Monday, December 25, 2006

These may be dark days for the online gambling business, but you would never
know that from talking to Calvin Ayre, the founder and president of Bodog
Entertainment Group, the online sports book and casino. A recent crackdown
on Internet gambling by U.S. regulators and lawmakers has seen several
online casino executives thrown in jail and has plunged the industry into
chaos. But none of that fazes Ayre, the 45-year old Saskatchewan-born
entrepreneur who turned Bodog into one of the most recognizable Internet
gambling brands. "The power of our model is now being realized as we are
witnessing a surge in popularity in all of our digital entertainment
properties - including gaming - and we don't see this changing," he said in
an e-mail interview from Bodog's headquarters in Antigua. Both Bodog and
Ayre have been flying high for the past year. In addition to growing its
gambling business, the company has continued moves into mainstream
entertainment with a record label, a poker TV show that aired on the Fox
Sports Network in the U.S., and Bodog Fight, a pay-per-view extreme fighting
competition. Ayre has also graced the covers of both this magazine and
Forbes, where he proclaimed himself one of the latest additions to the
exclusive billionaire's club. Of course, that boast was based on the value
of Bodog before the U.S. authorities began cracking down and before the U.S.
government enacted the Unlawful Internet Gambling Enforcement Act in
September, effectively banning Internet gambling by making it illegal for
U.S. financial institutions to process the Internet wagers of American
citizens. While some have called the new legislation unenforceable and
riddled with loopholes, it has been enough to convince many Internet gaming
companies and investors to fold their hands, sending the shares of publicly
traded gambling operations into free fall. On Oct. 2, the first day of
trading after the passage of the new U.S. law, shares of Gibraltar-based
Party Gaming PLC - which runs PartyPoker.com and trades on the London Stock
Exchange - plummeted from US$2.08 to US$0.87 per share. On the same day, 888
Holdings PLC shares dropped from US$2.86 to US$2.11, while Toronto-based
Cryptologic (TSX: CRY), which produces software for the online gambling
industry and recently announced it will be moving its headquarters to
Ireland, fell from $24.63 to $19. Whether online gambling is illegal in the
U.S. boils down to a matter of interpretation. Prosecutors maintain that
using the phone - or the Internet - to take bets from American gamblers is
illegal. As a result, most publicly traded companies have said they will no
longer do business in the lucrative U.S. market. But Ayre - and other
private gaming companies - maintain that U.S. authorities have no
jurisdiction over their business, since they operate in countries where
online gambling is legal. What isn't in dispute is how devastating
abandoning the U.S. market will be to online casinos. Party Gaming, for
instance, reported that in the first six months of 2006, more than US$512
million, or 77% of its US$661 million in revenue, came from U.S. wagers.
Gibraltar-based 888 Holdings PLC, operators of Casino on Net - one of the
largest online casinos - reported that during the same period more than 52%
of its US$165.3 million in revenue came from Americans. Bodog has no plans
to abandon the U.S. As a private company, it doesn't have to reveal its
earnings, but Ayre says last year it processed a total of about US$7.3
billion in wagers - more than three times the volume from 2004. That
translated into revenue of about US$210 million, with about a 26% margin to
the bottom line. Ayre claims Bodog's revenues are on track to reach about
$300 million this year. Before the crackdown, revenues like that would have
made Bodog worth billions. During the height of investors' love affair with
online gaming, many large Internet casinos were trading at 20 to 25 times
their earnings, says Spencer Churchill, an analyst with Toronto-based Clarus
Securities Inc. Now there are really no baseline metrics to value online
gaming. "You really have to look at each company on a case-by-case basis,
looking at their exposure to the U.S. market and the potential for growth in
other markets," he says.
How much Internet gaming companies are worth is now anyone's guess.
London-based Sportingbet PLC - operators of ParadisePoker.com, one of the
most popular online poker sites - announced in October that it was selling
its U.S. business for a mere US$1 to a private company in Antigua. The
difficulty valuing online gaming companies right now is one of the main
reasons Ayre is not on our own Rich 100 this year. But the fact that the
Internet gambling sector is in such disarray, doesn't mean that he isn't
rich - or that the online gaming business is not profitable.

Ayre still refers to himself as a billionaire on the Bodog website and in
the company's promotional materials. "In light of the recent growth in all
of our digital entertainment properties, including gaming, music and
television, I would now say that a conservative valuation of our company
would be well over one billion," he says.