Monday, April 15, 2002		Article

Business gets dicey in online casinos
Jamie Doward

IT was billed as the new Eldorado, a sure fire way of making money from the Internet. Online casinos and gambling Websites were predicted to earn huge sums for such places as Costa Rica and Bermuda by allowing billions of persons hitherto deprived of gambling to bet wherever and whenever they wanted.

'The Internet was global and as only 10 countries in the world have legalised betting shops, suddenly everyman and his dog thought "I'd like a bit of that",' Nigel Payne, chief executive of Sportingbet.com which runs the largest online sports book in the world said.

Thousands of sites based on sun-drenched islands where the authorities had scant interest in regulatory affairs sprang up seemingly overnight, attracting huge followings in Asia, the USA and the Middle East, where betting was banned.

After pornography, gambling quickly became the biggest online money-spinner.

But many investors lured by the prospect of fantastic rewards, have played a high stakes game and lost in spectacular fashion. The promise of easy money has evaporated. 'It's easy to set up an online casino, but it's increasingly difficult to make money out of it,' said Iain Wilkie, hospitality and leisure partner at consultant Ernst & Young.

Even established names have had their fingers burnt. The owner of top London store Harrods, Mohamed al-Fayed, set up an online casino, Harrods.com. But the value of shares in Gaming Insight, the company that powers the site and in which Harrods Online holds a stake, has fallen from 25 pence last June to around six pence now, despite the company announcing that profits were up by 300 per cent to more than $ 17 million in the 18 months to 31 December last year.

Last week, it was the turn of Damian Aspinall, son of the British zookeeper and casinos magnate John Aspinall, to experience a reality check. His Internet firm, the AIM-listed Aspinalls Online, admitted that a Bermuda-based online casino business it bought for more than $ 42 million less than a year ago, was worthless.

In addition, the firm is to subcontract the management of its two online casinos to an outside operator. It all adds up to an ignominious fall from grace for one of the most famous names in casinos.

These are grim times for most of the estimated 1,400 online gambling sites. Although the industry, which produced revenues of $ 4.6 billion last year, is predicted to be worth more than $ 125 billion by 2015, it is undergoing massive turbulence.

Many have already had little choice but to close for good. US credit card firms and banks, worried about the rising levels of fraud, have taken to blocking transactions with the offshore firms, effectively cutting off their business.

Gambling experts agree that the industry is on the cusp of a massive shakeout and that within the next two years only a fraction of the current online gambling firms will exist.

Tellingly, analysts at investment bank Merrill Lynch estimate that this year, for the first time since they began about five years ago, the number of online gambling sites dropped. It is thought that a year ago there were some 1,800 sites.

The trickle of casualties is likely to become a flood once the US grants online gambling licences, which will effectively signal the death of the smaller sites. Those operators that hold the new American licences will be allowed to advertise, thus channelling punters to their sites and away from others.

Already the big US gaming operators are shuffling for position in anticipation of US licences. MGM recently snapped up an online casino licence on the Isle of Man, off the west coast of England, and expects to have a site up and running in a few months' time. It can't be long before the most famous name in gambling, Caesars in Las Vegas, wants to develop its online presence.

For their part, the US authorities have played a waiting game, watching how countries such as Britain have dealt with the issue. 'It took years for the authorities to get organised crime out of Las Vegas. It's easy to forget the nervousness that surrounds gambling in what is a conservative society,' Wilkie said.

Recognition and regulation by the authorities is now the Holy Grail for the industry's biggest players, which seek to migrate punters from the Internet to other forms of new media.

'The Internet is just the first step. The majority of betting in the future will be entertainment and sporting-led, through interactive TV or over mobile phones,' Wilkie said.

According to analysts at the research firm Sportbusiness.com, by 2015 more than 80 per cent of the industry's revenue will come from sports betting.

An industry regulated by government goes some way to reassuring punters. 'Where do you want to put your money, the UK or Jamaica, where there are minimal regulations? 'You will get to a point soon where the customers and the investors have a choice about where they are going to go,' Wilkie said.

As such, many firms are now moving back onshore. Frederic Diot, of the analysis firm Datamonitor, says: 'Offshore online firms still represent a majority but as new legislation comes into effect legalising online gambling, like in the UK, we can expect a growing number of those companies to come onshore, looking for greater legitimacy, convenience and better infrastructure.'

The rewards for those left in the game are getting bigger. But many can no longer afford to play.

— ONS