Online Gaming: Great Opportunities And Big Threats
Wednesday, 14. July 2010

With George Bush’s 2006 signing of the Security and Accountability For Every Port Act, a healthy portion of the U.S.’s online gaming market withdrew defeated. One might think that this sounds ridiculous as there is no logical connection between ports and gambling; however, attached to the act was the Unlawful Internet Gaming Enforcement Act (UIGEA) which made it illegal for financial institutions to transfer funds for purposes of making bets with the explicit exception of horseracing, stock trading and fantasy sports leagues.

The UIGEA was a reflection of conservative public opinion in the U.S. at the time with respect to the legalization of online gaming. One of the most outspoken opponents to the UIGEA is the longtime Massachusetts senator Barney Frank who described the UIGEA as “a pain in the ass”. With its passing, many of the world’s foremost online gaming companies abandoned the U.S. market.

While revenues for online gaming for 2009 are estimated to be in the area of $26 billion, it still remains a relatively small portion of the global betting market; approximately 8%. That having been said, the online gaming industry has been steadily growing since it’s inception and H2 estimates that revenues for online gaming should exceed $36 billion by 2010.

The revenues for online gaming do not simply flow to the web sites taking the bets but also to the entire industry that fuels it including the companies that provide back-end services such as software design and the large variety of different e-Wallets. While there are obviously great financial opportunities for businesses contributing to the industry, there are also some serious issues stemming from it’s semi-legal status.

The whole concept of using the internet as a backdrop for gambling is about as old as the internet itself. The idea was actually first proposed by the renowned British computer scientist, Donald Davies, back in 1965. The first online gaming companies came onto the scene in the mid-90’s. The first sites were made up of sports books and casinos offering a variety of different games. Paradise Poker was established in 1999 and is recognized as the first online poker site which was soon followed by PartyPoker and PokerStars. PartyPoker is the main site in the PartyGaming family of sites. PartyGaming was one of the first online gaming companies to go public and has been traded on the London Stock Exchange in 2005.

With the passing of the UIGEA, PartyGaming and a most of the other publicly traded gaming companies pulled out of the American market. While the law passed, the demand remained and a number of private companies happily filled the void. All of these companies are registered offshore; primarily in South America, the Caribbean, Gibraltar and a number of different Indian reservations in Canada. Currently, the two online poker rooms that dominate the market are PokerStars and Full Tilt Poker. All of the companies that have continued to accept U.S. players have had to rely on a number of different money-transfer systems in order to circumvent the law.

The current U.S. attorney-general, Eric Holder, promised during his confirmation hearings to enforce the UIGEA and he has most certainly delivered on his promise. This past April, the CEO of Automated Clearing House, Daniel Tzvetkoff was arrested. Tzvetkoff allegedly created shell companies which allowed online gamblers to transfer $584 million from their personal bank accounts to online gaming companies. He is being charged with money-laundering and bank fraud and faces up to 75 years in prison. This past May, the Canadian, Douglass Rennick, was arrested on similar charges. Rennick pleaded guilty and is currently awaiting his sentence.

The passing of the UIGEA and the heavy sentences that the U.S. has imposed on those that they have arrested is a reflection of a general skepticism that Americans feel toward online gaming. This skepticism finds it’s roots in the historical connection between gambling and organized crime. Online gaming companies argue that the clear audit trails left by e-commerce make them less vulnerable then brick-and-mortar casinos; however, this would appear not to matter.

Europe, on the other hand, has been far more receptive to the concept of legalized online gaming. This having been said, there has certainly been conflict between national and EU regulations. In Britain, for example, it is tolerated; however, it requires a specific license and it is regulated and taxed. This spring, Italy began issuing online gaming licenses and France is expected to follow suit. Germany has actually made online gaming illegal; however, it does allow for online state-run lotteries.

Last year, the Portuguese charity that has been issued a monopoly on lotteries and gambling, Santa Casa da Misericordia de Lisboa, took the Austrian based online gaming company, bwin, to the European Court of Justice (ECJ) alleging that bwin was infringing on their national monopoly. While the ECJ ruled in favor of Santa Casa da Misericordia de Lisboa, the ECJ previously ruled that no EU member can prohibit their citizens from placing bets online with online gaming companies while allowing them to participate in state run lotteries.

Irrespective of any laws that have been passed, it would appear that people are continuing to place bets with online gaming companies. The U.S., where it is explicitly illegal, still makes up the vast majority of the online gaming market with bets expected to exceed $5.7 billion this year. Germany and France, where the legality appears to be in question, each individually make up approximately 5% of the market.

It is clear that laws have not prevented people that want to gamble online from gambling online. However, it has also been shown that the legalization of online gambling can, in fact, expand the market. In the case of Italy, the gross gaming yield is estimated to grow to nearly €1.6 billion in 2010 from just over €400 million in 2008.

Should the U.S. government decide to legalize online gaming, the estimated growth in the market could be exponential. While many people involved in the online gaming industry feel that the legalization of online gaming in the U.S. is an inevitability, the truth of the matter is that the opposition to the idea would appear to be fairly entrenched. With memories of organized crime’s domination of Las Vegas for a good part of the last century, any form of legalization would likely be heavily regulated. The fact that gambling in general is regulated on the state level, any legalization could very well prove to be fairly choppy. That having been said, with the overriding trend of European countries towards legalizing online gaming, many believe that the U.S. will eventually follow suit and will ultimately lead to a convergence between brick-and-mortar casinos and online casinos. As such, many U.S. companies such as Harrah’s are beginning to dabble in the online market.

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