Tuesday, December 1, 2009

Start-Ups Hedging Their Bets On Online-Gambling Legislation

November 27, 2009: summarized from Wall Street Journal -- Venture-backed start-ups operating in the three most popular forms of online gambling - poker, horse racing and sports betting – stand to see major impacts from proposals winding their way through Congress that could legalize certain types of Web-based betting.

While the start-ups are keeping a close eye on the bills’ progress – and in some cases positioning themselves for possible major changes – most believe that any new laws won’t be enacted for at least another year, and possibly longer.

Gerard Cunningham, president of Betfair US, the world’s largest legal online gaming company, isn’t confident that the bills will get their proper hearing in Congress soon. “The challenges those bills face is the amount of things going on in Washington,” Cunningham said. “They have other concerns now…maybe next year…maybe the year after.”

To be sure, Congress is beginning to realize there’s a major bucket of taxable dollars they’re missing out on. Internet gambling revenue for offshore companies was estimated to be $5.9 billion in 2008 from players in the U.S. and $21 billion from players worldwide, according to gambling industry consulting firm H2 Gambling Capital.

In May, U.S. Representative Barney Frank unveiled a plan that would exempt operators that are licensed and regulated from an online gambling ban enacted in 2006 that made it illegal for banks and credit card companies to make payments to online gambling sites. The ban resulted in billions of euros in losses for European online gambling firms.

Frank’s legislative proposal, HR 2267, would access a fee to operators, collect taxes related to Internet gambling and provide safeguards against fraud, money laundering and terrorist finance. The bill seems to be geared toward poker games, as it excludes any type of sports betting. On Sept. 19, Oregon Senator Robert Wyden introduced a bill that funnels all revenue created by Frank’s bill into low-income subsidies for health-care.

The Frank-sponsored bill would raise nearly $42 billion for the U.S. Treasury over the next decade, according to an analysis by the Joint Committee on Taxation.

In August, New Jersey Senator Robert Menendez introduced the Internet Poker and Games of Skill Regulation, Consumer Protection, and Enforcement Act. The bill focuses on licensing games such as poker, bridge, chess, mahjong and backgammon “in which success is predominantly determined by the skill of the players.”

John Taylor, chief executive at GameLogic Inc., considers himself an expert on gambling regulation. The Waltham, Mass.-based company offers free games that are loaded on casino Web sites to attract potential customers. GameLogic makes a host of online games including slot games, card games, bingo, trivia and puzzles.

“Given that so much of our business is about interactions with gamblers online through games, it has a big impact on our business,” Taylor said of the proposed legislation.

GameLogic is essentially a bridge between brick-and-mortar and online gaming. Casino customers play the games on the establishment’s Web site, and can earn perks such as casino credit when they visit in person. While the company currently operates as a marketing tool, it could easily flip a switch to offer a full-blown online gambling system to its customers.

But Taylor doubts Congress will act on the proposals any time soon, which gives start-ups time to decide how they will play their hand if online gambling is legalized. “The conventional wisdom, and it changes regularly, is that if anything is going to happen it’s going to happen by the end of 2010,” Taylor said.

Betfair Group Ltd., on the other hand, has managed an extremely lucrative betting operation of its own in the U.K. After launching in 2000, Betfair has more than 2.5 million registered customers in 140 countries. It now holds licenses in the U.S., U.K., Australia, Italy, Malta, Germany and Austria. In January 2009, Betfair acquired TVG, which included TVG.com, the largest legal wagering business in the U.S., and horseracing television channel Television Games Network. In addition to sports betting, Betfair offers a portfolio of casino, exchange games and poker.

Cunningham, Betfair US’s president, said the company saw revenue in the last 12 months of $50 million in the U.S. and more than $500 million outside the U.S. The company is experienced in understanding and navigating legal issues around gambling in many locales. It’s in a great position to turn on its online casino games in the U.S. if they are legalized.

“I joined Betfair for the opportunity because I believe the laws are going to change,” Cunningham said. “These things are legal and well-regulated in other parts of the world.”

Another company that could be substantially impacted by the proposed legislation is Zynga Inc., maker of the hugely popular Texas Hold’Em Poker games on social networks. The game allows Facebook users to play with their online friends. Players spend $5 for $75,000 in virtual chips and $50 for $5 million worth - but they can never cash out.

It’s been an enormous business for the company, which industry watchers estimate could see $100 million to $200 million in revenue this year. However, with a legal online version of poker available, those players could move to a table where they’re allowed to earn some actual winnings. Zynga declined to comment on the proposed legislation.

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