Tuesday, October 03, 2006

The death of online gambling

It truly is amazing when you think about the fact that it has come to this. Online gambling had been all the rage for offshore companies like PartyGaming and SportingBet primarily because of the appetite among Americans to press their luck not at online casinos. The all changed yesterday when Congress signed a bill making it illegal for U.S. banks to accept money transfers or payments from gambling sites.

The stocks of online gaming sites plummeted yesterday, as many lost over half of their market value. This rarely happens to any industry in a day, according to the Financial Times, but the fact that it can occur reveals the importance of the American market on something like internet gaming. Many news sources estimate that the online gaming industry generates $12 billion in revenue, half of which comes from the U.S. Placing a multiple on that loss of $6 billion in revenue of a conservative 2.0x and we are talking a $12 billion market value deduction.

From what I understand, Congress' primary argument is that these online gaming sites, which hold U.S. money offshore, could be scams and shut down on a dime with no obligation to return money to players. This is a valid concern, but not when you consider the size of the industry and the fact that the biggest companies (PartyGaming, SportingBet) command a high percentage of the traffic. The fact that many Americans have become gambling addicts and professional online gamblers probably has not helped the situation and given its an election year, you can expect many Congressmen to make attempts to appeal to targeted voters.

Interestingly, one company that I had been following for some time, Neteller, plummeted as well. The plunge seems well deserved, given the Company's reliance on bank transfers to gaming sites. Neteller takes a percentage of the transaction size, often as much as 9% as a processing fee. A large part of their business had to have been U.S. based, given that this was one of the few options that Americans had to transfer money (many credit cards automatically restrict people from making transactions with gaming websites).

Everything seems said and done for the gambling companies, but Congress' bill still requires Bush's signature, which is expected this week.

Crazy how things can change so quickly.

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