Monday, February 14, 2005

A reader just emailed a nifty article from Fortune magazine, featuring Party Poker.


Virtual Gambling, Real Profits
Nearly $180 million is wagered every 24 hours at virtual poker tables.

This year's hottest hand may be held by an American lawyer named Ruth Parasol, who used to run an adult-entertainment business and is now on the verge of cashing in her online poker chips.

Parasol is the principal owner of Party Gaming, a company based in Gibraltar that has cornered about 55% of the world's $2 billion online poker business. The company is flush with cash and, according to CEO Richard Segal, is contemplating a public offering in London. "It is definitely one of our options," says Segal, who joined the company last year after a stint running Britain's Odeon Cinemas.

Party Gaming won't reveal financial data, and Parasol, who is on maternity leave, declined to be interviewed. But industry sources say the company's income before taxes last year was about $350 million. Party Gaming is said to be worth $4 billion, thanks to the rapid growth of online poker. Nearly $180 million is wagered every 24 hours at virtual poker tables around the world by an estimated 1.8 million online players, according to Pokerpulse, a Canadian company that monitors the industry. That's up from $11 million at the beginning of 2003. "There are no signs that it is slowing down," says Pokerpulse's Dennis Boyken.

The online-poker boom has been fueled by successful television shows such as World Poker Tour and World Series of Poker, as well as by celebrity endorsements from the likes of actor Ben Affleck. Greg Raymer, who walked away with a $5 million prize in last year's World Series of Poker, was one of thousands who had qualified for the event through the Internet, signing up on the rival site Pokerstars.com.

Several poker sites now stage tournaments, and the allure of big money has continued to attract players. "In which other sport do you have amateurs playing against Tiger Woods and winning? It's happening in poker," says Lewis Rose, CEO of Cryptologic, a supplier of software to several poker sites. Two years ago 1% of Cryptologic's revenue came from poker; today it is 20% and growing.

The large poker sites operate with profit margins of between 60% and 70%, analysts say. Unlike casinos or traditional sports betting, online-poker players bet against one another, not the house. Poker sites take between 1% and 5% of the pot as a commission. "It's a very, very profitable business," says Nigel Payne, CEO of Sportingbet, a British company that owns Paradise Poker.com. Last year the site made $50 million on revenues of $80 million.

Party Gaming, which recently changed its name from iGlobal Media, was founded in 1997, but it was the launch of Partypoker.com in 2001 that set the company on fire. Today Party Gaming employs about 1,000 people in Gibraltar and London and at a large customer-support center in India. The company is more than seven times bigger than its nearest competitor, Pokerstars.com. "It's like a stock exchange," says Vikrant Bhargava, Party Gaming's marketing director. "Liquidity is crucial. Players want to be able to play what they want, whenever they want. So the bigger you are, the easier it is to attract new players."

Both Parasol and Party Gaming have shunned publicity. That may have something to do with online poker's ambiguous legal status. Although there is no federal law explicitly barring online gambling, and it is legal to operate a site from outside the U.S., the Justice Department has been trying to crack down on the business, and some members of Congress have been pushing for legislation to make electronic betting illegal. Justice officials say Internet gambling encourages fraud, money laundering, and under-age betting, and they are leaning on publishers and credit card companies in the hope of deterring them from doing business with the online-gambling industry.

"There has been a de facto prohibition," says Sue Schneider, chairman of the Interactive Gaming Council, an industry organization based in Vancouver, B.C. "If it hadn't been for the actions of the Justice Department, poker and other online gambling would have grown even faster."

In the U.S., where 80% of the industry's revenues are generated, some companies are fighting back. Last year Casino City, a Louisiana company that operates an online-gambling directory, sued the government for violating its free speech. "It's a bit strange to call us an offshore industry, when we want nothing more than to be onshore, regulated, and pay taxes," says Sportingbet's Payne.

With only a small fraction of the world's estimated 100 million poker players having found their way online, the potential for growth is still huge. Most poker-site operators think the market will double again in 2005. But after two years of explosive growth, the industry may soon consolidate. And Party Gaming is ready to put even more chips on the table. With plenty of cash at hand, its next move could be to swallow some of its 300 online competitors. "As the market leader, we are ready to make the most of the opportunities that may arise," says Segal. If Partypoker can stay on top of its game, Ruth Parasol and her partners may be in for a juicy jackpot.

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