Thursday, November 02, 2006

The online gambling industry is undergoing a seismic shift just weeks after
a new law cut off much of the business in the United States. Big public
companies have lost billions of dollars in market value and millions of
customers as they shut their United States Web sites for sports betting,
poker and other games. Those companies are anxiously searching for
acquisition partners and new customers. But business is booming at some
smaller private companies, which have continued to operate in the United
States despite the ban. Britain, meanwhile, is trying to drum up
international support for regulation of the industry outside the United
States. As the first large Western government to explicitly allow businesses
to set up shop on its soil, Britain has stood to benefit enormously from
taxing Internet gambling companies that moved here. Most of the public
online gambling companies trade on the London Stock Exchange. More than £4
billion ($7.6 billion) has been wiped off the market value of publicly
traded online gambling stocks since Congress passed the bill in early
October, analysts in London estimate. The bill makes it illegal for a bank
to transfer money to a Web site that offers gambling. The British government
has been sharply critical of the United States law. United States lawmakers
said they passed the ban out of concern that the sites would increase
gambling addiction and social problems. "The industry has been very hard hit
by the U.S. ban," said Tessa Jowell, Britain's culture minister, during a
news conference on Tuesday at the Ascot Racecourse, where she met with
delegates from 30 other countries to discuss the subject. The United States
was invited but did not send a representative. "The Internet is a global
marketplace, and that's why we need action at the global level," Ms. Jowell
said.

Many of the largest public online sites, like PartyGaming and Sportingbet,
got the majority of their revenue from the United States. PartyGaming
suspended its United States business after President Bush signed the
Unlawful Internet Gambling Enforcement Act on Oct. 13. Bankers, analysts and
Internet executives say online gambling companies are now discussing merging
with each other. Meanwhile, private equity companies, which are flush with
cash, have been wondering whether they can assemble a few of these companies
into one, slash their costs and reap the profit.

Traditional casino companies in the United States and Asia are also
considering buying up the sites as a way to enter Europe. And British
betting-shop chains like Ladbrokes and William Hill are thinking about deals
with the online gambling companies, bankers and analysts say.

So far, none of these conversations have resulted in any firm agreements. On
Monday, one online gambling company, 888 Holdings, said it was in "various
preliminary discussions with third parties," after articles in the British
press linked the company with PartyGaming. Any such talks are at an early
stage, several people in the industry said, and 888 is considering several
options.

Despite its intentions, the Internet bill has not eliminated online gambling
in the United States, say analysts and players. Instead, small, privately
held companies are thriving.

PokerStars.com, for example, had more than 52,000 players participating in
games on Tuesday afternoon. It is unclear how many of those were Americans,
but analysts generally estimate that they make up at least half of any
online gambling market.

In a statement on its Web site, PokerStars said that after receiving
"extensive expert advice" it had concluded that the recently passed
provision related to Internet gambling "does not prohibit you from playing
online poker" in the United States. The company is based in San José, Costa
Rica, and processes credit card transactions through a subsidiary in the
Isle of Man.

Many online gambling executives, however, were alarmed by the arrests of two
of their peers, and expressed concerns they would be arrested by United
States prosecutors. So far, that has not been the case.

Peter Dicks, a former nonexecutive chairman of Sportingbet, was arrested in
September as he flew into the United States. He returned to Britain in
October, after a New York judge dismissed his arrest warrant, citing a lack
of evidence. David Carruthers, the BetOnSports chief executive, was arrested
this summer and is still facing charges in St. Louis. He has pleaded not
guilty.

While lobbying for regulation rather than prohibition of the industry,
British officials said on Tuesday that they would not stand in the way of
United States calls to extradite British citizens or residents. A draft
communiqué from the conference said online gambling should not be allowed to
become a source of crime or be used to finance criminality, that it should
be fair to consumers and that children and problem gamblers should be
protected.