The Booming Business of Cash Prize Gaming
In April 2013, Skillz launched the first U.S. platform to host cash prize competitions for mobile video games on Android smartphones.
CEO Andrew Paradise and COO Casey Chafkin co-founded Skillz to help mobile game developers add cash prize competitions to their games. With 1.5 million users, a number that they claim doubles every month, Skillz hosts 50,000 micro-tournaments everyday across 150 different games. On Wednesday, Skillz released its iOS developer kit and now has a total of 300 game studios with 2,700 signed up.
And if you don't think the demand for cash tournaments for skill-based video games--as opposed to gambling or games of chance--is low, you're wrong.
As consulting firm Frank N. Magid Associates recently predicted, the U.S. skill-based gaming market will grow 350 percent by 2017 and rake in $9 billion in annual revenue. So, Skillz is working to capture some of that action.
But, it wasn't easy to just hop into the industry. Cash competitions for skill-based games are legal in 46 states--with 36 that have adopted the same block of regulations and nine with their own versions and caveats. The difference between gambling and cash competitions comes down to two factors: if a skilled player can beat an unskilled player 75 percent of the time and if there is no systemic chance. Roulette, blackjack, poker, scratch-off tickets, and slot machines are all considered gambling--an experienced player doesn't have a better chance at winning compared to a new player. But for skill-based games, like pool, football, basketball, and many video games, the more you play the better you should get.
Below, check out how Skillz navigated cash-prize legislation and avoided becoming an gambling platform stuck waiting for legislation.
Know the law.
Paradise tells Inc. during an interview that their main concern before launching was to know the law inside and out. They didn't want the trouble gambling startups were getting into by being tangled in a web of regulations and waiting for legislation.
"We spent the first few months getting to know the laws. We started off hiring a legal firm in Boston that has expertise in skilled gaming and advised a company that runs many of the states' lotteries. We had them help us find other skilled game lawyers around the country to pitch in too. Then we have a 100-page bible on state-by-state legislation, how it works, where we operate and why and where we don't and why," he says.
Paradise says they also worried about the misconceptions of the public. He says many people do not understand gaming culture. The aspect that makes competitive video gaming fun is that it's about skill, not chance.
Gambling is fun (and compulsive) because you could either win the jackpot, or lose your house with a pull of the lever, or a flip of a card. So, they needed to make sure they could present themselves the correct way. To start a cash-prize tournament, you pay an entry fee, usually around 60 cents and then if you win the tournament you get the prize pool--you don't make bets and you don't win the progressive jackpot. To help people understand he hasn't built a gambling platform, he says this: "The people who are making money on the system are good at the game. If you and I go to the roulette table in Las Vegas, I'm not going to do any better than you are (through skill). But in all of our games, just like in sports, it really depends on how good you are at the game," he says. "My analogy is if I go into a cash competition with Tiger Woods [like the PGA Tour], do you think I could beat him? No one would ever say, that's a gamble whether or not he'll beat me."
Focus on one thing.
Paradise says they could've launched their platform across 46 states, but decided to go with the group of 37 states that all have adopted the same regulations, which include New York, Vermont, California, Massachusetts. They prevent players outside that group of states, like Arizona, from playing by utilizing the player's smartphone GPS and building geofences which block certain states from access. He says focusing on states with uniform, simple laws on cash competitions was the best idea.
"When you're building a startup, you need to focus on one thing. I like to use the analogy of starting the very first ice cream business and first focusing on vanilla. The 37 states we are operating in all have the same laws around cash competitions and skills-based games--states like New York that run the New York Marathon, California, and Massachusetts all have uniform legislation," he says.
He added: "First we wanted to do 46 states, but the remaining nine states have varied legislation. As a small company, it makes it harder to operate and as an entrepreneur building a new company in a new industry, you just want to focus on vanilla--a new thing no one knows they even like it. My point is, when you're introducing something novel you don't want to try to do too many innovations, formats, or take on too much. We'll get there to those states, but it's not something you want to hit right out of the gate. Go for a meaningful toehold and go from there instead of trying to take on legislation and fail."
Test the games.
Two tests need to be run on every game--a predominance test, which analyzes what percentage of the time a skilled player will beat an unskilled player (needs to be 75 percent or higher); and the materiality test, which measure the amount of systemic chance and randomness. Skillz's platform works like this: A game developer downloads Skillz's free SDK and installs it into their game. It then will make sure the game is skill-based and removes all random aspects of the game and makes all the different levels uniform for each player. Skillz has a patent pending for their game analyzer that figures out if a given game is skill or chance and to what extent.
"Through mathematics and data mining, we can actually show to what extent people get better at a given game," he says. "The way we remove systemic chance is to use our algorithm that replaces random integer generation in a given game. What that means is that if two people play a game like Bubble Shooter, they will get the same colored bubbles and same color patterns thrown at them. It wouldn't be fair if one had an easy board and the other had an hard one. The two players wouldn't really be competing, they'd just be playing the same game."