Free games – an IT businessman's worst nightmare?

Everyone does it and you know they do. It appeals both to students and grandma's, they are for hardcore gamers and for people who barely know how to use a PC. Free flash games are taking over the minds of PC users and there's nothing you can do about it.
If 5 years ago you had to go through all the trouble of getting yourself a video games console, hooking it up to a TV set and then having to buy actual physical games to put it in your console, now you can kill time practically anywhere – and on any device. Fact is, everyone does it. Bank workers play their butts off in-between serving clients, IT workers go for 5 minute sessions instead of coffee breaks at their workplace, and there's nothing you can really do about it.
Working in an IT environment, you – as a business owner – realize that you can't control what your staff does in front of their PCs, unless you have surveillance software installed, of course. But still, how can you tell if your programmer is doing programming stuff and not kicking it up in the latest Tower Defense flash game, provided that you don't have enough skills yourself to understand what exactly he's doing? Of course, you can always walk behind their backs and checkout what they're doing, but come on – you're probably glued to your chair all day, busy with phone calls and video conferences.
After working in several huge IT companies, I have noticed some interesting facts.
First, out of the 8 hour work day, only around 4-5 hours of them are actual work.
Second, it's always better to have those 4-5 actual-work-hours instead of 8 "pretend to work hours" – that's very important
Third, people need to relax and not be glued to their PCs – that's when an hour of actual work equals to 2 hours of sitting in front of the monitor and doing nothing.
You have to remember to give your staff the freedom to plan their own time and not have them afraid to get up from their workplaces. Otherwise they'll just be playing free games all the time. Instead of going for the "you're late, you have to work off this hour tomorrow", go for a more realistic approach. Plan your work time in a way that "this, this and this needs to be done today" – and let the staff plan their own time to reach those goals. It is OKAY to let them play flash games every once in a while if it lets them relax. It's even better to make daily pong tournaments – where you as the boss would also participate.
What I've seen in one of the companies I've worked in is that there were no outside-kitchen and not-in front-of-monitor activities. So what the staff did was just pretend to work for 8 hours straight, when in reality they did 3 hours of work, and the rest was spent on pretending to work – playing flash games, that is. When I (as a project manager) came up to the senior management and tried to persuade them into getting a pong table, explaining it would drastically improve productivity of the department, they were like – wha? They wouldn't be doing any work then! Yeah right, idiots.
Right now at my current job we have a Nintendo Wii hooked up to a huge tele and have daily tennis tournaments, as well as use the Wii's browser to play free flash games on the web. Also occasionally we have speedruns of newest Tower Defense games. All that on top of coffee breaks. In reality we work a max of 5 hours per day, but the productivity is higher than what would be of working 8 hours straight and not doing anything else.
So remember, games aren't that bad. They let you relax, think and overall increase your productivity. Unless you aren't allowed to play them, then you'd just waste the whole day on playing free games .