by Dominic Walsh
A card game has undergone a transformation, aided by the rapid rise of online gambling
THAT Ruth Parasol should have made separate fortunes from pornographic websites and online gambling is no coincidence. Although companies such as Amazon, eBay and Google have been hugely successful, the most profitable areas of the internet are devoted to lust and greed.
Ms Parasol, a lawyer from California in her late thirties, is one of a small number of US and Indian investors who can expect to crystallise mind-boggling paper fortunes when they float PartyGaming, the online poker and casino company, on the London Stock Exchange later this year.
Although PartyGaming says an initial public offering (IPO) is just one of several “strategic options” it has asked Dresdner Kleinwort Wasserstein and Investec to investigate, most commentators reckon it will seek to cash in on the online gambling boom by pursuing an IPO.
Valuing PartyGaming, whose PartyPoker site accounts for more than 50 per cent of the online poker market, is difficult. However, with analysts predicting a market capitalisation of anywhere between $5 billion (£2.7 billion) and $6 billion, the business seems certain to enter the blue-chip FTSE 100 index.
According to a report from Global Betting and Gaming Consultants, worldwide turnover on interactive gambling reached almost $70 billion in 2003 — up from $16.5 billion in 2000 — generating a gross gambling yield for operators of about $5.6 billion. By 2010, it expects turnover to pass $100 billion and the yield to hit $11.3 billion.
Iain Wilkie, a partner in Ernst & Young, says that gambling had undergone a transformation, losing much of the stigma that was once attached to it. “Most countries have some form of state lottery and people seem to be comfortable playing them,” he says.
“The growth of internet betting is down to a growing social acceptance of gambling combined with a technological revolution that has extended the distribution network away from the traditional world of betting shops and bingo clubs.”
Within the online gambling boom, poker is by far the fastest growing sector. According to some estimates, more than £50 million is being wagered a day at the virtual poker table, compared with just £6 million two years ago. In Britain, about £4 million a day is bet on internet poker.
PartyPoker, which takes a percentage of the total amount staked by punters, known as a “rake”, reported 2004 earnings before interest, tax, depreciation and amortisation (ebitda) of more than $350 million, although this year that figure is expected to grow to at least $500 million to $600 million.
There are several factors behind poker's growth, including the huge popularity of TV poker tournaments such as Late Night Poker , Celebrity Poker Club and World Poker Tour . Celebrity poker fans, such as Sarah Jessica Parker, from Sex and the City , and the use of Caprice, the model, to host televised games, have helped the game to shake off its sleazy image.
But while many card clubs are still viewed as male-dominated and intimidating gambling dens, virtual poker allows a wide range of players — including more and more women — to participate from the safety of home, avoiding having to handle some of the psychological elements of a real-life game.
A survey published last week by uSwitch.com, the comparison organisation, claimed that 30 to 40 per cent of online gambers in Britain are female. This compares with just 5 per cent of players at casinos and betting shops.
John O'Reilly, managing director of Ladbrokes' e-gaming and telephone betting arm, says: “Poker is seeing huge growth because it's a game of skill that appeals to the twenty-somethings who like to follow the latest fashion. It's become very trendy and fashionable.”
One of the biggest factors behind the growth of websites such as PartyPoker.com and PokerRoom.com, a rival set up in 1999 by two poker-mad Swedish businessmen, is the success of an appropriately named amateur player from Tennessee in his twenties called Chris Moneymaker.
Two years ago and just four years after learning how to play poker, Mr Moneymaker played in the World Series of Poker in Las Vegas after qualifying through a $40 online event. He went on to win the main tournament, pocketing $2.5 million.
One company that has benefited from the internet gambling phenomenon is CryptoLogic, which provides software to a number of companies, including William Hill, Betfair and The Ritz Club. Lewis Rose, CryptoLogic's president and chief executive, says: “Since our inception ten years ago, we've processed $20 billion in transactions from two million players in 240 countries around the world.”
Mr Rose says that although the online gambling market is so huge, it still accounts for a very small proportion of the overall gambling market. “Even if internet gambling doubled in size, we'd still be just a pimple on the backside of the land-based gambling industry,” he says.
While the rise in home computers and the rollout of broadband has helped to fuel the industry's success, the ease of access has had some predictable side-effects. Last year, research from the children's organisation NCH found that under-age users were blocked from registering by just seven of the 37 websites tested.
The incidence of gambling addiction is also on the rise, with help groups noting a big increase in the number of people contacting helplines or attending sessions. Sales of special computer programs that prevent access to gambling websites are said to have soared.
Lobbying from pressure groups has prompted several big banks and credit card issuers to stop processing gambling transactions. This has been a big issue in the US, which remains the world's biggest market despite the questionable legality of internet gambling.
Last year, the World Trade Organisation ruled that the attempts by the US to prevent the small Caribbean island of Antigua from establishing itself as an internet gambling centre for Americans were a breach of international trade agreements.
However, the US is challenging the decision, claiming that online gambling is “immoral”, and most experts do not expect the industry to be legalised for many years. In a rare case of God and Mammon joining forces, the church has been supported in its lobbying by the large Las Vegas casino operators, which are concerned that their businesses could be undermined by the legalisation of gambling on the internet.
Ironically, legalisation would also hit the companies — including Sportingbet and PartyGaming — that continue to defy present laws by taking bets from Americans because it would open the floodgates to their British rivals, such as Ladbrokes, William Hill and Coral Eurobet, as well as the big American gambling companies such as MGM Grand and Harrah's Entertainment.
The other big issue that is taxing the brains behind these companies is whether to apply for the gaming licences that will become available in the UK after the passing of the controversial Gambling Bill. The Government is hoping that the Bill will prompt British firms, in particular, to bring their offshore operations to the UK, as happened with internet bookmakers after it scrapped betting tax in 2001.
But such a move looks unlikely unless the Treasury introduces a duty regime comparing favourably with the rules in jurisdictions such as Alderney, Costa Rica and Gibraltar. In Gibraltar, about 1,500 people are employed by the likes of Ladbrokes and PartyGaming.
The head of one British company says: “Even if the Government introduces a duty rate of say 2 to 3 per cent, there's still the question of having to pay corporation tax. The only way I can see it working is if it plumps for a zero rate, in which case we'd probably be willing to swallow corporation tax.
“But given the outcry over possible concessions on duty to land-based casinos in the Gambling Bill, I wouldn't bet on many of us deciding to relocate to the UK.”
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