Wednesday, April 20, 2011

Apocalypse

Last Friday, the webpages at PokerStars.com and FullTiltPoker.com were replaced with the following image. Shortly after that, Americans were no longer able to play poker on these sites. Regardless of the immediate outcomes of this event, and regardless of the eventual future that online poker will have in the U.S. and in the rest of the world, this destructive change marked the sudden and immediate end of the first era of online poker.


After my dozens of hours of wading through online discussions over the past several days, I have been at a loss for what to say regarding what the poker world is calling "Black Friday". I don't have anything valuable to add to the ongoing community conversation for now, so I've erred on the side of staying quiet so as not to add to the chaos.

Nonetheless, I wanted to at least provide a brief summary and a few thoughts, mostly for the benefit of my personal acquaintances who may not be familiar with poker, or who may not have followed this particular issue closely. Since I have this blog, I might as well put it here. It won't be anything new for anyone who has been following the forums.

This is the biggest news in poker history, and the biggest damage ever done to the entire game's economy. It may even be the single highest-impact adverse event in the history of any competitive game.

In as few words as I can:

What happened?

Friday afternoon, the Department of Justice unsealed indictments against individuals associated with the largest U.S.-facing online poker sites, including PokerStars and Full Tilt Poker. These sites served only as a venue for players to play poker against each other, and they did not offer any casino gambling. The charges against the sites include both illegal gambling charges and bank fraud charges. In response to the indictment, these sites blocked U.S. players from depositing, withdrawing, or playing in their games.

Since 2006, there was a reasonable probability that the DOJ would take an action like this at some point. It was more of a matter of when it would happen, rather than if it would happen.

No federal law addresses online poker, though some outdated laws cover sports betting or general gambling games played against the house (rather than between players). The DOJ has felt for years that online poker is illegal under these existing laws, and they have been alone in this assessment.

The UIGEA, passed in 2006, did not change the legality of any form of gambling and failed to provide a framework with which the DOJ could actually prosecute poker sites. However, this law, which targeted banks and other financial intermediaries that dealt with illegal gambling websites, allowed the DOJ to go after the processing of deposits and withdrawals for poker sites. For most major banks, the threat that poker sites might be considered "unlawful online gambling" and that servicing them might attract the costly attention of the DOJ was enough to make it a bad business decision to accept such transactions.

Thus poker sites that continued to serve the U.S. were inevitably destined to work with increasingly less reputable banking partners. At some point, the DOJ was bound to have enough information to make some claim against the poker sites under the broad classifications of money laundering and/or bank fraud. That is the nature of the bank fraud charges in this indictment.

Aside from the alleged bank fraud, which presumably became necessary in order to continue to serve the largest poker market in the world, PokerStars and Full Tilt Poker are reputable, legitimate, global companies. They are explicitly licensed in every country which provides licensing for online poker; the sites would be happy to pay U.S. taxes in exchange for the benefits of U.S. licensing, but the U.S. still has not established a licensing framework. The sites operated in the U.S. under strong legal opinions that peer-to-peer strategy games like online poker do not constitute illegal online gambling. If they can demonstrate that the business of offering online poker to Americans does not constitute illegal online gambling, the bank fraud charges may not apply. It's complicated.

While I generally trust in PokerStars and Full Tilt Poker, I do not support their misrepresentation of their transactions to banks, if the allegations are true.

What are the immediate effects?

Nothing has changed with regard to the legality of online poker for the player. American players are not targeted in any way in this indictment, nor under any federal laws. Even the DOJ agrees that playing online poker does not violate any federal law. All of the laws at play here are those which target only businesses that operate or profit from "illegal gambling".

Despite the fact that the players have broken no laws, their account balances with these sites are currently inaccessible. The sites will attempt to return U.S. players' funds as soon as they are able, but presumably, with an ongoing investigation into allegations of bank fraud in the U.S., the sites are having trouble initiating any further financial transactions in the U.S.

PokerStars and Full Tilt Poker were the only licensed and reputable online poker sites that were willing to accept American players amid the country's ambiguous legal landscape. Other smaller sites continue to serve the U.S., but are neither safe nor liquid enough for the consideration of serious poker players, especially as moving money to and from international poker sites will continue to become more and more difficult until the U.S. changes its laws.

Even if the indicted sites go on to win in court and to clear themselves of all charges, which would allow them to resume their U.S.-facing business, this will take years.

So, basically, for now and for the immediate future, online poker no longer exists in America.

What happens next?

Americans will continue to be unable to access their balances with these sites for some time. While historical precedent and most of the informed legal opinions I've read say that the players will get their money back eventually (possibly years), there's some chance that these funds are permanently seized by the DOJ due to the nature of the fraud charges or otherwise lost due to a future bankruptcy of these one-time giant global poker companies. Having read many different perspectives on this complex legal situation, I think there's at least a 95% chance that U.S. players will eventually get back their money. edit: Just now, a DOJ press release confirmed that the DOJ is looking to allow the sites to return players' money in an expedient manner, so upgrade this to 99%.

Tens of thousands of American online poker pros are essentially out of a job (I do not expect the general public to sympathize with this). Millions more American gamers have lost the opportunity to conveniently and efficiently play the game that they love and responsibly enjoy. Those few that are addicted to gambling on poker will continue to play at the remaining unsafe sites. For both professional and recreational players, replacing online poker with live, brick-and-mortar poker at U.S. casinos is rarely an option, due geographical concerns as well as a variety of economic and efficiency reasons. Serious players will have few options for practicing and improving their game, and the rest of the world will pull ahead of America at competitive poker.

The entire modern global poker industry of the past several years has been built upon PokerStars and Full Tilt Poker, and the damage done to these two big online sites will have effects on the entire world of poker. Some poker tournament circuits and televised poker programs have already been cancelled, and countless more industry and media jobs will be disappearing as the poker economy contracts. I expect that this amounts to thousands of "real-life" jobs lost for Americans. The same negative effects will also carry over into other countries to some extent, as international players will have lost the ability to compete in a fully global player pool.

When the indictments are resolved, hopefully the illegal gambling charges are addressed in a way that leads to a court case that definitively establishes that poker is not unlawful gambling under U.S. law. Depending on who you ask, the illegal gambling charges are somewhere in between a real stretch legally and purely frivolous or just for show. However, the bank fraud charges are severe, and while not necessarily an unwinnable battle for the poker sites, it looks pretty bad for them — though, as I noted earlier, some say that the nature of whether or not fraud was committed does depend in some way upon whether or not the underlying operations were illegal gambling. Nonetheless, because of the severity of the bank fraud charges, the full set of indictments may be settled out-of-court, which would be a tremendous loss for the game of poker.

The silver lining in this catastrophe is the opportunity for poker to finally get its day in court, and I hope that those associated with PokerStars and Full Tilt Poker will push for this.

The other possible silver lining would be if this indictment sped up the process of passing U.S. legislation to allow for domestic licensing of online poker. Some speculate that it will help compel U.S. interests to work towards it faster, as domestic casino companies will no longer need to worry about competing with established international sites for the U.S. player base. Others expect the controversy of this event to dissuade our elected representatives from embracing anything related to online poker. There does not seem to be a consensus.

Personal impact and thoughts

While I knew this day was likely to come at any moment in the past 4.5 years, and while I managed my money and planned my poker career accordingly, that hasn't made it easy to handle.

I play the vast majority of my poker online and will not be able to replace it with live poker to any meaningful degree. Moving to another country to play online poker would be incompatible with the rest of my life. This affects not only my finances, but also my happiness and life balance. Poker has been invaluable to me over the years as a unique outlet for mental exercise, strategic competition, and social interaction, all while being an excellent complement to my academic lifestyle. Over the past few days, it has really sunk in that I truly do value the game on these merits, rather than solely as an income source.

The entire premise of the government's various aggressive actions against online poker as "gambling", as well as society's refusal to properly treat poker the way identically-structured strategy games are treated, is something I have always taken serious issue with. This event is the culmination of a decade of ignorant and misguided policy towards my game, and it really hurts.

I was prepared for this and I'll be okay, but this is life-changing for me — and not in any good ways.

What to do?

If you have any interest in supporting the game of poker, the rights of competitive strategy gamers, or even just in supporting this because it is important to me, I would encourage you to take a look at the PPA's action plan and contact some of our elected representatives. While the charges against these particular poker sites may be legitimate, now that the perceived "bad actors" would be out of the picture anyway, this is an opportunity to gather support for U.S. legislation that will license and domestically regulate online poker. The government needs to hear that millions of its citizens are being negatively impacted by its policies towards online poker, and that its citizens deserve the consumer protections of a safe and explicitly-legal online poker landscape.

The poker world will never be the same as it was prior to Friday, but it will inevitably be rebuilt sometime in the next few years. The second, permanent era of online poker will emerge in a way that suits the interests of U.S. politicians and powerful domestic casino interests. This is discouraging at best, but it's the way laws get changed. As far as the health of poker and its players are concerned: the sooner it happens, the better. Every day in which well-minded, law-abiding, tax-paying Americans don't have access to compete at online poker is an undue intrusion into personal liberties and an insult to the integrity of this great game.

Links to more information

Ongoing 2+2 sticky thread with links to all relevant documents, press releases, and media coverage

Active Twitter folks on the issue and its aftermath: CKrafcik, GaryWise1, Karak2p2, Kevmath, Pokerati, taxdood

PPA's action plan


That's it for now. In general, this blog will continue, as most of my planned future topics were not entirely confined to online poker.

Saturday, April 9, 2011

A logical approach to the skill vs. luck structure of cash games vs. tournaments

In a ruling that, from a practical standpoint, is completely backwards, the Supreme Court in Sweden essentially decided that tournament poker is skill and cash game poker is luck.

Now, there may be more nuance in the ruling than that one article provides. But, if I recall correctly, this is not the first jurisdiction or court ruling that has found tournament poker to be "predominantly skill" or "not gambling" while finding the opposite for cash game poker.

I've even encountered poker players who believe either of these.

After all, the structure of tournament poker strongly resembles that of tournaments in other games that are commonly-accepted as games of skill and are rarely treated as gambling, while cash game poker looks a lot like "table games" in a casino, to the untrained eye.

Perhaps we can even sympathize with those who have made these decisions; perhaps they recognize that skill will always predominate over chance in the long run in any game, and that tournament poker "locks players in" to playing multiple hands of poker. Meanwhile, cash game poker lets players leave after one hand, which might give some gamblers the opportunity to take a quick risk on a hand of poker, just as they might do on the spin of a roulette wheel.

I have a reasoned argument as to why it cannot be the case that all tournaments "are skill" ("are not gambling") while cash games "are luck" ("are gambling").

A logical argument

Assume that it is somehow sensible or consistent that all tournaments are skill while all cash games are luck.

Then a 6-handed, winner-take-all tournament with a $200 entry fee, $200 in starting chips, and fixed (nonincreasing) $1/$2 blinds is skill.

Consider the following modifications to the rules of the tournament:

1) Players can buy in for less than the full amount if they wish, and they receive a proportional amount of chips; since the tournament is winner-take-all, and since each player's winning chances are equal to the ratio of their chips to total chips in play when all players are equally skilled, no inherent strategic advantage is given by this option (modulo short-stack advantages).

2) Players can rebuy when they lose all their chips or whenever they want to add on back up to the maximum.

3) If a player leaves the game by going broke or cashing out, a different player can take the seat and buy in just as the previous player could have rebought.

4) Players can "buy out" of the tournament at any time for their fair share of chip equity, equal to the ratio of their stack to the remaining prize pool. Ignoring the position of the button, again, since the tournament is winner-take-all, this is equal to the expected payoff for the player when he or she is at an equal skill level to his or her opponents, therefore this modification affords no in-game strategic advantage.

Making all four of these changes to the tournament makes it equivalent to a $1/$2 cash game.

So, which of these extra rules changed the fundamental "skill" or "gambling" nature of the game?

Do any of these changes make the game less skillful, or more luck-based?

#1 doesn't reduce skill. While shorter-stacked poker involves less complicated decisions, the level of stack-depth skill at work in any poker game with varying stack sizes will always be at least that of the same poker game if all stack sizes were at the minimum. An appropriate minimum buyin requirement can ensure that this level of skill is suitable.

#2 doesn't reduce skill. It's just a way for players to reenter the game. Notably, it allows a skilled player to continue to participate in the game, even if some bit of "bad luck" caused him to lose a big hand. In the right context, this would only increase skill relative to luck.

#3 doesn't reduce skill, same as above.

#4 doesn't reduce skill. It's just a way for players to leave the game early on any given night. The skill is still exercised over whatever number of hands they chose to play. I get that #4 is the one that Sweden and others might feel does change the skill vs. luck nature of the game, but even if the luck doesn't "even out" until a "long run" is reached, it's important to recognize:
  • If, say, we determine that 1,000 hands is the point where "skill predominates" in a certain poker game, there's no logical or practical difference between that player playing 1,000 hands in one night, or by playing those 1,000 hands in several sessions over the course of his life.
  • Almost every type of poker player will play sufficiently many hands in their life, even casual players.
(And I'm not even bothering to consider the fact that, by any measure, the amount of time in a cash game where "skill predominates" is going to be much, much less than the same necessary amount of time in tournament poker, as any actual poker player knowledgeable of the "LOL donkaments" creed is aware.)

So, with all due respect to naïve judges' attempts to implement an approach to skill vs. luck that recognizes that the duration of play affects the influence of luck on outcomes, a duration-based legal classification has logical as well as practical issues.

Classifying cash game poker as "luck" because it is possible to play it for a very short amount of time per day would be the same as deeming chess as "skill" under normal conditions, but "luck" when the same game of chess is broken up over several days and played a few moves at a time.

Do any of these changes make the game more "gambling"?

#1 doesn't introduce any "gambling". Certainly, giving players the option to play for less than the nominal amount can only reduce the amount of "gambling", by any definition.

#2 doesn't introduce any "gambling". In an environment where all tournaments are "not gambling", a player who has lost in a tournament could very easily enter a new tournament right away, if he were inclined. There's no difference between letting him do that on some table across the room and letting him do that at the same table he started at.

#3 doesn't introduce any "gambling", it just changes the particular players that might be participating at any time.

#4 doesn't introduce any "gambling". Again, this option can only reduce the amount of "gambling", and it does so in an incredibly significant way, especially in big tournaments.

In fact, the effects of #4 are so huge that I would argue that, from any sensible perspective, tournament poker has to be more "gambling" than the equivalent cash game. The primary difference between the two is that tournament poker forces its players to continue taking risks with their money rather than giving them the option to leave when they would like to, and certainly most tournaments will end with the remaining players taking on much more risk than they would be comfortable with, or rationally interested in.

For example, in a $1/$2 cash game, a player can leave if he triples up his stack and doesn't want to risk losing $600. In the equivalent $200-buyin tournament (think the Sunday Million), he can't leave with his $600-equivalent stack, nor any higher stack. If he makes the final table, he will be effectively taking risks for tens of thousands of dollars on every hand.

In almost any multi-table tournament with a reasonable field size, very few of the players who choose to play the tournament are actually well-equipped to rationally tolerate the financial risk they will have to endure if they make it to the end of the tournament and no deal is made. Utility annihilation, etc.

Conclusions

It cannot be logically consistent for all tournaments to be "skill" or "not gambling" while all cash games are otherwise. The differences between the two types of poker are largely practical, in that cash game poker accommodates players' personal schedules and personal risk tolerances much better than tournament poker. As far as game design goes, the additional game flexibility options of the cash game allow for a broader audience to participate, spending time on the game as it is convenient for them. This effect has to be an economic benefit to society from any perspective.

Any factor of cash games that might intuitively seem like enabling "luck" or "gambling" would also exist in tournaments of a certain blind structure, or a series of such tournaments.

Would Sweden really hope to provide regulations over tournament stack/blind structure? After all, it would be easy to define a tournament structure with very large blinds that would be over in fewer hands than any cash game.

Would Sweden also hope to regulate over deal-making in tournaments? After all, if a group of players join a winner-take-all tournament with the intent of chopping the prize pool with a chip-proportional deal after a certain amount of time, that's identical to a cash game.

There's an analogy to finance and investing here. Perhaps a government might decide that it doesn't want its citizens taking any short-term financial risk (a la playing only a few hands of a cash game), and thus only allows long-term investment by letting individuals only deal in instruments whose payoffs are far enough into the future. Consider a bond that pays out $100 in 365 days. Perhaps the current interest rates are such that the value of that bond today is $95. But if somebody buys that bond now, and the interest rates change such that the value increases to $98 the next day, he can't really be stopped from selling that bond to another person and locking up his quick $3 win -- the exact same $3 short-term payoff he could have had by speculating in interest rate futures. Generally, any short-term payoff can be derived synthetically by trading in longer-term payoffs, and settling tournaments early via deal-making achieves the exact same result in poker.

Would Sweden presumably approve of a cash game variant where players were artificially "locked in" to playing a certain number of hours or hands before they could leave? If so, then we're back to the silliness of the example of a game of chess being "skill", but the same game of chess being "luck" when played a few moves at a time and over the course of several days.

From a practical standpoint, looking at the ruling from any of these three natural conclusions should highlight the logical absurdity of the ruling in a manner which I would hope and expect to be apparent to everybody, regardless of knowledge or experience with poker.
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