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Safer Online Gamers
By David Kuo September 13, 2006
Online gaming companies were thrown into turmoil last week after US authorities arrested Peter Dicks, the chairman of online gaming site Sportingbet (LSE: SBT). He was arrested for allegedly violating Louisiana State laws relating to gambling by computer. His arrest followed the arrest of BETonSPORTS (LSE: BSS) boss David Carruthers, who faces charges of racketeering and tax evasion in the State of Missouri.
Now, online gaming companies have long been aware that Internet gambling is illegal in America. For instance, PartyGaming (LSE: PRTY) pointed this out in its flotation prospectus. It said its operations may violate state law, and that violation of these laws can serve as a predicate offence for liability under federal statutes.
Nevertheless, gaming companies appear prepared to run the risk of flouting US laws. Perhaps it is because some outfits can ill afford to ignore the lucrative returns from American punters. For instance, 80% of PartyGaming's customers are based in the US, and 888 Holdings (LSE: 888) is heavily dependent on America, too. It generates over half its revenues from there.
But that is not true of all online gaming outfits. And the recent cynicism over the sector may present some good buying opportunities for investors.
Take Ukbetting (LSE: UKB), which accepts bets on sporting events and poker. It generates 93% of its revenues from Europe and 7% from the rest of the world. But notably none of its revenues come from America. Significantly, it has adopted a policy from inception of not taking bets from the US. Following a number of years of losses, Ukbetting turned in a small profit of £0.4m last year, which is expected to rise to £2.2m in 2006. In 2007 profits are expected to increase to £2.7m, which values the company at 16 times earnings.
32Red (LSE: TTR) is another company that is not dependent on American punters. More than eight out of ten of its registered members are based in the UK, and they account for 90% of the company's revenues. Last month, 32Red said it may miss profits estimates after football's World Cup drew punters away from its online casino. This suggests the company may not achieve pre-tax profits of £3.6m this year. But next year, profits of around £7m have been pencilled in. This values the £50m Gibraltar-based company at roughly seven times earnings, which looks quite cheap.
Online gambling is unquestionably big business. At the turn of the Millennium online gamblers spent around £7bn a year on online gaming. But by 2005, this had ballooned to nearly £15b. And it is reckoned that growth may continue as the market develops and broadens its appeal to a wider audience.
But it is worth bearing in mind that online gaming companies exposed to the US, which is reckoned to be the largest single online gaming market, face risks. And while these risks remain unquantifiable, seeking businesses with little or no US exposure may be a better idea. Consequently, online gamers with exposure to the untapped Asian-Pacific regions and prosperous European countries may be a better bet. After all, just because you may want to invest in online gamers doesn't mean you have to take unnecessary risks.
Is party over for online gambling? (No)
By Eric Pfanner International Herald Tribune
LONDON - When PartyGaming, an online gambling company based in Gibraltar, went public on the London Stock Exchange in June 2005 in one of the most ballyhooed initial stock offerings of the year, the shares soared, lifting the company's market value to more than $10 billion. A little more than a year later, however, the shares have slumped, bringing them roughly back to where they started.
Is the party fading for PartyGaming and other Internet gambling companies after several years of torrid growth?
Actually, many analysts say they see no sign of an end to the boom. Christiansen Capital Advisors, a U.S.-based consulting firm, says global online gambling revenue will rise to more than $24 billion by 2010 from $15 billion this year and $3 billion in 2001. Growth in Internet versions of casino games like roulette may have eased slightly, but poker is surging, and the World Cup soccer tournament is serving as a catalyst for online sports betting.
Investors' waning excitement, which has also affected companies like BETandWIN.com Interactive Entertainment, 888 Holdings and Sportingbet, has more to do with uncertainty over the cards held by lawmakers and potential rivals than any slackening of demand for online gambling, analysts say. Especially uncertain, they add, is the regulatory environment in the United States, by far the largest Internet gambling market, accounting for about half of the global total.
"The results remain strong, but there's some concern about the U.S. situation, where the status quo has been good" for Internet gambling companies, said Graham Clucas, a director in the media and entertainment practice at PricewaterhouseCoopers in London.
The U.S. government maintains that online gambling is illegal, but cracking down has been difficult, given that its laws on gambling were written before the Internet existed, and most online gambling companies are based in offshore locations like Gibraltar, Antigua and Costa Rica.
Conservative Republican leaders in the House of Representatives want to make Washington's opposition more explicit, outlining an "American Values Agenda" last week that places a statutory prohibition on Internet gambling atop the Republican legislative priorities, alongside proposals like a constitutional ban on gay marriage.
But there are skeptics, and the American Gaming Association, a lobbying organization whose members include the big Las Vegas casinos, recently proposed a study to look at ways in which online gambling could be legalized and regulated.
While some investors have been worried about a possible U.S. legislative ban, analysts say legalization might actually be worse for existing online betting companies. These companies have benefited from the current murky regulatory status quo in the United States, where PartyGaming gets about 80 percent of its business, because it has proved difficult to stop Americans from visiting such sites.
If the United States were to officially sanction online gambling, however, American casino operators would be free to compete with the offshore companies. Given the strength of their brand names and their marketing know-how, analysts say, they could eventually carve out a large portion of the business for themselves.
In the meantime, the offshore operators are moving to diversify their offerings, in an effort to attract more business from outside the United States. PartyGaming last week introduced a new site dedicated to backgammon, a game popular in Europe, Asia and other regions. A spokesman, John Shepherd, said the company was also considering a move into sports betting, which has been a big growth area for other online gambling companies.
BETandWIN, an online sports betting company with headquarters in Vienna that runs its services from Gibraltar, said last week that revenue was expected to double during the monthlong World Cup. But in another move to diversify, the company recently acquired a Swedish provider of Internet poker and other games. Sportingbet, based in London has also broadened its offerings, through the acquisition of Paradise Poker.
By offering a variety of gambling options, online providers can "cross-sell" different games and sports events to their customers, which helps with one of the big problems for these companies - a relatively high rate of customer turnover.
As online gambling options proliferate - Shepherd at PartyGaming said there are at least 2,500 gambling sites on the Internet - players can easily jump from one to the next in search of the best games or odds. Sports bettors tend to be more loyal, analysts say, because events are more localized or specialized than universal games like poker, but there are sometimes long lulls between events. If sites can persuade sports bettors to try their luck at a hand of poker during these gaps, they can keep the revenue flowing in.
Several online gambling companies have moved to strengthen their sporting links by signing sponsorship deals with prominent European soccer teams, in which their logos appear on team shirts. BETandWIN, for instance, this spring reached an agreement with AC Milan, while 888 has an agreement with the English club Middlesbrough.
For now, the leading online gambling companies continue to report strong financial growth. At BETandWIN, earnings and revenue more than doubled last year, for instance. PartyGaming, meanwhile, reported a 54 percent revenue increase in the first quarter of this year, though some investors' eyebrows rose when several of the company's founding partners recently sold large blocks of shares that they held.
Given the number of gambling sites, and the uncertain regulatory environment, analysts say a shakeout in the industry is inevitable. While there may be some takeovers, as larger operators seek to acquire smaller rivals, Anthony Lee at Dresdner Kleinwort Wasserstein said some of the big providers with established brand names might pass on such deals, in the hope that rivals would fold.
"You don't have to go out and buy sites willy- nilly," he said. "A lot of them will go bust and you can take over their customers."
While the rush to the stock market that brought riches to the founders of PartyGaming and other online gambling companies has eased since last summer, analysts say another high-profile initial public offering may be in the works soon. PokerStars, based on the Isle of Man and owned by Israeli investors, is expected to announce plans to list its shares in London, though a spokesman for the company, Conrad Brunner, declined to comment.
Internet gambling companies have been drawn to the London market by a recent change in British law that aims to bring offshore operators into a legitimate, regulated framework, with an eye toward attracting their headquarters, and tax money, to British soil. Whether Internet gambling companies will move to Britain in any number remains to be seen, as the government has not yet revealed important details, like the tax rate they would be required to pay.
But Britain's open attitude toward gambling is already creating conflicts with some European neighbors, which take a more restrictive approach. Italy, for instance, moved this year to ban foreign online gambling operators, like British sports-betting sites, from operating in that country. Analysts say the objections to outside operators in Italy, as in some other European countries, have more to do with a desire to protect state-run gambling monopolies than American-style concerns about the corrosive effects of betting.
Analysts say an eventual opening of European markets is likely, given that court decisions have gone against national monopoly operators. Meanwhile, the World Trade Organization, in a case pitting Antigua and Barbuda against the United States, has determined that U.S. policy toward Internet gambling is inconsistent with international trade rules, because some American horse-racing operators are permitted to accept bets online. While the threat of retaliatory sanctions from tiny Antigua has not swayed U.S. policy making, analysts say, the stakes may be higher in any eventual dispute with bigger trading partners.
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