A Legal Alternative To Online Gambling

[Qbins Missile Crisis]

Here's a business model for you: Give people money and let them place any bet they'd like. If they win, they get to keep the spoils; if they lose, give them more money to play with.

No, we're not talking about the subprime mortgage business. We're talking about a new--and perfectly legal--online gambling outfit called Centsports.com, founded by budding Webpreneur Victor Palmer in College Station, Texas.

Online gambling has always been illegal, even though people got away with it for years. In 2006, U.S. federal prosecutors started cracking down on payment processors, making things a little harder, even for off-shore virtual casino operators and their customers.
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Palmer skirts this pesky problem by banking his customers. Three elements have to be present to violate most state gambling laws--namely "prize, chance and consideration," says attorney Chuck Humphrey, a gaming-law specialist and author of the Gambling Law U.S. blog. Because Centsports.com doesn't allow users to bet their own stash, no "consideration" is involved, and thus all is kosher. Quips Palmer: "Congress assumes if you’re dumb enough to give away money, then go for it."

Here's how the site works. Each user starts off with 10 cents in his or her account, provided by Centsports. (You need only register a name and password.) From there, they can bet on any event for which Las Vegas bookmakers set a line.

Once users accumulate $20 in winnings--the equivalent of doubling your money eight times, or striking gold on a 200-to-1 long shot--they can cash out a minimum of $10 and receive an actual check in the mail. (In terms of "consideration," winnings on that initial 10-cent stake don't constitute ownership until actually cashed out.) Losers risk nothing--except perhaps a touch of pride--and get immediately restaked with fresh dimes.

Cashing out is not exactly straight forward. To ensure he can always pay the electric bill, Palmer puts the breaks on payouts (talk about having a house edge). Users compete with each other to snag their winnings from a community pot; big winners get preference.

Users can also earn money by referring friends to Centsports.com. The incentive: 5% of any winnings their friends rack up.

How does Palmer aim to turn a profit? Hungry advertisers--which thus far include Skype, Pizza Hut and the National Basketball Association--and a meager marketing budget consisting of those 10-cent initial stakes and a few teaser videos on YouTube. (Most of Palmer's initial investment went to cover a mere $5-a-month lease on a computer server.) So far, so good: Palmer says his registered user base, now at 200,000 strong, is nearly doubling every month.

Palmer's not your average 26-year-old. He began college at Lubbock Christian University (in Lubbock, Texas) at age 11. He graduated at 16 with a BS in mathematics; soon after began working on a Masters degree in physics at Texas Tech University; and in 2006 bagged a Ph.D. in computer science from Texas A&M University.

That résumé notwithstanding, Palmer is more frat boy than power geek. On the phone, he jokes freely about girls and alcohol. With any luck, he may soon have plenty of reasons to raise a glass.

Jonathan Berke
06.12.08, 12:09 PM ET
Forbes.com