Building Better Business

A review of factors impacting variable-payback

and skill-basedEGM technologies

among commercial gaming states

Table of ContentsWho is the Association of Gaming Equipment Manufacturers (AGEM) ..............................3

Executive Summary ............................................................................................................................................4

Another Industry Point of View ...................................................................................................................6

Jurisdictions Allowing Either or Both Skill-Based EGMs and Hybrid EGMs ........................ 7

Jurisdictions Where Both Statutory and Rule Change is Necessary to Allow Skill-Based EGM Games .................................................................................................................8-9

Jurisdictions Where Rulemaking Alone Should Allow Skill-Based EGM Games ....10-12

Casino Floor of The Future .......................................................................................................................... 13

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Cooperation Benefits Everyone in Gaming

The current AGEM membership roster, 157 companies strong based in 23 countries, is a who’s who of the supplier segment of the global gaming industry: AGEM Gold Members: AGS, Ainsworth Game Technology, Aristocrat Technologies, Austrian Gaming Industries, Everi, International Game Technology (IGT), Intralot S.A., Konami Gaming, Merkur Gaming, Scientific Games and Sega Sammy Creation. AGEM Silver Members: Action Gaming, Aruze Gaming America, Casino Technology, Crane Payment Innovations (CPI), Gaming Partners International (GPI), JCM Global, NYX Gaming Group, Ortiz Gaming, Suzo-Happ Group, TCSJohnHuxley and Zitro. AGEM Bronze Members: Abbiati Casino Equipment, Alfastreet, Amatic Industries, APEX gaming, Astro Corp., BetConstruct, Bingotimes Digital Technology, Boss Gaming, Cammegh Limited, Century Gaming Technologies, CG Technology (CGT), Cole Kepro International, DEQ Systems, Euro Games Technology (EGT), Exacta Systems, FBM, Galaxy Gaming, Gamblit Gaming, GameCo, Gaming Arts, Gaming Support, Glory Global Solutions, Gold Club, Grand Vision Gaming, Incredible Technologies, Inspired Gaming, Interblock USA, Intervision Gaming, ISMS, Iverson Gaming Systems, Jumbo Technology, Matsui Gaming Machine Co., Metronia, Patriot Gaming & Electronics, Quixant Ltd., Table Trac, Universal Gaming Resources, Vantiv Entertainment Solutions, Wells-Gardner Technologies and Win Systems. AGEM Associate Members: 3M Touch Systems, Advanced Gaming Associates, Adlink Technology, Advantech-Innocore, Agilysys, AMD, Arrow International, Asimex Global, Atrient, Automated Cashless Systems, AVUITY, Axiomtek, British Group Interactive (BGI), Brown & Brown Insurance of Nevada, Camryn Industries, CardConnect, Carmanah Signs, Casino Connection International, Casino Screens, Catapult Global, CDC Gaming Reports, CMC Trading Engineering, Cooper Levenson, Digital Instinct, DiTronics Financial Services, Duane Morris LLP, DynaGraphic Printing, EFCOtec Corporation, Eilers & Krejcik Gaming, Elite Gaming Technology, Esterline Interface Technologies, Fantini Research, Finnegan, Henderson, Farabow, Garrett & Dunner, Four Corners, Fox Rothschild, G2 Game Design, Gambling Compliance, GAN, Gaming and Entertainment Touch Technology, Gaming Capital Group, Ganlot, Gary Platt Manufacturing, Gasser Chair Company, Genesis Interactive Technologies, GeoComply USA, Global Gaming Group (G3), Greenberg Traurig, Holley, Driggs, Walch, Fine, Wray, Puzey & Thompson, House Advantage, Howard & Howard, Impact Display Solutions, Intel, IPS, James Industries, James Industry Research Group, JCS Technologies, Jones Walker, KEY-BAK, Kontron, Lazcano Sámano, Lewis Roca Rothgerber, Lightstone Solutions, Majestic Realty, Media Resources, Metalcraft, NanoLumens, Olsen Gaming / Spectronix, Outpost Creative, Patir Casino Seating, Portilla Ruy-Díaz y Aguilar, Proforma GPS, Regulatory Management Counselors (RMC), RMMC, RSM US LLP, Sanmina, SCA Gaming, Sightline Payments, Slot Constructor, Southwest Manufacturing Services, Spin Games, StylGame USA, Taft Stettinius & Hollister, Talent Associates, The Bright Group, Tohkoh Plastics America, Touch Dynamic, Touch Embedded Solutions, Tournament One, TOVIS, TraffGen USA, TransAct Technologies, Veridocs, Wells Fargo, Young Electric Sign Company (YESCO) and Zebra Technologies.

In Nevada, this dialog resulted in legislative policy changes in 2015 and the adoption of new regulations and technical standards in 2015 and 2016 intended to promote the design and deployment of a new generation of technology that preserves appropriate oversight of game development and player protections while broadening the appeal of the games. These developments involved —

• Authorizing skill-based games for play on EGMs.

• Allowing flexible payoff percentages based on nondiscriminatory factors.

• Integrating with EGMs social media networking.

• Facilitating concurrent interactive networked game play among players in common games.

• Supporting improvements in electronic commerce transactions.

Observing the Nevada developments, a few other jurisdictions, notably New Jersey, Pennsylvania and Massachusetts, are in various stages of considering changes in policy and law needed to foster regulatory environments supporting the advent of new game technology.

The challenges facing the commercial gaming States are unrelated to the type of EGMs allowed and deployed. Thus, the issue is not whether the jurisdiction permits slot machines, video lottery terminals or Class III gaming devices under a Tribal-State Compact. Instead, there are four conditions that may be obstacles in the commercial jurisdictions, namely does the applicable law —

• Limit permissible games to games of chance or affirmatively disallow skill games.

• Require or suggest game outcomes result only from the use of a random number generator or another approved random process.

• Adopt a specific game testing and authorization protocol that would prevent the approval for use on an EGM of a game of skill, that is one where game outcome is determined predominately by player skill (a “Skill EGM”), or a game in which outcomes that incorporate skill influence in combination with chance results which predominate (a

“Hybrid EGM”).

• Establish a payback percentage rule exceeding 80 percent and disallowing any payback of 100 percent, which can operate to effectively frustrate the development and deployment of Skill EGMs or Hybrid EGMs.

One of the missions of the Association of Gaming Equipment Manufacturers (AGEM) is to work with State legislators and regulatory agencies to ensure that the regulatory systems governing the manufacture and distribution of gaming devices protect the valuable reputation of the gaming industry while fostering an environment for technological innovation.

In furtherance of this mission, in 2014 AGEM began a dialog with legislators, gaming regulators and other public officials about significant changes that were impacting the 24 commercial gaming jurisdictions identified by the American Gaming Association, specifically —

• Declines in revenue from the operation of electronic gaming machines (“EGMs”).

• Generational shifts in demographics of the gambling public.

• Profound influences of technology and social media on the leisure and entertainment industry.

The Association of Gaming Equipment Manufacturers (AGEM) is a non-profit international trade association representing manufacturers and suppliers of electronic gaming devices, lotteries, systems, table games, online technology, key components and support products and services for the gaming industry.

AGEM works to further the interests of gaming equipment suppliers throughout the world. Through political action, regulatory influence, trade show partnerships, educational alliances, information dissemination and good corporate citizenship, the members of AGEM work together to create benefits for every company within the organization.

Together, AGEM has assisted regulatory agencies and participated in the legislative process to solve problems and create a business environment where AGEM members can prosper while providing a strong level of support to education and responsible gaming initiatives. For more information, visit AGEM.org.

AGEM Represents Top Suppliers

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AGEM also does not address here whether as a matter of public policy, elected or appointed officials may conclude that a legislative or regulatory body should debate the offering to the gaming public of new gaming technologies, leaving this to local evaluation of skill-based gaming initiatives.

These summaries do not identify whether technical standards governing the approval of EGMs may require revision, given this topic is subject to considerable substantive variation among the jurisdictions, and will depend on whether and

Independent test labs and other gaming industry observers may advocate that no changes in law may be needed to allow skill-based games for play on EGMs. This view, they urge, is particularly true in the many States where regulatory agencies have or would authorized under existing law forms of electronic poker games.

Because such games combine skill and chance attributes, it is believed regulators already conclude Hybrid EGMs are allowed. A further extension of this interpretation is that Skill EGMs likewise should be authorized because the legality of games deployed on EGMs need not depend on the relative influence of skill or chance on game outcome so long as the integrity of the game is preserved and the nature of the game is fairly described to players.

Accordingly, in these jurisdictions, the task is not to change a statute or a regulation. Instead, the path forward is for the industry to collaborate with gambling control agencies to achieve regulatory acceptance that the State’s current legal oversight system for EGMs supports Hybrid EGMs and perhaps even Skill EGMs. The success of this effort requires developers of skill-based games to establish to the satisfaction of regulators that the technology underpinning the games do not conflict with the State’s public policy mandates and fits within the gaming control agency’s statutorily delegated discretion under existing definitions, rules and technical standards.

These industry advocates acknowledge that regulators may conclude that technical standards used by agencies could need adjustment to address new attributes for EGMs, such as player interaction technologies like touch screens, joy sticks, motion sensors or accelerometers. Modifications to technical standards, however, are typically more easily implemented and eliminate the more elaborate processes of pursuing statutory or regulatory amendments.

Stakeholders in each State will need to evaluate whether existing EGM approval processes used by the jurisdiction’s gambling control agencies already incorporate the flexibility required to permit Hybrid EGMs and Skill EGMs to be developed and deployed, or if not, whether these existing processes can be enhanced given the agency’s interpretation of its authority without resorting to statutory amendments or rulemaking procedures.

Another Industry Point of ViewThe accompanying three tables summarize information from each of the 24 commercial gaming States on these four topics.

The language of State regulations and technical standards applied in many of these jurisdictions may also impose other potential limitations on game development inhibiting deployment of Skill EGMs and Hybrid EGMs. These particular impediments, however, can be addressed when statutes are amended or regulations adopted to eliminate these four principal regulatory challenges.

The 24 commercial gaming States also have statutes, judicial decisions or attorneys general opinions that determine the jurisdictions’ views on what constitutes a game of skill or games of chance, and whether either or both are gambling subject to regulatory and criminal law. This classification might impact the scope of changes in law needed in a particular State to allow for skill-based games offerings on EGMs. For example, some States have statutes that specifically declare that any bet or wager on a skill game or event is illegal. As each jurisdiction evaluates whether any changes in law are appropriate to allow EGMs to operate skill-based games or permit variable paybacks, it will be important to craft either a specific legal safe-harbor for deployment of these technologies, or to examine holistically the States gambling laws to avoid unintended restrictions that could present hurtles to skill-based game development.

how State statute and regulation is changed to facilitate deployment of either or both Skill EGMs and Hybrid EGMs.

The omission of any discussion of Bingo Games, whether allowed by State law or as Class II Gaming under the Indian Gaming Regulatory Act, is intentional. Bingo Games under either State or federal law is generally classified as a game of chance and thus not relevant to developing and deploying skill-based games.

Likewise, AGEM’s examination is not influenced by whether a State allows EGMs to operate as self-contained devices or requires that all authorized EGMs be operated from a centrally located game server system, because this distinction should not govern the determination of whether skill-based games can be offered to the public regardless of the technological platform adopted by the jurisdiction.

To support efforts by commercial gaming jurisdictions to encourage regulatory systems that facilitate new game technology, AGEM has examined the laws of the 24 commercial gaming jurisdictions and identified the principal influences to authorizing Skill EGMs or Hybrid EGMs. Based on this analysis, the 24 commercial gaming jurisdictions can be placed within three general categories, namely —

• Four (4) jurisdictions – California, Nevada, New Jersey and Oklahoma – with an existing legal structure that allows either or both Skill EGMs or Hybrid EGMs to be developed and deployed for use and play.

• Seven (7) jurisdictions – Delaware, Illinois, Iowa, Kansas, Maryland, New Mexico and West Virginia – in which the State Legislatures might need to amend existing statutes and the State gaming regulatory agency may need to adopt related regulations to permit the use or play of Skill EGMs or Hybrid EGMs.

• Thirteen (13) jurisdictions – Colorado, Florida, Indiana, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New York, Ohio, Pennsylvania, Rhode Island and South Dakota – where is appears that only administrative regulations might need modification before Skill EGMs or Hybrid EGMs can be introduced to the market.

In the following three tables the findings of the AGEM study are summarized.

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STATE CUR R E NT L AW SUM MARY PAYBACK RULE N OTATIO NS

California The Tribal-State Compact defines an EGM in terms that permits “games of chance or skill” provided game outcome is determined “as a result of the application of chance.” 1999 Tribal-State Compact § 2.6. Thus, a

compacted tribe should be allowed to offer Hybrid EGMs as compacted Class III Devices without amending the existing Compact, while Skill

EGMs will require a Compact amendment.

75-80 Percent

Nevada Statutes, regulations and technical standards allow for development and deployment of Skill EGMs and Hybrid EGMs.

75 Percent

New Jersey Statutes and temporary administrative regulations support the development and deployment of Skill EGMs and Hybrid EGMs.

83 Percent

Oklahoma Statute authorizes EGMs pursuant to Tribal-State Compact and at licensed racetracks and non-profit organization venues, and provides

game outcome can be influenced by “player performance and opportunity for success can be improved by skill.” Statute requires

such games to satisfy the standards of approved independent testing laboratories without specifying a particular standard.

75 Percent

STATE CUR R E NT L AW SUM MARY PAYBACK RULE N OTATIO NS

Delaware Constitution authorizes state-controlled lotteries which may include EGMs. Statute and regulation limit EGMs to offering games of chance in

which the results must be randomly determined.

87 Percent Statute includes prohibition of bets orwagers on skill contests. Payout

percentage may not exceed 95 percent.

Illinois Statute and regulation mandate that EGMs “must use a random selection process to determine the outcome of each play of a game.”

80 Percent Statute includes prohibition of bets orwagers on skill contests. Payout

percentage may not exceed 100 percent..

Iowa Statute authorizes for various venues certain “gambling games” that are “games of chance” including EGMs. Regulations mandate use of “a random number generator to determine the results of the game . . ..”

80 Percent Statute includes prohibition of bets or wagers on skill contests. Payout

percentage may not exceed 99-100 percent.

Kansas Statute authorizes two categories of EGMs, one of which is a “lottery machine” in which game outcome must result from an element of

chance, but allows for both games of chance and Hybrid EGMs, and another which is an “electronic gaming machine” for play at limited

venues (e.g., pari-mutuel horse race wagering facilities), and includes “bingo, poker, blackjack, keno and slot machines.” Regulations adopt by

reference Gaming Laboratories International, LLC (“GLI”) Standard 11 (Apr. 20, 2007), which requires use of a random number generator.

87 Percent

Jurisdictions Allowing Either or Both Skill-Based EGMs and Hybrid EGMs

Jurisdictions Where Both Statutory and Rule Change is Necessary to Allow Skill-Based EGM Games

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STATE CUR R E NT L AW SUM MARY PAYBACK RULE N OTATIO NS

Maryland Constitution authorizes the operation of EGMs at lottery facilities in five specific locations. Statute provides EGMs may only offer games of chance randomly determined. Regulations require demonstration of

random process and use of random number generator for EGM game outcomes but also contain language suggesting that skill influence may impact outcomes on EGMs. Statute allows for the limited use and play of “game of chance” slot machines by certain charitable and fraternal

organizations in specific counties.

87 Percent Statute includes prohibition of bets or wagers on skill contests. Payout

percentage may not exceed 95 percent.

New Mexico The Tribal-State Compact defines an EGM in terms that require game outcome be determined “materially by chance.” 2015 Tribal-State Compact

§ 2(K). Thus, a compacted tribe should be allowed to offer Hybrid EGMs as compacted Class III Devices without amending the existing Compact,

while Skill EGMs will require a Compact amendment. Otherwise, the State’s Gaming Control Act provides that an EGM game outcome must

be “determined by chance even though accompanied by some skill,” and EGMs must use a random number generator.

80 Percent

West Virginia Statutes authorize for various venues the operation of EGMs where game outcome is made through “computer-generated random selection

of winning combinations based totally or predominantly on chance.” Regulations provide that EGMs must have a random number generator

to determine game outcome.

80 Percent Payout percentage may not exceed 95-99.9 percent.

STATE CUR R E NT L AW SUM MARY PAYBACK RULE N OTATIO NS

Colorado Both Statute and Regulation provide game outcomes in play of an EGM may be influenced by skill. By regulation, an EGM must use a random

selection process.

80 Percent Payout percentage may not exceed 100 percent.

Florida Statute provides that game outcomes on EGMs may be determined “by reason of skill or application of the element of chance or both.” By regulation, EGMs must use a random number generator to determine

game outcomes.

85 Percent Statute includes prohibition of bets or wagers on skill contests.

Indiana Statute allows the operation of any game approved by the Commission as a “wagering device.” Regulation provides that an EGM game outcome

may be determined “by reason of the skill of the operator or application of the element of chance, or both” and restricts the “slot machine” subclass

of EGMs to those where game outcome is determined by a random number generator.

80 Percent Payout percentage may not exceed 100 percent.

Louisiana Statute provides that game outcomes for EGMs, excluding video draw poker devices (“VDP Games”), operated in certain venues, may be

determined “by reason of the skill . . . or application of the element of chance, or both.” VDP Games must use a random number generator

for card selection. By regulation, EGMs are required to determine game outcomes through a random selection process.

80-83 Percent Payout percentage may not exceed 94-99.9 percent.

Massachusetts Statute provides EGM game outcomes may be determined “by reason of skill or application of the element of chance or both.” Regulations

adopt with some exception GLI Standard GLI-11 Version 2.1 (Aug. 25, 2011), requiring use of a random process.

80 Percent

Jurisdictions Where Both Statutory and Rule Change is Necessary to Allow Skill-Based EGM Games (continued)

Jurisdictions Where Rulemaking Alone Should Allow Skill-Based EGM Games

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STATE CUR R E NT L AW SUM MARY PAYBACK RULE N OTATIO NS

Michigan By statute, EGMs are authorized games. Regulations provide that game outcome for EGMs may be “by reason of the skill of the operator or

application of the element of chance, or both.” Regulation provides that EGMs must be equipped with a random number generator to select

game outcomes.

75-80 Percent Payout percentage may not exceed 100 percent.

Mississippi Statute provides that game outcomes on EGM’s may be determined “by reason of skill or application of the element of chance or both.” Regulation states EGMs “must use a random selection process to

determine the game outcome of each play of a game.”

80-83 Percent Statute includes prohibition of bets or wagers on skill contests. Payout

percentage may not exceed 99-100 percent.

Missouri Statute authorizes both games of skill and chance, with a procedure for skill-based games to be approved by petition to the Commission.

Regulations require EGMs to “have a random selection process,” but the rules also state an EGM “that may be affected by player skill must meet the minimum payout percentage requirement even when the skill of

the player provides the lowest possible return to the player from the skill portion of the game.”

80 Percent

New York EGMs approved under Commission standards are authorized. Regulations state EGMs presenting lottery games must determine game outcome among “multiple players competing for a chance to win a randomly drawn prize.” Rules otherwise provide EGM game outcomes must be

based on a random selection process, but indicate that EGMs “that may be affected by player skill shall use a method of play that will provide the

greatest return to the player over a period of continuous play.”

85-90 Percent

STATE CUR R E NT L AW SUM MARY PAYBACK RULE N OTATIO NS

Ohio Statute allows EGMs for both chance games conducted by the state lottery and in casinos where game outcomes are “by reason of the

skill of the operator or application of the element of chance, or both.” Regulations adopt with some exception GLI Standard GLI-11 Version 2.1

(Aug. 25, 2011), requiring game outcomes to be determined using a random process.

85 Percent

Pennsylvania Statute provides EGM game outcomes may be determined “by reason of skill or application of the element of chance or both.” Regulation states each possible slot machine combination producing winning or losing outcomes must be available for random selection at the initiation of

each play, and provides an EGM payout percentage affected by reason of skill must use a method of play with greatest player return.

85 Percent Payout percentage may not exceed 100 percent.

Rhode Island Constitution authorizes state-controlled lotteries as specified by legislature. Statute provides for lotteries, which may include EGMs.

Regulations provide that game outcome on EGMs must be “by chance.”

90 Percent State Lottery Director is authorized to determine payback percentage and

reports issued by State Lottery indicate payback percentages on EGMs are at

least 90 percent.

South Dakota South Dakota allows in certain venues the operation of EGMs where game outcomes are determined “by reason of the skill of the operator or application of the element of chance, or both . . ..” State regulation, however, mandate that EGMs must use a “random selection process.”

80-83 Percent

Jurisdictions Where Rulemaking Alone Should Allow Skill-Based EGM Games (continued)

Jurisdictions Where Rulemaking Alone Should Allow Skill-Based EGM Games (continued)

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Strength in Numbers.

The Casino Floor of The Future

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Marcus Prater, Executive Director +1 702 812 6932 • agem.org@cox.net

Tracy Cohen, Director of Europe + 44 (0) 7970 833 543 • tracy.cohen@agem-europe.com

AGEM.org ©2017 Association of Gaming Equipment Manufacturers (AGEM).Design & photo-illustration by Jeff Farrell/Outpost Creative.com • AGEM and charter ESP member since 2007.

Connie Jones, Director of Responsible Gaming +1 702 528 4374 • connie.jones@agem.org

Join AGEM today and work together with the world’s leading gaming suppliers.