A New Chance for Online Gambling

Is online gambling coming in from the cold?

When the U.S. Congress cracked down on Internet betting in 2006, the big, publicly traded European companies that had dominated the business closed up shop in the United States. Growth in the booming industry shifted away from these companies, once the darlings of the stock market, to private operators in offshore locations like Antigua and the Isle of Man.

But now, executives of some of the European companies whisper excitedly that they may soon get a second chance in the United States. Meanwhile, a number of European countries that have long maintained barriers are moving, under pressure from regulators, to legalize, and tax, online gambling.

"There's still a lot of gambling going on, where there's no revenue coming in to the governments," said Gavin Kelleher, an analyst at the research firm H2 Gambling Capital in Ireland. "They realize they could use the revenue."

The biggest potential change would be in the United States, where, perhaps within days, Representative Barney Frank, Democrat of Massachusetts, is expected to introduce legislation aimed at overturning the Unlawful Internet Gambling Enforcement Act.

"He supports the repeal and wants to move forward on it," said Steve Adamske, communications director for the House Financial Services Committee, of which Mr. Frank is chairman.

Mr. Frank tried and failed to do so once before, in 2007. But advocates of liberalization think they might get a friendlier hearing in Washington this time around. President Barack Obama, they note, boasted of his poker prowess during the election campaign. And the Democrats, who are seen as less hostile to Internet gambling than the Republicans, have tightened their grip on Congress.

A study by PricewaterhouseCoopers says the U.S. government could raise more than $50 billion over 10 years from taxes on legalized online gambling.

"I'd be amazed if it didn't happen over the next two or three years," said Clive Hawkswood, chief executive of the Remote Gambling Association, a trade group based in London. "It's just a question of what exactly the regulations will say."

Some analysts say that may be getting a little bit ahead of the game. Opponents of a repeal, including the Christian Coalition of America and the National Football League, have vowed to fight any new effort to end the ban.

Michele Combs, a spokeswoman for the Christian Coalition, said the group was gearing up for a "massive campaign" of letter-writing and lobbying to try to prevent any loosening of the law.

"We're not saying people shouldn't go to Las Vegas," she said. "But when it's in your home, it's too easy. It breaks up families."

U.S. sports leagues, meanwhile, worry that the ease of online betting increases the chances of game-fixing. Even the most bullish advocates of online gambling acknowledge that Internet sports betting - as opposed to poker or casino games - is highly unlikely to be legalized.

"There's a better chance now for some sort of gaming legislation to be approved," said Nick Batram, an analyst at KBC Peel Hunt, a brokerage firm in London. "But it took longer than expected to put anti-gaming legislation in place, and it will probably will take longer than expected to remove it."

Since the 2006 law was passed, North America, once the biggest market, has been passed by Europe and Asia, according to figures from H2 Gambling Capital. The law makes it illegal for financial institutions to handle payments to online gambling sites. But enough people have found ways around it, some by using overseas payment processors, to ensure that online gambling remains a thriving business. H2 says online gambling generated revenue of $6 billion last year in North America, more than a quarter the global total of $22.6 billion, up from $17.6 billion in 2006.

Pulling out of the United States cost PartyGaming about three-quarters of its business. Its position as the biggest online poker provider has been taken over by PokerSta

rs, a privately held operator based on the Isle of Man.

This month, PartyGaming agreed to a $105 million settlement with the U.S. attorney's office in New York, involving the period before 2006, when it acknowledged that its activities had been "contrary to certain U.S. laws." In turn, the U.S. authorities agreed not to prosecute the company, which is listed on the London Stock Exchange, or its executives.

The agreement fueled speculation that PartyGaming might be trying to position itself for a return to the U.S. market, if online gambling were legalized.

Analysts say one possibility for European companies like PartyGaming, should the ban be lifted, would be to form partnerships with American casino operators. That would allow the European companies to share their online expertise. Operating alone, they might struggle to obtain licenses, given their history of run-ins with U.S. law enforcement, analysts said.

"It's my feeling that even if the market were opened up, the U.S. government, in a palatable way, would probably find a way to give local companies a favorable position," Mr. Batram said.

So far, Las Vegas executives have maintained a cautious stance about legalization of online gambling. Steve Wynn, chief executive of Wynn Resorts, said in an e-mail message that he thought it would be "impossible to regulate."

"Even though it would be a benefit to our company, we are strongly opposed," he said.

But speculation that Las Vegas casino operators were looking into the possibilities was fueled by recent reports that Harrah's Entertainment, which owns Caesars Palace and other casinos, recently hired Mitch Garber, former chief executive of PartyGaming, for an unspecified role. Harrah's did not return calls.

Mr. Ryan said that PartyGaming planned to focus on acquisition opportunities to increase its market share in Europe and elsewhere, something that was difficult as long as investors were worried about the U.S. litigation. "We think Mr. Frank's efforts are quite meaningful to the sector," he said.

Several other online gambling companies whose shares are traded in London, including 888 Holdings and Sportingbet, are still in talks with the U.S. Justice Department. Analysts expect them, along with companies like Bwin International, whose stock is traded in Vienna, to be involved in a round of consolidation in the industry - along with a possible eventual move back into the United States.

As they await developments in Washington, online gambling companies are looking for growth in Europe and Asia. Under pressure from regulators in Brussels, several European Union members, including France, Italy, Spain and Denmark, have been moving to legalize some kinds of online gambling, turning it into a regulated and taxed business. Britain was the first big European country to do so, in 2005.

Other countries, like Germany, Greece and the Netherlands, continue to hold out, though, in what the European Commission sees as an effort to protect government-sponsored gambling monopolies from private competition.

The commission in March published a report arguing that the United States was violating World Trade Organization rules by keeping out European online gambling companies, given that online betting on horse racing is permitted in the United States. But the commission said that it favored negotiations, rather than legal action, to end the dispute.

Also in March, however, the European Parliament adopted a separate measure supporting the right of individual E.U. member states to make their own rules on online gambling.

"It's interesting that the European Commission is telling the U.S. it's persecuting European companies when it can't even get its own house sorted out," Mr. Batram said.

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Source:  New York Times