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 Technology News | June 2005 
Betting On Some Winners
 Michael Keller - Forbes
| | The World Series of Poker draws hundreds of the world's best poker players to Las Vegas - with thousands more following the action online. |
Event organizers of the World Series of Poker, now under way and owned and operated by Harrah's Entertainment, expect more than 6,500 players to battle for a first-prize purse topping $8 million. But that's a pittance compared with the nascent but growing business of betting on the players themselves - online.
Betting on poker players online is one small part of online gambling, an industry that will see up to $300 billion in wagers flow between gamblers and operators this year. That's more than the gross domestic product of Belgium.
In 2005, the industry will see between $12 billion and $22 billion in gross gaming revenue - what the terrestrial casinos call the "casino win," according to Michael Caselli, the editor of several gaming magazines including Bluff and iGaming Business. That's further proof that there is big money to be made in gaming beyond sitting at the tables.
Indeed, there are a number of publicly held companies that operate gambling Web sites, in effect allowing investors to bet on betting. And (pun very much intended) they look like good bets. Caselli believes that the industry will grow about 5% a year over the next five years.
One Internet gambling stock index called streetdice.com, which lists 58 publicly-traded companies, has soared 225% since January 2002. The site also calculates that the five-day trading volume in its component shares ending June 9 reached $1.06 billion.
Much of the investing in the online betting world goes through the London Stock Exchange, where the government licenses and regulates bookmaking and online gambling operations. And although it is a gray area as to whether Americans can legally gamble online, the Securities and Exchange Commission says there's no barrier to Americans gambling on the foreign companies' shares.
PartyGaming, touted as the world's largest online poker company, on June 2 announced its plans to float on the LSE. With revenue of the company last year reaching $550 million, PartyGaming, the operator of partypoker.com, is estimated to be worth over $9 billion. Richard Segal, the chief executive officer of PartyGaming, is reportedly interested in the consolidation and acquisition potential of the industry. Indeed, he's on the prowl for companies to buy.
Another big player is Sportingbet.com - currently one of the three largest publicly-traded online gambling companies. It is listed on LSE's Alternative Investment Market. Its shares trade just above $5.
The company claims to have over 1 million customers in 103 countries and has set up its Web site to accept 23 currencies. Its strategy excludes high rollers, who they believe scare away small-time gamblers. By limiting the average bet size to just over $90, it's looking to bring in customers who are for entertainment.
Despite sales that increased $512 million in the nine months ending April 30, versus the same period a year ago, Sportingbet.com estimates it has captured less than 1% of the global online-gambling market.
BETandWIN.com, an Austrian company trading on the Vienna Stock Exchange, is another showing growth and potential for investors. The stock, which began trading in 2000 at $16.51, is now above $111. Though stock values have dropped from a yearly high of $152.35, they are still up 300% since December. Gaming revenue doubled from 2003 to 2004, and customer registrations rose nearly 160,000.
CryptoLogic (nasdaq: CRYP - news - people ), a Canadian company traded on the Nasdaq, Toronto Stock Exchange and LSE, licenses its gambling and financial transaction software to several of the big gambling Web sites. The company reported total revenue of $63.7 million dollars in 2004, almost $20 million more than the previous year. Its stock price today hovered near a five-year high, around $34.
The true potential of the industry depends on its ability to break into Asia and Australia. According to market analysts, the growth outlook looks strongest in that part of the world, where gambling can add up to 5.5% of total consumer spending. There is a vast pool of potential customers there. Still, gaming editor Caselli believes it will be hard to realize the online potential in Asia. "There are credit card and cultural issues with betting in Asia," he said. "They also mainly have a cash-based wagering system."
There is also considerable uncertainty among online gambling companies when it comes to one of the largest markets - the U.S.
Odds are against online gambling landing the average American bettor in jail. Legality sits in government limbo, resting on judicial interpretations of the 44 year-old U.S. Wire Act.
It is clear through its enforcement pattern that the government is not targeting individual bettors. In fact, the wording of the Wire Act has been interpreted to apply to American companies and people who place and lay bets, essentially bookmakers and casino operators.
Most companies have responded to this reality by moving their businesses offshore - into the Caribbean and European countries. Over the last few years, several members of Congress have been trying to pass bills that make Internet gambling illegal. Nothing has succeeded and the law remains murky.
U.K.-based Betfair.com won't take wagers from anyone with an American address because of the vagueness of U.S. online gambling law. The privately held company controls 90% of the online betting-exchange market and weekly has over $90 million going through its system, according to Ben Fried, a member of its online poker bookmaking operation.
On the investment side, the U.S. Securities Exchange Commission said that there is no reason for American investors to feel squeamish about buying stock in overseas gambling companies.
"Federal securities laws regulate issuers rather than investors primarily," said John Heine, a spokesman for the SEC. He added that the SEC does not concern itself with the securities issuer's business, only that the business accurately tells investors what they are getting. "We don't prohibit investors from buying securities not registered with the SEC," he said. |
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