A new hot startup investment area for venture capitalists and celebrities turns video games like 'Fortnite' into cash contests. Some worry it gives kids an invitation to gamble.

  • Video game wagering platforms, where gamers can bet as little as $1 to play strangers on "Call of Duty," "Fortnite," and other games, have exploded during the pandemic. 
  • Some platforms don't do much to keep out underage users, and clinicians and researchers said they're concerned about kids developing gambling habits. 
  • One company catches children by asking users to take selfies with their identification, while another company instructs kids on the best way to take their winnings off that platform. 
  • Visit Business Insider's homepage for more stories.

Brandon, a Canadian high-school student, found an easy way to make money doing what he loved: beating people at video games. 

The teen, who requested anonymity, heard from older friends about a relatively new platform two years ago called Players' Lounge. It lets gamers parlay their passion into profit by wagering on "Fornite" and other games that they play against strangers. Brandon played weekly – he would have played more, but for his sports commitments – and earned about $60. 

But when Brandon, then 16, wanted to cash out, his account was frozen. 

The online platform he competed on, Players' Lounge, never verified his age when he signed up and uploaded money to wager on games. It wasn't until he tried to claim his winnings that he was asked to prove he was over 18. 

"I did think I was at least going to get my investment back, maybe not the profits," Brandon said.

Players' Lounge is one of several video-game-based wagering platforms where players can mix the thumb-twitching adrenaline of their favorite titles — including "Madden NFL," "Fortnite," and "Call of Duty" — with the thrill of winning money. Users of the platforms can bet as little as $1 on a game, or in some cases as much as $500, for a pot that goes to the victor.

Some venture capitalists have spotted big growth opportunities in these nascent businesses, many of which say they have experienced a surge of usage during the pandemic.  

As with so much on the internet, there are varying efforts to ensure users are who they say they are, raising concerns that the sites offer an attractive and comfortable setting for kids to engage in gambling-like behavior at an early age.

Business Insider looked at four of the top platforms that have emerged in recent years – Players' Lounge, Play One Up, UMG, and CMG – and found that there is no consistent age verification process. Some had little more than a checkbox for users to attest that they were 18. UMG, a site that offers both esports tournaments and one-off wagering on gameplay, even provides explicit instructions for how underage users can collect their cash winnings. 

Players' Lounge, which had the most rigorous verification of the bunch, appears to run only sporadic identity checks when new users join the platform — an inherently porous process that two former employees of the company ascribed to management's desire to limit obstacles to user engagement. The company checks identities at various stages determined by a computer system, said CEO Austin Woolridge. 

The lax age verification among video game wagering sites echoes the broader debate over internet platforms like social media as they face pressure to play a more muscular role policing how their sites are used. For video games, a multi-billion dollar market with dedicated users spanning all age groups, the boundaries between entertainment and betting are not always obvious.

"There's no technical barrier" to adding age verification, said Keith White, the executive director of the nonprofit National Council on Problem Gambling, calling the lack of verification a sign of poor leadership at the companies. 

Woolridge, the Players' Lounge CEO, says his platform combines an automated system and manual checks to make sure players don't go over certain tiers of wagering and other thresholds before they're verified. If players are locked out, they should get the money they put in back, and their winnings are largely returned to the opponents who lost. 

"Given our standards, [underage gaming is] not a big problem for us," Woolridge said. "Gamers know how seriously we take this and word spreads. What happens next is that they end up playing on platforms that don't verify age in a meaningful way, if at all." 

A representative for UMG said the company takes age seriously and has a special policy to deal with underage users: Teenage users  – kids between 13 and 18 – can register, add money, and play games for cash, but not withdraw funds.

The UMG website however, specifically directed users under 18 to a third party wallet in order to withdraw funds. After Business Insider asked about the seeming contradiction to its own rules, the UMG spokesperson said the language on the site was being updated.

Another platform, Play One Up, verifies identity at withdrawal with a driver's license or passport photo and the last four digits of the user's Social Security number. A representative declined to comment. 

Activision and Epic Games, which publish "Call of Duty," and "Fortnite," respectively, did not respond to requests for comment, nor did wagering platform CMG. EA, which publishes "Madden NFL," declined to comment. 

A battle royale or a casino royale? 

In the months since the coronavirus pandemic caused widespread lockdowns, several of the video game wagering platforms have said that users and matches have increased significantly. Players' Lounge, for example, saw a 70% jump in matches and a 50% increase in new users in April, compared with March, the CEO told the Wall Street Journal.

Compared to the broader market for online video games, which have hundreds of millions of players, the wagering platforms are still relatively small. The largest have hundreds of thousands of users: CMG has more than 600,000 registered users and 10,000 unique daily players, per one of the founder's LinkedIn profiles. 

New York-based attorney Ryan Morrison, who represents developers, gamers, and others in the video game ecosystem, said he's been approached by parents and kids who have lost hundreds of dollars, and sometimes even tens of thousands of dollars, on video game wagering.

"We get reached out to quite a bit, either by kids, scared their parents will find the credit card bill, or by parents who did find the credit card bill," he said. 

Morrison said he doesn't think the companies themselves are targeting minors, but the games they're built around, like "Fortnite," are particularly appealing for kids.  

Wagering platforms have a simple proposition: bet on your game, play, and the winner takes home the pot, minus a cut for the platform that ranges from 3.75%-15%. They're becoming big businesses. Skillz, which skews to more casual mobile gamers who play games like "Solitaire," not "Call of Duty," is going public at a $3.5 billion valuation via a reverse merger with a so-called blank-check company.

The wagering startups focused on action-based video games like "Fortnite" have attracted venture dollars from big names. Players' Lounge raised a $3 million seed round in March 2019 from a group of venture capitalists, as well as rapper Drake and former Yahoo CEO Marissa Mayer (representatives for Drake and Mayer did not respond to requests for comment). In June, Play One Up brought in seed capital from VCs and professional athletes Denzel Ward and Victor Oladipo, who did not respond to requests for comment. Play One Up then sold a 20% stake in August to publicly-traded Engine Media Holdings, which bought Canadian esports platform UMG last year. 

These companies distinguish the wagers their players place on their own games from the highly-regulated gambling industry. The four wagering platforms Business Insider evaluated only offer what they deem games of skill, not games of luck such as roulette or slots. It's a fine line – there's some luck and randomness inherent in games, such as the random weapons assigned in "Fortnite" — but overall, the gameplay in a Fortnite Battle Royale or in sports game like Madden is considered a skill-based endeavor. Each state decides on its own definition of gambling, said Morrison. 

While the companies may skirt the legal definitions of gambling, David Zendle, a lecturer at the UK's University of York, said they fit the psychological hallmarks of gambling: exchange of money; winners at the expense of losers; a future event determines the exchange of money with a result determined partly by chance; and losses avoided by not taking part.

"They look just like gambling. There's no reason to believe they don't affect people the same way that gambling does," Zendle said. 

Fortnite is one of many big-name titles that gamers can bet on through companies like Players' Lounge and Play One Up.Chesnot/Getty Images

A 2016 paper, which reviewed 44 studies on youth gambling since 2000, found that between 0.2–12.3 % of adolescents globally met criteria for problem gambling.

"We know for a fact that kids that start gambling with money at a young age develop addictions later in life. Gambling at a young age for the most part is a bad idea," said physician Timothy Fong, who co-directs UCLA's Gambling Studies Program.

The National Council on Problem Gambling has received multiple calls from adults and children concerned about Players' Lounge, said White, the executive director. The typical caller for Players' Lounge, he said, is not so much worried about large financial losses incurred. Rather, they're alarmed about someone's obsession with wagering on the platform – a "hallmark of addiction."

"It's fairly low stakes, so for many people, it's a less risky form of gambling, but it can still plant those seeds," White said.

The kid with the McLovin fake ID

The game wagering platforms draw a steady parade of kids, said a former Players' Lounge staffer who described the youngsters' attempts to fool the age verification system — a process that requires the user to pose for a photo while holding up their ID.

Screenshots viewed by Business Insider show comically crude attempts to get past the system, such as a baby-faced blonde boy holding up an elderly woman's driver's license, and another adolescent standing in front of a computer with a sample Dutch ID, available on Wikipedia. 

In one memorable incident, a player attempted to pass off a copy of the famous "McLovin" fake ID card used by a character in the 2007 teen comedy film "Superbad." The enterprising charlatan took the ruse even further by using the below still image from the movie in front of the selfie authenticator. 

When some of those screenshots circulated on an internal company Slack channel, a former Players' Lounge employee said he tried to convince executives to take age verification more seriously. 

While the screenshots showed that the verification system, made by a company called Berbix, was catching youngsters, Players' Lounge was only running the ID checks when users tried to take money out, the source said. There was no barrier to prevent kids from joining the platform and wagering in the first place. The former employee recommended age verification for all new users but said that executives worried about slowing down the onboarding process and losing potential new users. Another former employee said the company prioritized simplicity in onboarding. 

"They blamed the kids for signing up," said the first source. Wooldridge, the Players' Lounge CEO, disputed the allegation.

"We have dotted our i's and crossed our t's to the best of our ability thus far to handle those situations," Woolridge said. 

Players' Lounge now checks some new accounts when users first deposit money, per a Business Insider test of new signups.

Three other platforms – Play One Up, UMG, and CMG – didn't ask for proof of age when a new user deposited money. All four companies asked users to agree that they're 18 or older at signup. 

"There have to be better solutions," said Cam Addair, who runs Game Quitters, a support community for video game addicts. He said there are valid concerns about data privacy during identity verification, but the status quo – asking users to check an 18+ box – doesn't keep kids out.

Bringing home the loot

The videogame wagering platforms have largely flown under the regulatory radar due to their relatively modest size. But they could face greater scrutiny if the lockdowns continue to boost their popularity.

The controversy over in-game virtual items could offer some guidance.

Loot boxes – crates of random virtual items that are purchased with real or virtual currency – have ignited discussions among gamers, researchers, and government agencies about whether they encourage kids to gamble. It's a big business: loot boxes generated $30 billion in revenue in 2018 and are expected to bring in $50 billion next year, per Juniper Research. 

In a 2019 research paper for the Royal Society Open Science, UK researchers, including the University of York's Zendle, found a link between loot box spending and gambling among older adolescent gamers. The link was stronger than the relationship the researchers previously observed in adults who bought loot boxes. 

The link doesn't necessarily mean that loot boxes cause problem gambling – problem gamblers could be more likely to engage with loot boxes, or another factor, like impulsivity, may drive people toward both loot boxes and gambling.  

In 2018, Belgium banned loot boxes, and the UK is considering the matter. The Federal Trade Commission held hearings on loot boxes last year. 

Some games' loot boxes unlock items that stay with the player's account, while other games allow players to trade and resell the virtual goods. In 2016, video game publisher Valve faced state regulatory scrutiny and lawsuits after players took decorated virtual weapons called "skins" to largely unregulated websites to trade, sell, and gamble. 

The market exploded. Consultancy Narus Advisors estimated that $5 billion was gambled on skins in 2016, in part because swapping the colorful weapons, including through roulette and slots games, appealed to young gamers. Outlets like Bloomberg wrote that "virtual weapons are turning teen gamers into serious gamblers" and ESPN profiled a teenager who had spent more than $8,000 on skins gambling and considers himself a recovering addict.  

Facing media and regulatory investigations, Valve said last year that it would tell third-party sites to stop operating. Some, though not all, of the sites shut down.

White, who from his perch in Washington DC works with regulators frequently on gambling issues, said legislators need to take more responsibility for online gambling in videogames, whether it's happening with loot boxes, wagering platforms, or other scenarios. 

"Without national oversight or regulation and without state-level regulation, what we see is maybe some companies trying to be responsible, but most are not," he said. "Most set their level of responsibility down to their competitors, so it's a race to the bottom."

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