July 11th, 2010
Courtesy of The Economist, a look at online gambling:
“WHEN George Bush, then America’s president, signed the Security and Accountability For Every Port Act into law in 2006, parts of America’s online-gambling market retired hurt. That was because attached to the port act was the Unlawful Internet Gaming Enforcement Act (UIGEA), which prohibited financial institutions from transferring funds from punters to gambling sites (though it made exceptions for horseracing, fantasy sports and stocktrading).
The act reflected prevailing public opinion in America: surveys show that more than two-thirds of the population are opposed to legalising online gambling. But Barney Frank, a congressman who has introduced legislation to repeal UIGEA, describes its enforcement mechanisms as “a pain in the ass of the highest magnitude”. Many companies, including PartyGaming, the world’s largest online-gambling company, abandoned the American market as soon as the act was passed.
In absolute terms online gambling remains a small part of the global betting market: a mere 8% in 2009, with revenues of about $26 billion, according to H2. But last year it rose even as the overall market fell. In the coming years it is expected to grow even more: 13% a year, says H2, with revenues rising to $36 billion by 2012.
The idea of using the internet for betting is not new. Donald Davies, a British computer scientist and co-inventor of the packet-switching technology that drives data transmission over the internet, first proposed using that technology for wagering in December 1965. The first commercial online gambling sites appeared in the mid-1990s, offering casino games and sports books. Online poker followed a couple of years later. Paradise Poker opened in 1999, followed by PokerStars and PartyPoker, the flagship product of PartyGaming, one of the first online-gambling companies to go public and list on the London Stock Exchange, in 2005. In May 2010 Casinocity.com, an independent online-gambling directory, listed 2,316 gambling sites taking bets, excluding lotteries.
When PartyGaming and other listed companies pulled out of America, others filled the void. Bookies registered offshore, notably in Antigua and the Mohawk Reserve in Canada. PokerStars and Full Tilt Poker, both of which accept American players, are now the two biggest online poker rooms by a large margin, according to Pokerscout.com, an online poker forum. Thanks to UIGEA, those that cater to gamblers based in America have had to rely on arcane money-transfer systems that fudge the letter of the law and violate its spirit.
UIGEA’s main congressional defenders, Jon Kyl and Spencer Bachus, are both avowed opponents of online gambling. A Republican congressional counsel who has worked in this area asserts that “there has never been any doubt by any justice department—the Clinton justice department, the Bush justice department, the Obama justice department—that online gambling is illegal.”
Eric Holder, Mr Obama’s attorney-general, vowed in his confirmation hearings to enforce UIGEA. He has kept his word. In April federal agents arrested Daniel Tzvetkoff, an Australian whose company, Automated Clearing House, allegedly created shell companies to allow punters to transfer $584m from their bank accounts to gambling sites. He faces up to 75 years in prison on bank fraud and money-laundering charges. In May Douglas Rennick, a Canadian, was arrested on similar charges; he pleaded guilty to the illegal transfer of gambling funds and awaits sentence.
All this reflects a profound and multilayered American scepticism of online gambling. In a 2004 report the State Department called gambling sites “the functional equivalent of wholly unregulated offshore banks”, giving warning that they might be used not only for money-laundering but also for criminal activities ranging from terrorist financing to tax evasion. Online gambling companies reject such claims, pointing to the clear audit trails offered by e-commerce. They argue that thanks to identity screening, online casinos are far less vulnerable to fraud than bricks-and-mortar ones.
Europe has generally been more receptive to the idea of legalising online gambling, though national and European regulations often conflict. There is certainly no single European market in online gambling. In Britain it is allowed, though it requires a licence and is taxed and regulated. Italy started issuing online-gambling licences this spring. France is due to follow suit on a more limited scale. Germany banned online gambling in 2008 but allows its citizens to play in state-run lotteries online.
In 2009 Santa Casa da Misericórdia de Lisboa, a Portuguese charity that runs lotteries, took bwin, an online-gambling company based in Austria, to the European Court of Justice, alleging that bwin’s activities in Portugal infringed its national monopoly on lotteries and gambling. The ECJ ruled in Santa Casa’s favour, stating that “restrictions on the freedom to provide services may be justified by overriding reasons relating to the public interest.” Gambling appears to fall within that category. But the ECJ had previously ruled that a country cannot prohibit its citizens from betting online with private operators if it allows them to take part in state-run lotteries. Michel Barnier, the European Union’s internal-market commissioner, said in February that he plans to seek coherent European rules on online gambling.
The laws may be muddled, but people are betting anyway, even where it is illegal to do so. America retains the lion’s share of the global market; its punters are expected to bet $5.7 billion online this year, only slightly down from its 2006 level of $6 billion. Germany and France account for around 5% of the market each.
Clearly prohibition fails to prevent citizens who want to gamble from doing so. But legalising online gambling can expand the market, as demonstrated by Italy. H2 predicts that that country’s gross gaming yield (which measures the amount of customer monies kept by betting operations) from online poker, casino and bingo will grow from just over €400m in 2008 to nearly €1.6 billion in 2012.
Should America’s market ever open up, the effect would probably be similar but larger. Whether and when this might happen, though, is uncertain. Many in the online gambling industry think it inevitable, but opposition seems entrenched. It took decades to get geographically based gambling regulations right; for much of the 20th century crime festered in Las Vegas. In laying out an online regulatory regime America is likely to err on the side of caution. And since gambling is a state rather than a federal issue, any legalisation of online gambling is likely to be patchy.
Yet just because America remains a laggard does not mean the rest of the world will stop. Mitch Garber, who heads the interactive-entertainment division of Harrah’s, the world’s largest gambling company, believes that the trend towards legalisation across Europe will ultimately reach America and will eventually lead to a convergence between bricks-and-mortar and online businesses. More and more land-based companies, like Harrah’s, are dipping a toe into the online market.
To do so they tend to use established back-end companies rather than reinventing the roulette wheel. These companies “sell the picks and shovels but don’t prospect for gold”, as David Loveday, who heads a gambling-software company called Orbis, puts it. This lowers barriers of entry to the online gambling market for established names. For example, William Hill, a British high-street bookmaker, runs a poker room for the Sun, a tabloid newspaper; that poker room runs on software developed by Playtech, a leading gambling-software developer, whereas William Hill’s sports book is run by Orbis.
Such convergence is happening not only online; it is also moving across platforms. Betfair, a betting exchange, has launched an application running the Yahoo! TV Widget Engine Program, which offers a range of interactive content. Gigi Levy, who heads 888 Holdings, a large online-gambling firm, has similar plans. He says that at the moment sports betting is not “social”. A television-based application that allows punters to place a bet during a game with just a click is a logical development of the sort of in-game betting offered by online bookies and exchanges. The idea sets sports-betting fans’ heart aflutter—and gives gambling opponents nightmares. But it may come too late to save the horses.
Those revenues will flow not merely to websites taking bets but also to companies offering back-end services such as software design or proprietary gambling software. Yet online gambling presents thorny problems as well as opportunities. Businesses that want to offer it have to deal with a welter of different regulations—or operate semi-legally. Politicians have to decide whether to allow open markets or protect state-approved (and often state-run) monopolies. The first is hard to do; the second hypocritical.”
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