Friday, October 20, 2006

Even though President Bush has signed a law to curb Internet gambling,
investors in the handful of U.S.-listed Internet gambling companies may not
want to fold their hands just yet. "There is growth in this industry even
without the United States," said Blackmont Capital technology analyst Wojtek
Nowak. "The drive into broadband Internet in Asia and Europe still makes
this an interesting sector." Investors fled Nasdaq-listed companies such as
Cryptologic Inc., a Canadian maker of software used by Internet gambling
sites, and GigaMedia, a Taiwan maker of gambling software, after Congress
passed the Unlawful Internet Gambling Enforcement Act Sept. 30. The
legislation signed into law by Bush on Friday makes it illegal for U.S.
banks and credit card companies to settle transactions for patrons of
Internet gambling sites. Most publicly traded companies that operate online
gambling sites immediately announced plans to abandon the U.S. market to
focus on other regions. "That is where growth will have to come from," Nowak
said, naming also Eastern Europe and South America as regions for potential
growth. Online gambling is expected to expand to a $15 billion industry this
year from $12 billion in 2005, according to DesJardins Securities analyst
David Shore, who cited statistics from Global Betting and Gaming
Consultants. While the U.S. market accounts for half the Internet gambling
market, online betting equaled less than 4 percent of the estimated $260
billion global land-based gambling market, Shore said.

Analysts assume the preponderance of American bettors online has more to do
with easy high-speed Internet access -- which enables the fast transmissions
needed to load data from the flashy sites -- than a lack of gambling culture
in the rest of the world.

The United States has 36 percent of all broadband connections in the 30
member countries of Organization for Economic Cooperation and Development,
according to an OECD report released Friday. But Europe, in particular is
catching up. "The strongest per-capita subscriber growth comes from Denmark,
Australia and Norway," the report said.

In Asia, Korea and Japan have high rates of broadband penetration, but
China, the largest nation by population, lags.

"The difficulty with China is that a fragmented financial system has kept
operators away," Nowak said. "But in general, software companies are looking
to Asia as potential growth market."

As the rest of the world continues to improve Internet access, Nowak said,
the online gambling sites will meet with a larger audience.

"The Internet is a good medium for gambling," he said. "It assures privacy
and you can conduct it from the comfort of your home."

That is not to say there will not be other hurdles. Gambling is generally
illegal in China, for example, and Japan only allows bets on a few types of
activities, such as horse racing. In China and other developing nations,
cash is still king, so although gambling is part of the culture, some
bettors may be wary of paying online.

In Europe, instead of banning Internet gambling, some countries are trying
to regulate and tax the industry. Austria and Italy have taken steps to
allow domestic online gambling. And the European Commission has indicated
that private online gambling sites cannot have less access to bettors than
the state-run lottery monopolies that generate billions in tax revenue for
most European countries.

"They are taking the opposite approach in Europe and it's going to be an
opportunity for growth for the companies that have activities there,"
DesJardins' Shore said.

Among them are U.S.-listed Cryptologic. With enactment of the law, the
company lost about $30 million in revenue in the United States, or a quarter
of its total, which it will seek to replace in Europe and Asia. Nowak said
that could take up to five years. "It's going to grow at 20 percent a year,
but that's a lot to recover," he said.

Shore expects the company to struggle for a year before recovering. "They're
losing a lot of revenue, but so far haven't said how they will reduce costs,
so profits are going to suffer," he said. "Crypto is growing nicely in
Europe and that market is going to expand."

GigaMedia, whose shares are listed on the Nasdaq, recovered most of its
share-price losses after the company assured investors it generates no
revenue in the United States. From its beginning, GigaMedia shunned the U.S.
market for Asia and Europe because it worried legislators would outlaw the
sector.

"I would argue that those companies that expunged their U.S. exposure are
now lower-risk investments," Nowak said.