Sunday, February 26, 2006

I'll prolly start an uber-post tonight.
But for now, here's the latest from the AP Wire about US internet gambling.

Must read.


Viva E-Vegas: The State of Online Gambling

Of all the ways fortunes are won and lost over the Internet, few endeavors have enjoyed the explosive growth or weathered the intense scrutiny of online gambling. Its popularity is surging, thanks to a proliferation of Web sites that cater to bettors, a poker craze that shows no signs of abating, and continued interest in wagering on huge sporting events such as the Super Bowl and the World Cup.

At the same time, debate over the legality and morality of Internet gambling has raged since the very first bet on the virtual blackjack table. The brief history of online gambling is an ever-evolving drama that has swept up lawmakers, entrepreneurs, criminals, lobbyists, and opportunists of every stripe.

Although it is currently illegal to operate a gambling Web site within the United States, that did not stop 30 million U.S. Internet users from visiting offshore gambling sites in 2005. While efforts in Congress to strengthen existing laws have been stymied for years, the industry has matured quickly, with the larger players consolidating to such an extent that prohibition might be impossible. Many experts believe the U.S. has little choice but to embrace regulation.

A quick look at the numbers confirms that foes of Internet gambling face some pretty long odds.

High Stakes

Online gambling is a $10 billion-plus behemoth that benefits from a powerful combination of cutting-edge technology, widespread broadband availability, and unprecedented interest in betting.

Worldwide online gambling revenues rose from $8.5 billion in 2004 to $10.9 billion in 2005, according to a December 2005 report from the New York-based research firm eMarketer. Its paper, "Online Gambling: Bet, Call or Fold," also reports that visits to online gambling sites increased substantially in recent years: The 30 million Americans who participated in 2005 more than doubled the ranks of the 13.6 million players in 2001.

Koleman Strumpf, an Associate Professor of Economics at the University of North Carolina at Chapel Hill and an expert on sports bookmaking, said that as people who are Internet-savvy take up an increasing share of the population, interest in online wagering will continue to rise. The legal status of online gambling in the U.S. will do little to slow the fervor, he said.

"When there is a large demand for an activity," Strumpf said, "supply will figure out a way to get around regulatory roadblocks." In other words, people like gambling online -- a lot -- and will continue to do it, especially as broadband Internet access becomes more widespread and people are able to reach highly interactive gaming sites with enough bells and whistles to make for an engaging experience.

The convenience of online gambling also has fed its tremendous appeal. R.J. Bell, founder of Pregame.com, a sports-wagering information site, said that even though U.S. gambling hotspots such as Las Vegas or Atlantic City offer an "all five senses" experience that cannot be matched online, those places cannot compete with the ease of gambling by computer.

But Vegas needn't worry just yet. Calvin Ayres, founder and CEO of Bodog.com, an online gambling and entertainment company based in Costa Rica, said the relationship between brick-and-mortar outlets and online gambling is synergistic and will only get stronger in the years ahead.

The best example of that mutual benefit is poker, Ayres said. Players can hone their skills using online poker sites in a setting that is less intimidating for a beginner than a smoke-filled room filled with card sharps. Most online poker sites give players the option to participate in games using "play money," so a rookie easily can get plenty of practice without risking insolvency.

Eventually, online poker players move on to actual poker tournaments, where they can test their newfound skills face-to-face against other players. In 2005, two thirds of the entrants in the World Series of Poker, held every year in Las Vegas, qualified on online poker sites, according to eMarketer's gambling report.

And after all, it's nice to be handed a cocktail while playing your favorite game at a casino, Ayres said. Bottoms up!

Gambling with Corporate Dollars

In spite of the gambling industry's best efforts at PR, people likely will continue to associate it with unsavory criminal elements. This is especially true for gambling Web sites, which stay clear of U.S. antigambling laws by setting up shop abroad.

In many countries, including the United Kingdom and several Caribbean nations, online gambling is legal and regulated. The rules in the U.S. are somewhat murky. Currently, the Federal Wire Act of 1961 prohibits using telephone transmissions to bet across state lines, but no new law has yet amended the Wire Act for the Internet age. Gambling sites remain nonexistent in the U.S. because a license is required by law to set up a site, and no state has yet granted one. Some states also have specific laws against online gambling.

Opponents of Internet gambling frequently point to money laundering as one of the main reasons the practice should be outlawed. But are all gambling sites owned by shady characters only interested in skirting the law and lining their pockets at the expense of others?

The truth is that many of today's online gambling sites are owned by either corporations or individual entrepreneurs. PartyGaming PLC, the largest online gambling company, was cofounded by American attorney Ruth Parasol, who, at 38, is now one of the youngest self-made billionaires in the world with a net worth of $1.8 billion, according to Forbes magazine.

Based in Gibraltar, PartyGaming operates the PartyPoker Web site, which claims to be the Internet's most popular destination for online poker. The company went public on the London Stock Exchange in 2005 and, according to eMarketer, made $171 million in net profits during 2005, a 25.3 percent increase over 2004.

Other prolific online gambling companies include Bodog, Sportingbet, William Hill, and Cassava Enterprises. These are large, profitable businesses enjoying increasing popularity. But there are hundreds of other smaller sites operating around the world that are not as healthy economically, according to Bodog's Ayres. In this environment, he said, a shake-up is inevitable.

"We are already seeing signs of successful online gambling brands separating themselves from the rest of the pack," Ayres said. He added that a wave of consolidation eventually will leave a few mass-market-friendly, online-entertainment giants with the lion's share of the gaming market.

I. Nelson Rose, a professor at Whittier Law School and an authority on gambling law, agreed. He said that many of the smaller sites do not make money because it costs hundreds of dollars in promotions and come-ons to attract a single new patron. In contrast, he said, the sites at the top of the food chain, such as PartyGaming, are making enormous amounts of money, setting the stage for consolidations or for the outright disappearance of marginal operators.

Bodog's strategy is itself focused on creating a strong brand and a diversified entertainment concern that covers all the bases, from online wagering to poker to fantasy sports and even music.

Bodog is certainly not shy about courting the U.S. mass market with unique promotions. For the past three years, the company has sponsored the Lingerie Bowl, a pay-per-view event staged as an alternative to the Super Bowl halftime show. The contest features scantily clad models playing football on teams with suggestive names, such as the New York Euphoria and the Los Angeles Temptation.

Bodog even sponsors a yearly marketing conference to help operators acquire and retain customers. The site for this year? The Wynn Las Vegas.

Bullish on Betting

Beyond lingerie models running post patterns, online gambling is making an imprint in the U.S. in another, more-traditional way: Wall Street is investing in the sector, said Keith Furlong, Deputy Director of the Interactive Gaming Council, a Canadian nonprofit gaming industry organization. As the United Kingdom continues to establish the needed regulatory structure for overseeing the gambling industry, money for new projects will flow in from overseas -- even as investment firms are unable to underwrite initial public offerings for these companies in the United States, Furlong said.

Many are waiting to see how the developments in the UK will affect jurisdictions like Gibraltar, Malta, Costa Rica, and Antigua, places that have traditionally welcomed and licensed online gambling operators. According to Furlong, the UK's newly created Gambling Commission is setting the stage to begin licensing and regulating all forms of gambling -- including online gambling -- beginning in 2007. Industry heavyweights such as Bodog and PartyGaming already have obtained licenses to operate in the UK.

Many industry watchers agree that the growth prospects for online gambling are excellent. According to eMarketer, the industry is about to enter a "new phase of consolidation" that will result in a wave of mergers and acquisitions during the next few years and an increasing number of IPOs as the stronger companies go public.

But before the market can cash in, it must keep its eye on another formidable player. Washington is once again putting its chips on the table.

This month, Reps. Bob Goodlatte (R-VA) and Rick Boucher (D-VA) reintroduced the Internet Gambling Prohibition Act (IGPA), which seeks to add Internet gambling and the use of new technologies to the Wire Act's existing ban on gambling over telephone lines.

The IGPA, first introduced in the Senate in 1999, would establish a blanket prohibition on Internet gambling and restrict legalized online gambling to "closed-loop, subscriber-based systems" operating in states where certain types of gambling are legal. Internet service providers would be protected from liability and from the requirement to keep an eye on their own systems for illegal gambling activity, provided they respond quickly to court orders mandating the removal of access to gambling sites.

The bill has won support from organizations including Focus on the Family, the Family Research Council, and the Christian Coalition.

One Wild Jack

Tellingly, this month's joint press release from Goodlatte and Boucher's offices blames previous failures to pass the legislation on the efforts of Jack Abramoff, the embattled former lobbyist at the epicenter of a raging influence-peddling scandal.

But Abramoff's activities had very little to do with the bill going down in the 106th and 107th Congresses, said IGC's Furlong. Instead, lobbying efforts over several years by the horseracing industry and groups including the National Indian Gaming Association were the main contributors to the legislation's defeat, he said.

Nonetheless, Abramoff's disappearance from Washington's inner circle might yet help the IGPA finally gain passage. The timing of reintroducing the bill -- on the heels of Abramoff's fall from grace -- seems like a calculated move to associate opponents of the legislation with the fresh public image of the disgraced former lobbyist.

Another recent political development is the reintroduction of a bill by Rep. Jim Leach (news, bio, voting record) (R-IA) to prohibit the use of just about any kind of electronic-funds transfer mechanism to move money into or out of online gambling sites.

Furlong said that this bill would merely codify safeguards that already exist, as most major U.S. financial institutions already block Internet gambling transactions. Most credit card companies, and even services such as PayPal, prohibit customers from conducting financial transactions with online gambling sites. Leach's effort shows that members of the U.S. Congress continue to wage a "quixotic campaign to block this growing industry," Furlong said.

Bluff or Killer Hand?

Quixotic or not, a new U.S. law could very well slay the online-gambling dragon. According to Christiansen Capital Advisors LLC, in statistics cited by eMarketer, 51 percent of online gambling revenues in 2004 were generated in the United States. Even though that number is expected to drop to 40 percent by 2009, passage of the IGPA suddenly makes this huge client base disappear.

Strumpf, the UNC professor, said that U.S. policies toward online gambling are not very successful and don't make much sense. In fact, he said, driving the industry offshore is precisely the wrong move because it takes gambling out of the reach of U.S. regulators.

Strumpf said that a more logical approach would be to legalize the industry in the U.S. so that government can regulate it. But, he added, policies are not likely to change soon because it's a very easy political sell to take a stance against online gambling.

This is not to say that legislators' concerns about the social toll that gambling can take on young adults and those with addictive personalities are misplaced. There is little debate that online gambling could make it easy for addicts to feed their vice at considerable expense to their well-being and that of their families.

But prohibition means no gambling revenue flowing to the U.S. government to use toward addressing these problems because players are unlikely to report their winnings as income. Advocates of a friendlier regulatory approach to online gambling in the U.S. believe that legalizing and regulating the industry not only will help reduce the aura of criminality associated with it (whether fairly or not), but also will result in increased tax revenues flowing into the U.S. Treasury.

Given how much politicians like new revenue streams, some have found it surprising that the U.S. government hasn't softened its hard-line stance on Internet gambling. The renewed efforts in Congress make it clear that the industry still faces a battle in the U.S.

But, as Bodog's Ayres put it, "Once governments come to the realization that online gambling is here to stay, we can expect to see a move toward regulation, and a paradigm shift in the world of online gaming."

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