Virtual Weapons Turn Teen Gamers into Serious Gamblers, Boom in Pro Video Gaming Fueled by $2.3BIL in Online Bets

Bloomberg by Joshua Brustein and Eben Novy-Williams | April 20, 2016


The video game Counter-Strike: Global Offensive, in which players form teams of terrorists and counterinsurgents and shoot at one another, is a favorite of the professional e-sports circuit. A tournament in early April sold out Nationwide Arena in Columbus, Ohio, where the NHL’s Blue Jackets play, and generated 71 million online views over four days. In May, TBS and WME/IMG will launch their own league for CS:GO, as the game is called, streaming games online and broadcasting them on TV on Friday nights.

The game’s current success has made it easy to forget that CS:GO wasn’t an immediate hit for game maker Valve. It was the latest in the aging Counter-Strike series and came out at a time when there was no shortage of other shoot-’em-up games to choose from. Everything changed when Valve introduced something new: decorative virtual weapons, known as “skins,” that could be acquired in the game and sold for real money.
“AK-47 Fuel Injector”; $74.07 – $408.00
Source: CSGOStash
In-game purchases weren’t new, but the cash trade was Valve’s special twist. Within two years, the number of people playing CS:GO had grown 1,500 percent. Today, there are 380,000 people around the world playing the game at any given time.

When it introduced the skins, Valve said in an announcement that the online arms bazaar would let Counter-Strike players “experience all the thrills of black-market weapons trafficking without any of the hanging around in darkened warehouses getting knifed to death.” It was supposed to be a joke. But the reference to black markets was prescient.

Reasonable people can debate whether competitive video gaming is a sport, but it has at least one thing in common with football, basketball, and soccer: People like to bet on the outcome. For CS:GO, the introduction of skins led to a thriving gambling market. People buy skins for cash, then use the skins to place online bets on pro CS:GO matches. Because there’s a liquid market to convert each gun or knife back into cash, laying a bet in skins is essentially the same as betting with real money.
“AWP Elite Build”; $18.80 – $98.35
Source: CSGOStash
CS:GO’s popularity skyrocketed along with the skins gambling markets. Valve has sold 21 million copies of the game and made $567 million in total revenue from the title since it debuted almost four years ago, according to research firm SuperData, and a range of websites now let players trade or sell skins, or use them to gamble.

This kind of betting is far from mainstream, but plenty of people are figuring it out. By one estimate, more than 3 million people wagered $2.3 billion worth of skins on the outcome of e-sports matches in 2015. This, too, has contributed to Valve’s bottom line. The gambling sites run on software built by Valve, and whenever CS:GO skins are sold, the game maker collects 15 percent of the money.

“Nothing about Counter-Strike is about the game anymore,” says Moritz Maurer, head of e-sports integrity at gambling watchdog SportIM. “It’s all about betting and winning.”

Unregulated gambling on sports is illegal almost everywhere in the world, and some lawyers say this qualifies. The highest levels of competition in pro gaming have already seen match fixing by people looking to profit from skins gambling. Valve has ferreted out cheaters at times, but it has not discouraged gambling on its games, nor made any attempt to prevent people from using its products as currency. The company did not respond to repeated requests for comment for this story.

Gambling on Counter-Strike appeals to the game’s biggest fans: teenage boys. Sven, a Dutch 16-year-old, is pretty typical. He and his friends play CS:GO and watch pros play online. Sven said he first tried skins betting after a friend told him that people were making tens of thousands of dollars doing it, and his interest in CS:GO has shifted. “Ever since I have been betting, I have been playing less,” he said. “You’re really hyped and hoping that your team will win. Every kill they get, every round they win, you get way more excited.”

Sven places his bets on an independent website called CSGO Lounge, the biggest destination for Counter-Strike skins gamblers. It provides scant information about its owners, how it complies with local gambling laws, or whether it has any consumer protections in place. Sven is unperturbed. After all, CSGO Lounge has one of the biggest names in video games in its corner. “I fully trust this site since everyone in the community uses it,” he said. “It’s even been recognized and helped by Valve.”

Bets and trade proposals on the website CSGO Lounge
Bets and trade proposals on the website CSGO Lounge.
Source: CSGO Lounge
Based in Bellevue, Wash., Valve is revered in the video game industry. It makes a handful of popular games including the Defense of the Ancients (DotA) series, and runs Steam, an online marketplace that is to PC gaming what Apple’s App Store is to smartphone apps. The private company doesn’t release sales figures, but researcher PrivCo estimates that in 2013 it made a $325 million profit on $1.6 billion in revenue. Gabe Newell, one of its co-founders and the public face of the company, is worth about $2.2 billion, according to Forbes.

Valve takes its virtual economies seriously. At one point, Newell enlisted Greek economist Yanis Varoufakis to help with thorny issues like creating shared currencies between separate virtual economies. (After leaving Valve, Varoufakis became Greece’s minister of finance.)

At Valve’s 2014 developers conference, employee Kyle Davis explained the thinking behind the strategy. The best way to get players deeply engaged in games, the company had determined, was to give away virtual items of random value and encourage a robust market to trade them.
“Nova Hyper Beast”; $6.81 – $29.32
Source: CSGOStash
“This is not an accident. This is by design,” he said. “We see more blogs popping up and more and more e-mails from our players saying, ‘I’m not really sure what happened but I’ve been playing DotA for the last week or two, and I made $100 selling these items that I got.’ This is hugely successful for us.” Davis declined an interview request for this story.

Buying and selling in-game stuff for real-world money has become a common feature of video games, and encouraging players to buy virtual merchandise has become a predominant business model for game companies. But Valve is unique in letting players transfer their virtual possessions to third-party sites, many of which offer gambling. There, users with names such as bulletpoint and ravenouskilljoy stake skins on pro teams. There are also ways to wager that have nothing to do with CS:GO contests. One website runs multiple lottery-style contests per minute, where a player’s odds of winning rise with the value of the skins wagered. Another operates a game that looks like roulette.

These sites, while independently run, use Valve’s software and pay out in skins. Valve employees also communicate with CSGO Lounge and have given technical support to the site, said Courtney Timpson, a community administrator and spokesman for CSGO Lounge. The Valve logo is prominently displayed on the site, and in one post on its forum, a moderator addresses people—especially the “younger audience”—who feel that they have been scammed. “If something is wrong, don’t post on the forums; contact Valve/Steam,” the moderator writes.
The growth in this kind of gambling tracks the growing popularity of e-sports. Millions of people around the world—especially boys and men under the age of 25—now spend their free time watching young, headset-wearing players furiously type and click through online battles. It can be hard to follow the action, but fans of traditional sports should recognize the basic structure. There are teams, leagues, sponsorships, media deals, and, increasingly, money.

When Turner Broadcasting and its partners turned to e-sports to attract an audience that isn’t watching much basic cable, they built their strategy around Counter-Strike. With familiar graphics and a spy-vs.-spy structure, CS:GO is far more accessible than fantasy games like League of Legends, which look like an incomprehensible frenzy of bizarre creatures casting spells on one another to the novice viewer. Watching digitally rendered humans shoot one another is relatively simple by comparison. Turner and WME/IMG did not comment for this story.
“FAMAS Valence”; $2.79 – $21.70
Source: CSGOStash
Promoters of pro gaming are widely interested in betting. E-sports books and skins websites are active sponsors in the space. Those companies aiming to develop regulated sports books cast a wary eye on skins gambling, which they see as illegal competition. “There’s no doubt that regulators will catch up with them, and it will be a sad day for the people who operate these sites,” said Bryce Blum, general counsel for Unikrn, an e-sports gambling firm in Seattle that’s licensed to operate somewhat like a traditional sports book in countries where sports gambling is regulated. It bars U.S. bettors.

For now, the unregulated guys are winning. CSGO Lounge is one of the 700 most popular sites in the world. (In March, 38 million people visited the site, almost five times the traffic of popular online sports book Every day brings a new series of matches, some of which draw action from tens of thousands of accounts. The average match draws $134,000 in skins wagers, according to sports gambling watchdog SportIM, but some fetch much more. One of the most popular matches so far this year, a March contest between teams named Luminosity and Fnatic, drew almost $1.2 million in bets.

This kind of money is bound to cause temptation, and rumors of match fixing are rampant. Earlier this year, reports of a particularly high-profile incident reached Valve, and the company contacted CSGO Lounge to help identify the culprits, according to Timpson. In the end, Valve banned seven players from events it sponsors, and forbade professional players and team staff from gambling on matches, associating with high-volume gamblers, or sharing inside information. It didn’t take any visible action against the gambling sites themselves.

In the U.S., sports betting is illegal in 46 states. CSGO Lounge reminds players to adhere to local gambling laws but doesn’t use technology to restrict players based on geography, as many other gambling sites do. More people visit the site from the U.S. than any other country after Russia.

Gun skins for sale on the website CSGOStash
Gun skins for sale on the website CSGOStash.
Source: CSGOStash
It’s not surprising that skins gambling has avoided legal scrutiny. Obscured by several layers of abstraction, the wagering is tucked away in a subculture that most mainstream legal authorities don’t know exists. Gaming lawyers say Valve could be legally vulnerable; on the other hand, this is a rapidly changing area of the law with little established precedent.

In a handful of cases, judges have ruled that activities carried out entirely with virtual goods within video games shouldn’t be considered gambling, because they have no connection to the real world. “Even in the Internet age, there is a crucial distinction between that which is pretend and that which is real and true,” U.S. District Judge James Bredar wrote in October, dismissing a suit against mobile gaming company Machine Zone. “The laws of California and Maryland do not trifle with play money.”

Like the companies that have successfully defended themselves in court, other prominent game makers, including Zynga, Riot, and Activision Blizzard, have been aggressive about keeping virtual currencies separate from real ones. Valve has not: Its software enables an explicit connection between in-game goods and off-line cash.

Ryan Morrison is a lawyer in New York who specializes in legal issues related to video games. Over the last four months, he says he has received more than two dozen inquiries from people who want to sue Valve after losing money gambling with skins. Many of them are underage, and the biggest losses extend into the thousands of dollars. Underage gamblers are often unwittingly subsidized by their parents, because the skins they’re purchasing to bet with show up as charges on the Steam accounts. None of them would agree to speak to a reporter.

Morrison gets visibly worked up when discussing skins gambling. “Valve acts as if they’re a 10-person indie company,” he said. “I am shocked that they let this go on.”