Global Economics

Britain Bets on Internet Casino Games


It doesn't have any ritzy Vegas-style casinos -- at least not yet. But Britain has gone mad for betting. Newsstands are crammed with glossy gambling magazines and a national daily newspaper devoted entirely to games of chance launched last month. Some cable and satellite channels air nothing but poker and casino games. This year Britain even opened the world's first casino college, where croupier trainees learn the tricks of the trade. Now, the government hopes to make Britain the global hub of online gambling.

Britain has already laid out the welcome mat for online betting firms which allow customers to wager electronically on everything from horses and soccer matches to the winners of reality TV shows and the Oscars. Such Web sites are operated legally by traditional street-corner bookies like Ladbrokes and William Hill, as well as by Web upstarts such as Sportingbet, UKbetting, and Betfair. They pay 15% of their gross profits in tax. So far, that's been a pretty good bet for the government: Tax proceeds have topped $2.5 billion for the Treasury since 2004.

Now Britain is set to increase the stakes. Parliament has enacted sweeping new legislation that will open up the online market, starting next year, to traditional casino games such as poker, blackjack, and roulette. Britons already play such games by the millions, but the companies offering them are based in offshore tax havens such as Gibraltar, the Channel Islands, and Costa Rica. The government hopes that by becoming the first country in the developed world to legalize online gambling, it can lure offshore outfits to locate on British soil and pump even more revenues into public coffers.

BETTING LEADER. It's a huge opportunity. Bookmaking has been legal in Britain for nearly 50 years, and the British are notorious for their love of betting. But the Internet has drawn in millions of new punters who never would have set foot in the betting shops found in every British town. From the privacy of their own homes, Brits wagered an astonishing $40 billion last year alone, according to Christiansen Capital Advisors, a New York-based consultancy which tracks the gambling industry.

British investors also are playing the game. Attracted by the more favorable regulatory environment, three of the world's biggest Internet betting outfits, including Partygaming, went public on the London Stock Exchange last year in multi-billion dollar listings. "Britain is already the global leader in betting and now it looks likely to become the world capital of Internet gambling as well," says Professor Leighton Vaughan Williams, director of the betting research unit at Nottingham Trent University.

That's unleashing dot com-like wealth creation. Partygaming's flotation last year made billionaires of its four founders. One of them, former electrical engineer Vikrant Bhargava had never played poker or seen the inside of a casino until he joined the Gibraltar-based company in 2000. Back then, he says it was "a bit of garage operation" with 40 employees. No longer. Thanks to aggressive marketing and the explosive growth of poker, Partygaming's revenues hit $978 million last year, up from $30 million in 2002, and earnings climbed from $4.7 million to $293 million over the same period.

TOUGHER LAWS? It's an entirely different story in the U.S. Americans are by far the biggest online gamblers, betting a massive $145 billion over the Internet in 2005 -- nearly half the global total. But neither the government nor the stock exchanges are profiting from the business. The U.S. Justice Department says that online gambling is illegal under the 1961 Wire Act, which prohibits using telephone transmissions to bet across state lines. As a result, none of the big online gambling companies currently has operations in the U.S.

Now, a strange-bedfellows coalition of conservative and casino interests is pushing for even tougher laws. Congress is debating two new bills that would further restrict online gambling in the U.S. One aims to starve offshore outfits by making it illegal for credit cards, checks, or electronic funds transfers to be used for online gambling transactions. The other is aimed at updating the Wire Act to ban gambling over the Internet. Observers say momentum to get a bill through Congress is building, though it's too early to handicap the odds.

Online gambling outfits worry because for many, the U.S. is by far their biggest market. British heavyweight Sportingbet took out full page ads in U.S. newspapers last year directed at the U.S. government saying, "Please, sir, can we pay tax?" The company's CEO, Nigel Payne, calculates that if Internet gambling were legal in the U.S., it would have generated $1.2 billion in tax revenues in 2004. "If the U.S. regulates this industry, we will set up there and gladly pay tax," he says.

SLIPPING AWAY. In the meanwhile, online gambling firms are lowering their U.S. exposure by taking aim at the rest of the world. As recently as 2005, American players made up nearly 90% of PartyGaming's customer base, says marketing director Bhargava. But with the regulatory situation in the U.S. so unclear, the company is now turning elsewhere. Bhargava says that 40% of all new players on the site now come from outside the U.S. "Slowly but steadily we are decreasing our dependency on the U.S. market," he says.

If a Congressional online gambling ban goes through, the U.S. loss will likely be Britain's gain. "If legislation passes, the U.S. has wiped out any chance of capitalizing on what is becoming one of the world's fastest growing and most lucrative businesses," says Nottingham Trent's Vaughan Williams.

Britain has no intention of letting that chance slip away. Internet gambling companies wishing to set up in Britain will pay a yet-to-be-determined fee for a gambling license. In exchange, they will be regulated by the newly created Gambling Commission and permitted to advertise in Britain. The government has yet to decide at what level Internet gambling companies should be taxed. "The real question is whether it will be low enough to be attractive," says Karen Potts, a partner in tourism, hospitality, and leisure at Deloitte & Touche in London.

EXTRA CREDIBILITY. Why would online gaming sites choose to be regulated and taxed when they can operate offshore? Some well-established players such as PartyGaming may well decide to remain in places like Gibraltar. But experts reckon that newer, smaller outfits eager to build reputation in a crowded industry could get an edge from the government's seal of approval.

In an industry where anyone with a server can set up a gambling site, British regulation will offer extra credibility for investors and customers. Another attraction to a British home base: greater access to software programmers and other talent than in small places such as the Channel Islands or Gibraltrar.

The global Internet gambling industry, currently valued at $12 billion, is set to double in five years, according to Christiansen Capital Advisors. "Britain is ahead of the rest of the world when it comes to regulating online gambling," says Deloitte's Potts. "Instead of pretending it can be banned, the government is regulating the industry and protecting its citizens." With those kinds of stakes, the odds are rising that Britain just might win the jackpot.


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