The Lowdown on Games of Skill vs. Games of Chance

Reading Time: 14 minutes

Author: Sebastian Scheplitz

The iGaming industry is exponentially growing. It’s also becoming exponentially accessible to more and more people through mobile devices such as tablets and phones.

And, given the industry’s fast-paced, extremely competitive nature, casino gaming has never been so enticing and engaging.

That’s also mainly because game developers are constantly publishing new titles, and at the same time, continually enhancing them.

Much of those enhancements have a lot to do with attracting, engaging, retaining, and then re-engaging users. But it’s not as simple as that, because there is a fine line that developers must toe when developing their games.

Why’s that?

For instance, iGaming companies are subjected to different gambling laws in different countries and across jurisdictions. Therefore, breaching such regulation can land iGaming companies in a lot of legal, financial, and reputational hot water. 

And this could spell a generous fine, not to mention jail time, for those who do so. Because in some countries, the definition of what’s legal is what makes or breaks your business. 

iGaming companies, as well as game developers, therefore, need to be aware of the differences between games of skills and games of chance.

That’s why we’ve come up with clear guidelines as to what constitutes a game of skill and a game of chance, their key differences, and what they mean for your business.

For now, this video will guide you through the differences between these two types of games as well as regulations for them in different countries around the world.

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What is a Game of Skill?

Games of skill, simply put, are driven by a player’s mental or physical expertise, rather than relying solely on the stars aligning in their favor.

That’s not to say that games of skill do not have an element of chance – they sure do. It’s just that individual skills play a larger role in determining a successful outcome.

Games of skill permit the game’s players to develop their proficiency at the game. 

Such games reward players for studying the rules and developing strategies to improve their chances of winning within the game’s framework.

Many games of skill require a lot of practice outside the tournament scene to gain the requisite skills, knowledge, and know-how to achieve a higher success rate.

Some argue that it’s no different from how Phil Ivey wins Poker tournaments or how experienced blackjack players tend to win more often than they lose.

At the same time, others think that relying on the “luck of cards” can’t be considered a “skill”. And different countries have different rules regarding this.

In the US, judges have ruled that Texas Hold’em is a game of skill, while Germany and Austria, for example, still consider it a game of chance or game of luck.

Games of skill, simply put, are driven by a player’s mental or physical expertise, rather than relying solely on the stars aligning in their favor.

Examples of Games of Skill

Texas No-Limit Hold’em Poker is undoubtedly the most popular form of a more skill-based game in the iGaming world, where players duke it out against each other rather than the house. 

Players that have prior experience playing the games have an edge in skill-based games, unlike their chance-based counterparts.

Strategies and techniques such as mixing and matching a player’s play styles can be employed. This means adjusting individual playing styles that work well against the same players in a table who you know play a certain way.

In Poker, for example, although there are different variants, players have the possibility to take different actions at least once, if not more times.

Although these are limited, namely Bet/Raise, Call/Check, or Fold, players have an influence on the course of the game.

And on top, there’s a number of factors that influence decisions in Poker:

And since we’re talking about skill, here are some of the skill components to master Poker:

In general, it’s like this – to understand if a game is a game of skill, you will have to look at the critical repetition frequency (CRF).

The CRF is a formula that is defined as the threshold of repetitions at which a game becomes predominantly influenced by skill rather than by chance.

Without going too much into detail, which you can do by reading the study Quantifying Skill in Games – Theory and Empirical Evidence for Poker, the theoretical interpretation of the CRF is the number of games it would take for a player to reach his 50% / 50% chance-vs-skill cut-off point, illustrated below.

It’s obvious that whom one is playing against makes a big difference in winrate and thus CRF.

For Poker newbies, this number is relatively high, meaning that they have to play a lot of hands to be able to use their skill and not rely on sheer luck of hand any more.

On the other hand, seasoned players (with a lot of repetitions) are skilled enough to use the whole repertoire of the skill components mentioned above.

If you want to dig deeper here, you can read books like “Theory of Poker” or “Mathematics of Poker”.

The lower a game’s CRF, the more likely it will be considered a game of skill.

Regardless, the legal interpretation of the word ‘skill’ depends on the jurisdiction and it may differ from country to country.

Thus, skill-based gaming is still considered gambling in many countries, and that’s why you need to be careful where you offer what. 

Other examples of skill-based gaming include Pai Gow, Blackjack, and Texas Shootout. And even sports betting and horse race betting could be considered skill-based, when punters use their intimate knowledge of the sport, even if the outcome is a result of chance for them. 

What is a Game of Chance?

On the other hand, games of chance are determined primarily by a randomized factor of any type.

And you guessed it right: they have a high CRF.

Games of chance often require players to wager money by choosing a number or pressing a button to get a chance to land on their desired position.

Casino mainstays such as baccarat, craps, casino war, and roulette, or games that give out random results such as slots or sic bo, are considered games of chance.

These could include some degree of skill, or otherwise may involve a greater degree of chance than skill, but possess a chance component.

Games of chance have been around for as long as millennia because they are easy to develop and play. 

For instance, six-sided dice have been used since 2000 BCE and still remains an integral part of gambling to this very day.

Games of chance are determined primarily by a randomized factor of any type.

Examples of Games of Chance

There are plenty of games of chance, and these include online casino games such as Slots, Craps, Roulette, Baccarat, and Video Poker.

Meanwhile, in the US, UK, Canada, Ireland, and Australia, older adults play a lot more Bingo, even going to Bingo halls to play live.

Lotteries and slots are also games of chance, some of which have led to the biggest jackpots in history. 

The Key Differences between Games of Skill vs. Games of Chance

It’s important to understand the differences between both types of games as a game’s legal status can be impacted depending on the definition.

Because even if the mathematics of a game’s CRF is universal, every country has its own definition.

The curious case of Poker

One of the most hotly-debated casino games when it comes to determining its type is Poker, as you have read above.

Several iGaming sites and land-based casinos have found a way to tweak Poker to make it fit even more into the game of skill category by eliminating the element of luck – that is, showing all five cards after the dealer has dealt each player’s respective hands, for example. 

This makes the margins of victory or defeat determined by a player’s bluffing skills, or if a player has premium cards.

Sports betting

What about sports betting? Betting on sports is considered skill-based but remains forbidden in many countries, including several parts of the United States.

Here’s the rub: a punter most of the time bets against the house (or against other punters on a betting exchange like Betfair) when betting on sports – and he or she has no say as to what the outcome of the match will be.

The outcome is left to chance, even if he or she used his skill to make an informed bet.

This is why sporting events cannot be bet on if the jurisdiction – country or state – considers games of chance illegal. 

Regulations around the world

Many countries and jurisdictions do not allow games of chance, while games of skill are permitted.

European Union

Offline and online gambling in the EU have been around for a while. At the time of writing, EU legislation doesn’t have sector-specific regulations for gambling operators.

Members of the EU have the autonomy of how they choose to organize their gambling regulations, as long as they are pursuant to the freedoms stipulated under the Treaty of the Functioning of the European Union (TFEU), as interpreted by the EU Court of Justice.

In particular, the freedom to proffer services or open businesses in another EU member-state.

Most EU member-states allow some games of chance to be marketed on the internet. There are some countries that permit all types of games, and there are some countries that allow only sports betting, casino games, or Poker.

Additionally, there are certain European jurisdictions wherein state-controlled public operators or private operators with exclusive rights run online gambling services as a monopoly.

However, there is an increasing number of EU member-states that have formulated and implemented licensing systems allowing more than one operator to offer gambling services. Based on the existing EU legislation, there is no particular system that is favored or prescribed over others.

It must be noted that certain jurisdictions in the EU either disallow games of skills and games of chance altogether. For instance, in the Netherlands, any form of gambling, betting, or skilled gaming is prohibited unless adequately licensed.

United States

In the United States, states have particular legal requirements as to what counts as being a game of chance or a game of skill. Some states consider Poker as a game of chance due to involving an element of randomness despite its obvious elements of skill (e.g., shuffling a deck of cards). 

There’s a lot of grey area involved, and it varies across state and federal lines. 

Another controversial topic that sparked the debate in the US gambling industry is Fantasy Sports. 

Although many players and operators alike would strongly agree that Fantasy Sports is a game of skill, it is often labeled as gambling or somewhat similar to sports betting.

One of the reasons behind such heated debate is that it is a highly-potential iGaming market, which could churn out almost 15 billion dollars in revenue by 2020.

It is also said to be played by approximately 57 million Americans, which could explain why it has caught the attention of lawmakers and industry leaders recently.  

Therefore, in order to explain what the controversy is all about, we need to get into the basics first. 

What is Fantasy Sports? 

First of all, Fantasy Sports are virtual online games where a player chooses a contest, draft a virtual group of real-life players of a professional sport, such as American Football, Football/Soccer, Basketball, Baseball, or even esports, under a fixed salary cap. 

Once a virtual league is formed, different teams would then compete against each other based on the real-world performance of the chosen players. 

Traditional fantasy sports leagues continue for the entire season after the team’s been formed. However, with the daily fantasy sports (DFS), you can tweak your lineup strategy every day or every week, depending on your score outcomes. 

And depending on the contest type, you can win cash prizes based on your cumulative total points for the entire contest or as soon as the contest ends. 

Therefore, in order to master playing Fantasy Sports, a fair amount of time, money, and research needs to be invested in understanding player values, the probability of winning the games, and coming up with the lineup strategies.

How does it differ from gambling? 

At the end of the day, Fantasy players still win money based on real-life sports events. So, how is it different from gambling? 

Although there are striking similarities, several experts claim that it is based on skills and that only higher-skilled/more knowledgeable users have higher chances of winning.

In contrast, for sports betting, one could easily place a wager on the odds set by the bookie and still could win just from wild luck. 

According to a research conducted by McKinsey & Co., it was found that only the top 1 percent of players can earn a significant amount of profit compared to their average spending on entry fees.

Moreover, to prove the theory that chance plays a mere role in Fantasy Sports, Professor Todd Easton and his team conducted an experiment in which random players and teams were selected to mimic a completely “unskilled” DFS participant. 

The experiment was conducted on FanDuel’s NFL contests and DraftKings’ MLB contests and resulted in losing all 35 DraftKings MLB Double Up contests. The results from FanDuel’s contest also statistically proved that Fantasy Sports scores are not based upon chance. 

(FanDuel and DraftKings are currently the two most popular Fantasy Sports platforms in the United States.)

The research paper stated:

“All 35 entries lost and the odds of this occurring, if these contests are chance, is 1 in 312,681,518. These odds are less likely than winning the Powerball lottery with a single ticket. Thus, daily fantasy sports are not games of chance, and the authors recommend that these contests should not be considered gambling.”

The current legal status of Fantasy Sports

According to The Unlawful Internet Gambling Enforcement Act of 2006 (UIEGA), Fantasy Sports is exempted from the definition of the term ‘bet or wager’ as it involves an outcome generated by a pool of statistics of multiple athletes from several sports events.

“All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.”

The Unlawful Internet Gambling Enforcement Act of 2006

Therefore, Fantasy Sports are considered as a legal gambling activity across the United States apart from the following states: Washington, Idaho, Montana, Nevada, Arizona, Louisiana, and Hawaii – at the time of writing.

This is why United States-based iGaming companies need to be 100% aware of how legislatures and courts determine how they evaluate similar games in their jurisdictions. 

Game developers need to know this because they may breach not only state gambling laws but also federal gambling laws.

Asia

Asia has varying degrees of legalization despite being one of the hottest and fastest-growing markets for iGaming. 

China

In China, all forms of gambling is prohibited except for the Welfare Lottery and the Sports Lottery. 

Not even its favorite pastime, Mahjong, is safe from strict regulations. Mahjong can only be played in licensed mahjong parlors – and there is a limit as to how much money is involved in the game.

Therefore, playing any form of chance-based and skill-based games can be considered illegal in China apart from the government-run lotteries.

For anyone residing in the Republic of China who wants to gamble, they would need to play at a more lenient jurisdiction, such as Macau, as it operates under a different administration system. 

Japan

In Japan, most forms of gambling are illegal. This includes chance-based games as you would see in a casino.

Gambling has effectively been banned in Japan since 1907, save for a few exceptions such as betting (both land-based and online) on horse racing, bicycle racing, motorcycle racing, motorboat racing, and lotteries that are operated by the public sector. 

The most notable exception, of course, is Pachinko. Pachinko is similar to a slot machine game played with pinballs. 

There are thousands of licensed pachinko parlors owned by private companies all over the country. It is by far and large one of the largest gambling businesses in Japan, turning over hundreds of billions of dollars annually. 

While there is some skill involved in the method of how you drop the ball, pachinko is considered a chance-based game. Once the ball is dropped and lands on a particular field, players win tickets. 

Since gambling for cash is deemed illegal in Japan, they cannot be exchanged for cash prizes in the parlor, removed from the parlor, or exchanged with other shops. 

However, one way to work around this is to legally trade them with special prize tokens, which can then be legally sold for cash to another vendor. 

Rest of the World

Brazil 

Brazil is a fascinating case. Gambling has been illegal in Brazil since 1946 – and there isn’t any legal framework, much less legislation since then.

Activities that are considered as “gambling” include: 

• Games whose outcome solely/mainly depends on chance 
• Betting on horse races outside the racetrack or authorized premises 
• Sports betting 

However, in 2018, legislation was finally passed to oversee the regulation of retail and consumer sports betting over the next couple of years. 

The legislation is expected to create massive revenues for the cash-strapped government.

However, progress has ground to a standstill since the COVID-19 pandemic erupted. Thus, it is expected that it will take a little more time before sports betting arrives officially.

Poker, on the other hand, is considered as a skill-based game, and therefore operators are allowed to hold buy-in Poker tournaments.

Fantasy sports is also considered to be a skill game as it depends on the skill set of the players. Therefore, it is not considered gambling in Brazil. However, it is not regulated by any local government authorities. 

Another important point to note is that gambling-like activities are considered as social gaming and are legally allowed as long as no prize money is involved in the process. 

Australia

Australia has no uniform law that regulates gambling in the country. Like the United States, gambling legislation exists at the state and the federal levels of government.

Australia is one of the largest markets, with over 80% of adults engaging in gambling activities of any kind. In fact, it has the highest rate in the world.

However, federal legislation prohibits online casinos, slot machines, and Poker. The same is true for online betting services that offer live betting, unlicensed betting services, and online instant lotteries. 

In terms of land-based gambling, Poker at casinos and outside casinos is regulated as a table game, given that the operator or the venue owner doesn’t gain monetary profit from the bets.

Even though Bingo is a game of chance, regulations for land-based Bingo differ according to states and territories. In most places, licensing is not required if the gross proceed is below a certain limit.

In New South Wales, for instance, the legislation allows people to pay money to play games of skill but prohibits them from playing games of chance. In spite of the huge market, gambling remains strictly regulated in the country.

The future of iGaming

The gambling industry has come a long way since the early days of smoky Bingo halls and sketchy casinos.

The advent of technology is moving at the speed of light, compared to the glacial pace that government legislatures move in to determine what is and what should or shouldn’t be legal.

Just looking at the last ten years, online gambling has mushroomed exponentially. It has led to iGaming operators to up their respective games to capitalize on this highly competitive and lucrative industry.

It has also blurred the lines between skill and chance-based games. Determining skill was much easier defined in the past when it was easier to see its physical manifestation.

Now that the iGaming industry is continuing its expansion, how are such skills transferred to the new mediums? The answer isn’t always as black-and-white as we want it to be.

In the end, people can debate endlessly as to whether which games fall under what category.

More and more people are being reached by iGaming apps and websites than ever before. 

But the fact of the matter is, gambling in all forms is regulated on the basis of their definitions as games of skill and games of chance.

iGaming operators, therefore, need to understand the complex regulations that govern the target market and invest in building sites and apps that are compliant with each, as well as being written in languages that their customers can understand.

That’s why companies operating in the iGaming industry need to invest in iGaming localization in order to develop content and games that are not only high-quality and engaging but also compliant with existing regulations. 

That means performing online casino game translation on the titles that iGaming developers publish, as well as creating relevant content that is suited to the target audience’s location.

iGaming localization is going to be more important than ever in the coming years as technology continues to revolutionize the industry and legislation keeps up with it.

Is your company ready to take a larger piece of the lucrative pie? We’re here to help you with your localization strategy in a professional, experienced, and systematic manner.

Header Image Source: Photo by Alessandro Bogliari on Unsplash