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The U.S. Congress has yet to pass the pending legislation cracking down on Internet gambling. But in the meantime, the Justice Dept. has cast a much deeper freeze over the business with its July arrest of BetOnSports Chief Executive David Carruthers. Now, under pursuit of U.S. legal authorities, European online gaming companies are scrambling to reduce their exposure in the U.S. and find new markets in Europe and Asia.
Industry insiders say the trend could signal the start of a major wave of consolidation. Earlier this month, PartyGaming, the world's biggest Web poker company, spent $131 million to buy Bulgarian-based Gamebookers, a sports betting business focused on Continental Europe. According to Aug. 21 news reports, Gibraltar-based PartyGaming is also the top candidate to bag rival Victor Chandler, which has no U.S. exposure.
The potential loss of their U.S. markets is devastating for online gaming companies. Last year Americans gambled about $5.9 billion online—around half the global total. Some companies garner an even bigger chunk of revenues with U.S. players. PartyGaming, for instance, scored about 85% of its nearly $1 billion in 2005 sales in the U.S.
BIG BACKLASH. But companies are now facing up to the possibility that they'll lose their fight with Washington. The Justice Dept. is pursuing leading online gambling executives and even putting pressure on media to drop online gambling advertisements (see BusinessWeek.com, 7/19/06, "Justice Gambles on Net Crackdown"). What's more, the U.S. is refusing to change laws restricting Internet gambling that the World Trade Organization has ruled are illegal.
It's obvious that Justice's tough stance has spooked the online gaming business. On Aug. 14, Betcorp, an Antigua-based online sports betting and poker company, said it has stopped taking phone bets from U.S. residents and is reevaluating its entire U.S. online gambling business, which accounts for 80% of revenues.
The stock market seems to agree that the companies are facing huge risks. Since the arrest of Carruthers for alleged racketeering and money laundering, shares of some rivals, such as bookmaker Sportingbet, have fallen 20%. "The Dept. of Justice has done very well in scaring the whole industry," says Tej Randhawa, a leisure analyst at Evolution Securities. "No one is immune (see BusinessWeek.com, 7/12/06, "Betting Against Online Gambling")."
SMALL AND GROWING. All of this is making Asia look like an attractive alternative. Online gambling in the region is growing fast and "is still untapped," says Leighton Vaughan Williams, Director of the Betting Research Unit at Nottingham Trent University.
The trouble is the Asian market, at $2.1 billion last year, is only about one-third the size of the market in the U.S. Even if it triples, as expected, between now and 2010 it will be only as big then as the U.S. market is today. On top of that, the use of credit cards and electronic payments is not as widely accepted in Asia as in the U.S. and Europe, though that's beginning to change quickly.
Analysts say the greatest promise lies in Japan and China—the former for its advanced banking system and the latter for its sheer size. But the heavy hand of government in the region is a major concern for betting sites, said Greg Harris, an analyst at investment bank Canaccord Adams. In China, for instance, the government has forced some Internet service providers to block sites, such as 888 Holdings' 888.com, which is inaccessible in most of the country.
OTHER TARGETS. For now, expansion and consolidation of European online operations seems to be a better bet. Among those companies already making a move is Vienna-based Bwin Interactive Entertainment, which bought Swedish poker site Ongame for $643.5 million last December. Analysts say 888 Holdings is also scouting opportunities outside the U.S.
Other companies with a big European presence also are likely to prove attractive takeover targets, said Evolution's Randhawa. One contender: Stockholm-listed Unibet Group which runs unibet.com and is active primarily in the Scandinavian market.
Even so, the European market is hardly an overnight cure for the industry's headaches. Cash-strapped national and regional governments are eager to snare tax revenues from the online crowd. And European governments aren't averse to tangling with online gambling operators.
KEEPING OPTIONS OPEN. Italy, eager to preserve its state-run gambling monopolies, has sought to prevent online outfits from operating in the country. And after a dispute dating back to 1989, the German state of Saxony revoked Bwin's license to operate in Germany earlier this month. The Vienna-listed company will find out on Aug. 24 if its appeal of the ruling is successful.
Even so, revenues for most online gambling companies continue to grow at more than 40% annually, according to a recent Dresdner Kleinwort report. Despite the growing problems of operating in the U.S., the business is still so big and lucrative that some operators are willing to tough it out.
British-based Sportingbet, whose gambling sites include sports-betting site sportbook.com and paradisepoker.com, is taking a typical approach. The company says "it's business as usual." But a spokesman acknowledges that the company is aiming to reduce its reliance on the U.S., which now generates 65% of its revenues. Absent an unlikely complete change of heart in Washington, that seems to be the safest bet.