Brighter Days for Online Betting?

Signs that the U.S. may reconsider its 2006 online gambling ban offer European operators hope for reentry into the lucrative U.S. market

Five European public online gambling companies, which together took in some $1.4 billion from U.S. customers in 2005 alone, watched their share prices tank and profits collapse when a bill banning Internet gambling payments was signed into law last October by President George W. Bush (see, 10/02/06, "Party's Over for Online Gambling").

The carnage was perhaps even worse than predicted. One company, London-based, saw its shares suspended after Chief Executive Officer David Carruthers was arrested and recently pleaded guilty to federal racketeering charges in the U.S. Another, Empire Online, based in Tortola (British Virgin Islands), gave up its online gambling activities entirely and became an investment company (see, 8/21/06, "Online Gambling Hedges Its U.S. Bets").

Others, including, 888 Holdings, and PartyGaming, which bought Empire Online's poker customers, have weathered the fallout by shifting their focus to Western European gamblers. But their share prices haven't come close to recovering: Most are now trading at around a quarter of their peaks in the summer of 2006, though they've risen some in recent months.

U.S. Rethinking Ban

An odd coalition of antigambling conservatives, Las Vegas interests, and law enforcement were behind the passing of the 2006 ban, but now that the bill's impact is registering—little decrease in overall gambling levels, and a shift away from aboveboard operations to more shadowy outfits—some analysts believe the U.S. may reverse its stance. That could open the door for European operators to reenter the lucrative U.S. market.

The possibility of legal and legislative relief in the U.S. could help the kings of online gambling get a second shot at being hot-growth stocks. In March, Sportingbet struck a deal with the state of Louisiana to drop charges of "gambling by computer" that had been filed against its former chairman, Peter Dicks.

And both 888 Holdings and PartyGaming publicly acknowledged this week that they are negotiating with the U.S. Attorney's Office for the Southern District of New York to obtain amnesty for having offered online gaming inside the U.S. prior to October, 2006, when the ban went into effect. (Neither company returned calls from BusinessWeek on June 5.)

Perhaps most important, the House Financial Services Committee is expected to hold a hearing June 8 to consider a bill that would again make it legal for banks and credit-card companies to process payments for online gambling sites, potentially allowing Europe's online gambling companies to do business again in the U.S. market.

Reform Is Inevitable

Though it's far too early to pop the champagne—few Washington observers think the bill has a chance of passing right away—analysts in Europe say a change in the current situation is inevitable. Why? In part because even though the U.S. ban forced publicly traded companies like PartyGaming and 888 Holdings to pull out of the U.S., the void was quickly filled by private outfits offering unregulated online gaming services to U.S. customers.

Consider PokerStars, one of more than 350 sites that are licensed by the Kahnawake Gaming Commission, run by a Mohawk Indian tribe outside Montreal. While most forms of sports betting are forbidden in the U.S., games such as poker fall into a gray area.

PokerStars advises its customers in an online statement that it has "received extensive expert advice from within and outside the U.S." concluding that U.S. law "does not in any way prohibit you from playing online poker. Therefore our business continues as before—open to players worldwide, including the U.S."

With lots of offshore gambling services continuing to target U.S. customers, the total spent by U.S. citizens gambling online has decreased by only 20% since the ban went into effect, says Professor Leighton Vaughan Williams, director of the Betting Research Unit at Britain's Nottingham Business School. "As we have learned from previous cases of prohibition, the Internet ban doesn't actually prevent gambling," he says. "All it does is transfer the gambling spending to a nonregulated environment," (see, 10/19/06, "Online Gambling Goes Underground").

"Puritanism and Protectionism"

Vaughan Williams calls the 2006 U.S. ban an ill-conceived mixture of "puritanism and protectionism." The legislation, he says, never would have passed had it not been tacked onto an antiterrorist bill. "You could not be for online gambling without being pro-Al-Qaeda, which is not something you want to do just before the congressional elections," he quips. Vaughan Williams believes U.S. legislators eventually will pass a bill requiring online gambling sites to be licensed and pay taxes in the U.S.

Ed Barton, a games and gambling analyst at London-based research company Screen Digest, agrees that the U.S. will likely allow a regulated form of online gambling.

The European online gambling companies clearly could use the help. While there is still some growth to be found in Western Europe, uneven legislation has made it difficult to expand services uniformly. By contrast, the U.S., with its high broadband penetration, large number of credit-card users, and relatively homogenous market of people with similar gambling habits, remains the biggest prize.

Giving the U.S. a Slice

European outfits such as PartyGaming and 888 Holdings got significant U.S. experience before the ban went into effect. If allowed back in by U.S. authorities, they would attempt to reconnect with their hundreds of thousands of previous customers, says Screen Digest's Barton. But, he warns, the playing field is likely to be vastly different than it was before the ban went into effect.

For one thing, under new legislative scenarios, European companies probably would have to set up operations in the U.S. and agree to pay U.S. taxes. They also would likely face stiff competition from new competitors in Las Vegas, which could be allowed to launch brand-name online gambling services for the first time, Barton says.

What's more, if permitted to under new legislation, the various state lotteries in the U.S. might follow the example of Britain's national lottery and branch out into areas such as online scratch cards. That could provide even more competition for the Europeans.

Still, there is a lot of growth potential for a post-prohibition U.S. market. Given the chance to come back, Europe's beleaguered online betting sites will readily take the gamble.

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