Online gambling hits growing jackpot
Illegality doesn't stem popularity
Shelley Emling - For the Journal-Constitution
Sunday, August 28, 2005

London --- Thanks to American gambling enthusiasts, a bright future could be in the cards for BetOnSports.com, one of the largest sports gambling companies in the world.

Licensed on the Caribbean island of Antigua, BetOnSports.com was one of the first firms to bet that online gambling was more than just a fad. It launched an initial public offering on the London Stock Exchange in July 2004.

The gamble paid off. The company's customer base --- 90 percent from America --- and stock price have both increased sharply.

And the success comes despite the fact that online gambling is technically illegal in the United States.

Indeed, BetOnSports.com is just one offshore company that's cashing in big on the popularity of Internet gambling, even as murky U.S. laws have sidelined American companies.

Those in the gambling game say its legal status in the United States will eventually change but maybe not soon.

In Europe and elsewhere, "there is such a plethora of IPOs that those in the United States are starting to take a lot of notice," said Clive Archer, BetOnSports' chief operating officer. "This is good, because currently the U.S. gambling market is a gray area from a regulatory standpoint."

Every day, some 1.8 million players take a gamble on Internet betting sites --- 70 percent of them from the United States.

Revenue from online gambling is expected to soar from $12 billion this year to $24.5 billion in 2010, according to Christiansen Capital Advisors, a Maine-based consulting firm.

With Texas Hold 'Em leading the way, poker is driving the online gambling trend. Poker frenzy has swept across America, spurred by the introduction of the World Poker Tour and other poker events on television. Poker is now the third-most-watched televised sport on cable TV, trailing only auto racing and football.

Internet gambling --- including poker --- is barred in the United States under the little-known federal Wire Act, a 1961 law that took aim at mobsters by regulating gambling that takes place over telephone wires.

But government officials, focused heavily on terrorism, have yet to prosecute any online casino owners or individual online gamblers.

And many online gambling businesses are challenging the law in state courts by arguing that those behind the 1961 statute had no concept of what the Internet would bring when they wrote it.

For now, Internet gambling businesses are avoiding legal uncertainties by setting up shop offshore --- mostly in the Caribbean, but increasingly in the British Isles and other places where gambling is allowed.

For example, PokerStars.com, the world's second-biggest Internet poker company, plans to move its operation from Costa Rica to the Isle of Man, a United Kingdom protectorate, later this year ahead of a possible stock market flotation.

Other gambling firms also plan to launch on the London Stock Exchange in an effort to take advantage of the sector's momentum.

Many are hoping to follow in the footsteps of Party Gaming, the world's largest online gambling company, which began offering its stock on the London Stock Exchange in June.

The first-day share price was 116 pence ($2.12), raising about $8.5 billion in what was the largest IPO on the London Stock Exchange in years. Since then the stock has risen to about 163 pence ($2.93).

Based in Gibraltar, the company reported 596,000 registered real money players on its PartyPoker.com site last year --- 87 percent from the United States.

But the company maintains no assets in the United States and, thanks to the Wire Act, no U.S. investment houses were able to reap any fees in the massive IPO deal.

Meanwhile, concern over U.S. laws has led at least one business --- Betfair --- to build growth on a different model. It simply refuses to take bets from Americans.

Based in London, Betfair has high hopes for its future and has retained Goldman Sachs and Morgan Stanley to explore an IPO.

The company has been a pioneer in online betting by going beyond sports and allowing customers to bet on virtually any outcome, from who's likely to be the Democratic presidential candidate in 2008 to who will win the MTV award for best music video.

"We are a stock market for opinion," said Mark Davies, Betfair's managing director. "If you have a view that differs from those of other people, you can trade on it."

But Davies said the company would continue to shy away from the lucrative American customer base.

"There are people in the United States who want to strengthen the prohibition and not loosen it," he said. "We think this entire situation could be made more difficult before it's ever made more liberal."

For example, Sen. Jon Kyl, (R-Ariz.), who has tried for at least eight years to crack down on Internet gambling, recently announced plans for legislation that would prohibit banks from processing online gambling transactions, including credit card payments.

Sebastian Sinclair, president of Christiansen Capital Advisors, agrees that Britain has become the center of the e-gambling universe.

"U.S. gaming firms will not be participating as long as laws in the United States remain unclear," he said. "The environment in the United States will eventually change, but it will be some time in coming.

"One factor in the drive to prohibit e-gambling in the United States is the incorrect assumption that the United States can effectively stop or curtail this activity," he said. "Slowly, more educated views are being expressed on Capitol Hill, but these voices are weak at this time."

Sinclair said Washington would have to learn its lesson the hard way.

"There will be a widespread prohibition eventually becoming law, followed by the requisite experience of a failed national policy as unregulated e-gambling continues to grow across America," he said.

"Eventually selective legalization will occur, but this process will be slow and piecemeal."

In the meantime, offshore betting companies are content to be the beneficiaries of online gambling's financial windfall.

"Our business is continuing to grow dramatically," said Archer at BetOnSports.com. "The United States is missing out by not regulating and also taxing this industry.

"Online gambling is not going away," he said.