he thought Foxwoods PlayAway would be back.

''I'd say this is neither a positive or a negative," he said. ''It's just part of the process. There's always tension between the casino operators and the regulators and the device manufacturers."

Scott Kirsner is a contributing editor at Fast Company. He can be reached at kirsner@pobox.com.