14 July 2006


    BUSINESS WEEK online
    JULY 12, 2006
    News Analysis
    By Catherine Holahan

    Betting Against Online Gambling
    U.S. lawmakers stepped up a legal attack against online wagering. If passed, will new rules do much to end the practice? Don’t bet on it

    Google is entering the online payments arena, turning up the heat on eBay’s PayPal. How likely will you use Google instead of other methods?

    Online gambling just got riskier. House of Representatives lawmakers on July 11 passed antigambling legislation that could make it difficult for U.S. gamblers to carry out transactions online.

    If passed, the Internet Gambling Prohibition and Enforcement Act could deal a blow to the online betting industry. It explicitly bans Internet gambling, prohibits online poker sites and other betting companies from “knowingly accepting” money from U.S.-based customers, and encourages financial institutions to deny Internet gambling transactions. It does not affect horse racing.

    Bill sponsors heralded the passage as a victory against gambling addiction and illegal activity. “Internet gambling is a serious problem that must be stopped, and I believe the Internet Gambling Prohibition and Enforcement Act will help eliminate this harmful activity before it spreads further,” bill co-sponsor Bob Goodlatte, a Republican from Virginia, said in a statement.

    SMOKE AND MIRRORS. Shares of Gibraltar-based PartyGaming, which owns the popular Party Poker, Party Casino, and StarLuck sites, slipped a mere .24% on the London Stock Exchange. PartyGaming had gotten a lift in June on reports that it planned to expand its sports betting operation (see BusinessWeek.com, 6/29/06, “On the Move: Deutsche Boerse, Alitalia, Party Gaming”).

    Just how much of a setback is the proposed legislation for the $12 billion industry? While online gambling companies generate half their sales from U.S. gamblers, the industry is operated almost completely by companies beyond the reach of U.S. regulators. “Lawmakers can put a dent in it, but they are not going to stop it,” says Sebastian Sinclair, president of New York-based Christiansen Capital Advisors, which has followed the online betting industry since 1995. Adds Frank Catania, president of New Jersey-based Catania Consultancy, which specializes in gaming: “Legislation is not going to affect offshore Web sites. It’s a lot of smoke and mirrors and misstatements.”

    In essence, the bill does little to change what Visa, Mastercard (MA), and most merchant banks have done since November, 2001, when they first began refusing e-gambling transactions. “The industry went down about 20 percent then,” Sinclair says of shares in e-gambling companies. “A year later, they were back to the same level, and then, a year after that, they probably saw 20% to 30% growth. I expect you will see something similar.”

    NEW WIRE ACT. On July 11, PartyGaming spokesman John Shephard said the company was monitoring the U.S. government’s actions and was hopeful that American lawmakers would eventually follow the “sensible and pragmatic approach” of the U.K., which has embraced online gambling and the billions of pounds in tax revenue to be reaped from it (see BusinessWeek.com, 5/15/06, “Britain Bets on Internet Casino Games”). “Prohibition is not the right way to do things,” Shephard said.

    Bookmaking and other gambling activity has been legal in the U.K. since the 1960s. “The U.K. has always been very liberal on betting,” says Leighton Vaughan Williams, director of the betting research unit at the Nottingham Business School.

    Not so in the U.S. The bill, known as HR4411, was pitched by sponsors Goodlatte and James A. Leach, a Republican from Iowa, as merely clarification of the existing 1961 Wire Act, which prohibits gambling transactions over telephone lines. Until July 11, there was still some debate as to whether the Wire Act was applicable to the Internet.

    WHEN THE CHIPS ARE DOWN. That debate is over, but bets are far from off. After the 2001 action by U.S. banks, the industry recovered, thanks to online vendors such as Neteller (NLR), FirePay, and CentralCoin, which allow transactions from gambling sites. Known as “e-wallets,” these companies let customers put money into an account and transfer funds from online sites into those accounts. The sites also allow users and Web sites to transfer funds to each other, enabling gambling sites to deduct and add money to users’ accounts. Shares of Neteller, one of the largest e-wallets, fell 7.3% on the London Stock Exchange on concern over the bill.

    The Gambling Prohibition and Enforcement Act also allocates $10 million a year for three years for prevention of illegal online gambling. But even groups dedicated to ending gambling addiction surmise that Americans who want to play will find some way to get their chips into the hands of Internet dealers. “We believe this bill is rhetoric and it will only indirectly help problem gamblers,” says Keith Whyte, executive director of the National Council on Problem Gambling in Washington, D.C. “We suspect that, much like with people buying illegal drugs, the money will find a way to flow. Certainly prohibiting sports gambling over the last 20 years has not done much to limit the flow of money to domestic sports gambling.”

    The bill may not even become law. To date, there is no pending companion legislation in the Senate. “The ball is now in the Senate’s court,” bill co-sponsor James A. Leach, a Republican from Iowa, said in a statement. The Senate would have to bring the house’s legislation, or a similar bill, up for debate and pass it before the President can consider signing it into law. If the Senate fails to act, ultimately the legislation will die.

    MORE TIME IN VEGAS? Still, there are worries that a Congress and President eager to focus debate on family values may get behind such legislation. And, if the bill does become law, some Internet gamblers say they’ll steer clear of the new risks associated with online betting. “If they made it so that a company could refuse to pay me, it would be hard to justify that second gamble—gambling that I’d be getting paid when I won,” says “Mr. Dynamite,” a New Yorker who regularly gambles online and hosts a popular blog about his experiences, Fridayinvegas.blogspot.com.

    In that case, Mr. Dynamite, who asked that his real name not be used, says he’d find another way to get his gambling fix: more Friday nights in Vegas.

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