The popularity of sweepstakes casinos is growing more than ever, but an analyst points out that the sector will likely face more scrutiny from regulators. It is now a $4 billion industry, and as such, it has gained more attention from regulators as it blurs the line between traditional online casinos and social casinos, where everything is for free.

Sweepstakes casinos, also known as sweeps casinos, are becoming a much prominent segment of the gaming sector, experiencing remarkable growth while simultaneously attracting regulatory attention. This unique form of wagering, which blends elements of social casinos and iGaming, has transformed into a $4 billion industry. However, its expansion raises questions about its legal status and potential impact on broader gaming legislation.

A booming industry with room for growth

According to Aaron Lee, an analyst from Macquarie, sweepstakes casinos have achieved a compound annual growth rate of approximately 75% from the years 2019 to 2023. This rapid growth positions the industry as a catalyst for further iGaming legislation by spotlighting the untapped tax revenue potential.

"Though there are clear similarities between sweepstakes and iGaming, we see little evidence of cannibalization," noted Lee. He adds that in fact, the growth of sweepstakes could be positive for iGaming legislation since it attracts attention to unexploited tax revenues.

Lee suggests that if cannibalization occurs, social casinos, rather than iGaming platforms, are more likely to bear the brunt of this competition. Currently, iGaming - offering real-money versions of standard casino games - is legal in only seven US states, while sweepstakes casinos operate in a legal gray area, offering players a chance to win prizes through games that resemble gambling.

A legal and ethical tightrope

Sweepstakes casinos are often viewed as a form of iGaming due to their operational model. Players are enticed with free-to-play games that offer potential rewards but frequently encounter opportunities to make in-app purchases to enhance gameplay or increase their winning chances. While these purchases are technically optional, many players end up spending significant sums, blurring the distinction between free social gaming and real-money gambling.

Lee points out that sweepstakes casinos skirt traditional definitions of gambling by eliminating the 'consideration' component - a key element in determining whether an activity qualifies as gambling. In legal terms, gambling typically involves three elements: prizes, chance, and consideration. By removing the requirement for monetary payment to enter a sweepstakes, operators argue that their activities fall outside traditional gambling definitions.

To comply with legal requirements, sweepstakes casinos offer alternative methods for entry, such as mail-in forms. They also utilize a dual-currency system where players earn and wager 'sweepstakes coins,' which can be redeemed for cash prizes. This approach, however, has drawn criticism from regulators and the American Gaming Association, which urges stricter oversight of the dual-currency mechanism.

Challenges in regulation

Despite growing calls for regulation, pursuing legal action against sweepstakes operators is challenging, as many are based outside the United States. Currently, residents of four states are prohibited from accessing sweepstakes casinos, and another seven states enforce some restrictions.

The AGA and other advocates for tighter regulations argue that the industry's operational model skirts federal and state gambling laws. By promoting virtual currency purchases as entries into prize drawings, sweepstakes casinos exploit legal loopholes, creating a murky regulatory landscape.

Sustained growth amid controversy

The rapid expansion of sweepstakes casinos reflects their resilience and appeal, even amid increased scrutiny. Data from Eilers & Krejcik Gaming highlights this growth, noting that the market surged to $4.2 billion in 2023, up from $460 million in the year 2019. However, when factoring in payouts to winners, net revenue amounted to $1.3 billion in 2023, compared to $7 billion for social casinos and iGaming’s $6.5 billion.

Lee projects continued growth for sweepstakes casinos, with gross revenues expected to reach $5.6 billion in 2024 - a 30% year-over-year increase - and $6.9 billion in 2025. On a net basis, these figures translate to $1.7 billion and $2.1 billion, respectively.

As the sweepstakes casino industry continues to expand, it faces mounting challenges in navigating regulatory scrutiny and public perception. Its hybrid nature and dual-currency model continues to blur the lines between social gaming and gambling, prompting regulators to consider tighter controls.