Area Internet Sweepstakes Cafes: Legal or Not?
By Mark Luedtke
The sign on the sidewalk outside of Roy Smith’s Internet sweepstakes cafe in Middletown says win a TV. The sign on the window advertises Las Vegas-style games and cash prizes. The inside looks similar to a college computer lab, but friendlier. Computer monitors line tables. An attendant sits in an office, ready to provide service. Free snacks are available in the back. An ATM machine stands prominently in a corner in the main room.
Most of the customers are middle-aged women. They play colorful games that look like slot machines on the computer screens while chatting with each other. When asked what they are doing, most respond, “Gambling.”
How the System Works
According to Smith, they are not gambling. Here’s how it works: Customers come to the parlor and purchase long distance calling cards. Smith’s cards sell for 10 cents a minute, so a $5 card, which is the minimum purchase, has 50 minutes of long distance time. The cards also come with sweepstakes points that the customer can use to play Vegas-style games on the terminals in order to win cash prizes. Customers simply swipe their cards through a reader on a terminal and begin playing. When they are done, they swipe their cards again to update them with any winnings.
There are two reasons this isn’t gambling. First, if the customer loses all their sweepstakes points, they still have a phone calling card. In other words, they never risk what they purchased. Smith compares this aspect of his product to sweepstakes games offered by other retailers like McDonalds.
Second, the games are neither games of chance nor games of skill. In fact, the games displayed on the terminals are just for show. The schedule of prizes for each card is determined at the time the card is created. Customers can ask the attendant to redeem their sweepstakes points for the maximum prize at the time of purchase instead of playing the games. And the schedule of prizes are not assigned by chance either. They are assigned by a server from a list with millions of entries in a fixed order. Each new card is assigned the next entry in the list. The game terminal is just a dumb machine that displays the schedule programmed on the card in an entertaining fashion that appears similar to Las Vegas-style slot machine games. The maximum prize is $5,000. Players can’t win more than the maximum on their card, but they can use up their winnings by continuing to play. Since the customer is unaware of the prize schedule assigned to the card, she has incentive to keep playing in hopes of increasing the winnings.
The business model is ingenious. The more minutes the customer buys, the more sweepstakes points they receive. Since all calling cards are basically pure profit because the cost of making a phone call is effectively zero, Smith’s system pays out 92 percent of its income from the cards in prizes. He pays his business expenses and takes his profits out of the other 8 percent. Smith offers free hot dogs, popcorn, other snacks and coffee to entice people to keep playing.
Smith has the law on his side when he says his system is not gambling. In 2008, Toledo police raided the Players Club Internet Cafe owned by Rob Dabish. Dabish went to court and won his case. Judge Francis X. Gorman ruled that the system used by Dabish, the same system used by Smith, had no element of risk and therefore was not gambling. Ohio’s 6th District Court of Appeals upheld this ruling.
Once Dabish won his case, Internet sweepstakes cafes started popping up all over Ohio. Dabish owns Lucky’s Internet Sweepstakes Cafe on North Dixie near Siebenthaler. The Attorney General’s office estimates there are now 280 cafes in Ohio, most in the northwestern part of the State.
Criticism of the cafes has increased with their numbers. Many claim this system is not like the McDonald’s sweepstake games or prizes on bottle caps because people purchasing McDonalds or sodas want the product first, and the sweepstakes prize is extra. They claim the sweepstakes customers buy the phone cards for the sweepstakes points, and they don’t care about the phone card minutes. Dabish disagrees, saying 80 percent of his customers use at least some of the calling card minutes and they understand how his system works.
Others claim the cafe owners are exploiting a loophole in the law to run mini-casinos. According to the Toledo Blade, “Stop Predatory Gambling”, a Washington organization that opposes state lotteries and the spread of casinos, is critical of Internet cafes. ‘They’re trying to bring these mini-casinos all over the community,” said Les Bernal, Executive Director. “We’re living in a period of time when people are looking for ways to get out of their financial predicament. More than one in five Americans thinks the best way to long-term economic security is to play the lottery.”
Some take the opposite view, claiming they dupe customers because they aren’t really gambling houses. For example State Senator Joe Schiavoni complains that because of the predetermined nature of the cards, some people sit down at the machine with no chance of winning. The critics can’t seem to make up their minds. On the one hand they complain the system is gambling, and on the other they complain it’s not.
Critics also claim the cafes promote crime and run down neighborhoods, but no evidence is presented to support those claims. The three cafes visited by the author were all friendly, looked nice and enhanced the strip malls they occupied.
One common criticism repeated by local politicians is the cafes operate in a legal gray area despite the cut and dry ruling by Judge Gorman and the 6th District Court of Appeals. That’s because in 2008, an Akron woman, Cynthia Groff, who ran an Internet sweepstakes cafe pled guilty to running a gambling house after prosecutors seized all her equipment and shut down her business. According to the Akron Beacon Journal, “[Prosecutor] Powley said Groff applied for the prosecutor’s diversion program and agreed to forfeit to the city all the items seized, including the $2,300 and the computers. ‘This business of selling phone cards is just a front for gambling,’ he said.”
Akron’s prosecutor claims he protected the people of Akron from a criminal. Another possibility is prosecutors seized Groff’s legitimate means of making a living and intimidated her into pleading guilty so they could create a gray area in the law and profit by keeping her cash and selling her equipment. This is what Toledo prosecutors did to Dabish, but fortunately for him, he was wealthy enough to fight them and win. That isn’t the only time prosecutors did this to Dabish. Despite having been exonerated in 2008, on January 7 of this year, prosecutors raided Dabish’s cafe in Fremont, seized his equipment and shut down that business. Dabish hasn’t been charged in the case, and he has sued Attorney General Mike DeWine and Fremont officials for violating his rights.
Local towns are using this gray area excuse to prohibit Internet sweepstakes cafes from opening. West Chester and Liberty Township recently put a six month ban on opening them. Smith says Fairfield officials told him not to bother opening a cafe there.
Other towns are zoning the cafes out of existence. Smith was going to open a cafe in Xenia. He rented the property, but the city zoned the cafes as industrial so he couldn’t open in a profitable location. They also created specific regulations for the cafes that cannot be met. For example, one rule prohibits indecent, immoral, and profane language. Because of these new ordinances, Smith must pay rent on a property he can’t use.
Other cities have passed licensing fees as a way to profit off of these successful businesses. For example, Hamilton charges an annual fee of $5,000 a year and $500 per terminal. For a site with 30 terminals, that’s $20,000 a year. The owner gets no additional services from the city in return for these fees. Since those fees increase his costs, the owner will pass those costs on to his customers.
Clash of Interests
It’s probably not coincidence that governments are racing to regulate Internet sweepstakes cafes at the same time that casinos are opening in Ohio. The Cleveland Casino opened on May 14. The Toledo casino opened on May 29. The Cincinnati and Columbus casinos will open later this year. Some forecasters predict gamblers could gamble $3 billion in Ohio in 2013. And the casino industry lobbies relentlessly. The industry spent $2 million last year lobbying for more casinos in Indiana. Their lobbyists in Ohio managed to get an income tax exemption for gambling losses suffered anywhere in the country inserted into the Ohio tax code.
The last thing these casinos want is for people to spend their money in Internet sweepstakes cafes. The same with the politicians. On top of regular taxes, casinos pay 33 percent of revenue to the state. 51 percent of that money gets distributed back to local governments. Money spent in Internet sweepstakes cafes is money that doesn’t go into the pockets of casino owners and politicians, state and local.
And those aren’t the only competing interests. The state lottery, bars and charity gambling events stand to lose money too. The cafe industry was forced to hire its own lobbyists to defend itself. All those interests are working to create HB 195 to regulation the cafes.
While the bill is still in flux, some of the provisions being considered include a minimum $100,000 licensing fee, licensing of equipment suppliers, barring them from proximity to casinos, banning cash payouts, alcohol prohibition and a maximum number per county. The cafes would also be regulated by the Ohio Casino Control Commission, which would put them at the mercy of the casinos.
Even Dabish is calling for state regulation. Since he won his first case, thriving competition has cut into his profits. Regulation would restrict his competition so he could make more money.
One customer said her cafe was like Cheers without the beer, but with all these powerful people competing to maximize their profits at the expense of others through regulation, the cafes will be forced to change.