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Is a Bet Still a Bet on the Net?
by J.K. Riggin
Following on the coattails of Web-enabled commerce and auctions, we now have Web-enabled gambling. At the moment, there are already over 850 Web sites offering various gambling opportunities. Web-based gambling revenues have jumped 80% in 1999, and are expected to rake in over $3 billion by 2002.
But in order to make bets online, you'll have to clear customs before you start cashing out cyber-chips. Online gambling is illegal in the U.S. for several obvious reasons — age verification, the danger maxing out already ballooning credit card debt and fixed games are just a few. Although U.S. law enforcement has been able to put the kibosh on American online casino operators, they are pretty well hamstrung in preventing U.S. residents from placing bets on offshore gambling sites.
This has resulted in a unique situation in which all the envelope-pushing in a new Internet market space is being done on foreign soil. Though Yahoo (YHOO:NASDAQ), AOL (AOL:NYSE) and Amazon.com (AMZN:NASDAQ) are busy exporting their services (and first-mover advantage) all over the globe, the pioneers and likely winners in online gambling are all overseas.
And some of the early entrants seem to know what they're doing. Like their American predecessors, the best way to start an Internet business (i.e. raise money) is to convince people that you have a compelling business model (i.e. new acronym). In this case, it's P2P, or person-to-person transactions. The idea is to displace the bookie, who naturally shifts the odds in his favor as he takes on more bets. Much like online auction sites, the P2P gaming model enables individuals to offer and accept bets with one another over the Web. So Joe Schmo offers a bet of, say, $50 that Tiger Woods will win the Hoo-ha Open, and the next person comes along and takes the bet thinking that Tiger will choke. The Web site records the details, holds the money (sent via credit card transaction), pays the winner and keeps a piece of the action.
Gimme $25 On Hillary To Lose
So hot they had to go to the United Kingdom to put it together, Flutter.com is not your father's gambling parlor. Here you can bet on anything with anyone. Think Hugh Grant will tie the knot? Will Gore win in November? How about your favorite cricket team? That's right, Flutter.com is a P2P enabler, making it easy for you to initiate a new bet ("flutter"), or take on an existing one.
The revenue model is driven by the vig ("transaction fee"). Flutter.com takes 2.5% of the action, as well as what it generates from advertising and e-commerce. The company expects to make 70% of its revenue off of the vig. Against a backdrop of money-losing e-tailers, Flutter.com's profit-driven model has attracted venture capital to the tune of some $38 million. In a little over a month since its launch, the Web site has already attracted more than 20,000 registered users. And there's plenty of room to grow, as (in the UK alone) 3% of the population regularly places wagers in betting shops.
Before you get too excited about betting on how bad Hillary will lose in New York, though: you can't bet on Flutter.com if you're a U.S. resident. The company, founded by two former consultants at Boston-based Bain & Company, is highly sensitive to staying within all legal boundaries and does its level best to prevent non-UK
residents from using the Web site. In fact, Flutter.com is officially licensed by the UK Gaming Authorities.
With a $150 limit on each bet, and an average bet of around $10, Flutter.com is going after casual bettors to rapidly build traffic and therefore leverage its potential first-mover advantage. Its sizable cache of venture money will help Flutter.com ensure that it has the infrastructure in place to sustain the expected traffic load. The company plans to expand its service to other gambling-friendly locales in Asia, Australia and Europe. Though they're
at least a year away from an IPO, keep an eye on Flutter.com, as they're the first legit, pure-Web-gambling play out of the gate.
Wireless Wagering
Of course there's a wireless play. And if you want to place bets via your wireless phone, look no further than Irish start-up BetMart.
Founded by a former derivatives trader and son of a bookmaker, BetMart is very similar to Flutter.com, but more focused on alternative delivery channels. At the moment, it's wireless Internet devices. And since two of the most popular applications at the moment for wireless Internet phones are stock quotes and sports scores, BetMart is gambling that placing wagers in the same environment shouldn't be too much of a stretch. The company is looking to integrate sports scores from established content providers with its betting capability.
Still, they recognize that despite the predictions, wireless Internet is not quite ready for prime time yet. So BetMart also is working toward extending its service to other devices, most notably the Sega Dreamcast system, and possibly working with online auction houses too. Just think, one day you may be able to teach your 12-year-old the value of money by letting him go double-or-nothing on his allowance before kicking your ass at NBA Jam.
You Gotta Play to Win
Don't you just love how certain state governors piously prohibit casino gambling while filling their coffers with state-run lottery revenues? All so our public servants can pay for mission-critical projects like building sports stadiums, after which it costs twice as much to watch our favorite felons crush dingers and tackle each other for a zillion dollars a game. (No, I'm not bitter...)
Anyway, the same double standard applies to running lotteries on the Web. And they're cropping up everywhere, such as Webmillion and iWon.com. The specifics vary from site to site, but the net-net is always the same: users get blitzed by banner ads and surrender an email address and some personal data in exchange for a shot to win money. The Web sites do their best to retain traffic in the way of content and search services, but the main draw is the jackpot. The revenue model is the same as the leading portals: advertising and commerce referrals.
To date, only iWon.com has made a dent in terms of attracting serious traffic. According to the most recent Nielsen/NetRatings report, iWon.com ranked 14th among the top 25 Web properties, with a unique audience of just under 3.5 million. But compare that to #1 AOL (26 million) and #2 Yahoo (24 million), not to mention #4 and #5 Excite and Lycos (each with just over 9 million).
The challenge is that these Web sites still need to get the word out, and the cost of promoting their own Web site (perhaps you've seen the annoying iWon.com television spots?) cuts deeply into the ad revenue they hope to make. And at the end of the loop, users end up with a portal that pales in comparison to Yahoo, AOL, Lycos, Excite and the like.
Now that the Internet slide is over, don't be surprised if iWon.com manages to jam an S-1 through the SEC. If so, avoid it, because it'll be a weak portal play dressed in gambling attire.
Open Tables?
Much like the e-commerce service providers I wrote about last September — among them Vignette (VIGN:NASDAQ) and AppNet (APNT:NASDAQ) — there are a handful of companies focused on delivering Web-gambling systems to international firms.
Online Gaming Systems (OGAM:OTC BB) builds Internet-based systems only licensed to gaming operators in regulated jurisdictions, including specialty platforms and casino, sports, lottery and bingo wagering. The company also offers wireless and portable gaming devices through a Las Vegas-based subsidiary called Excel Design.
The Florida-based company has been keeping pace with the increase in Web-based gambling activity. For the first quarter of 2000, revenues increased approximately 98% over the same period in 1999. In addition, the company began realizing gains from its overseas operations, with significant headway in Australia.
The OTC stock is currently under $1, but as the Flutter.coms and BetMarts build a larger profile, interest in this company and its track record will increase.
Toronto-based Cryptologic (CRYP:NASDAQ) is the best financed and one of the most experienced developers of Internet-based gaming software. After a successful March IPO, the stock has been battered in the overall Internet malaise, falling more than 50% off its early $42 run-up. Although the company posted ho-hum (by Internet standards) growth of only 8%, it's important to note that Cryptologic has established a relatively broad base of customers. Cryptologic software is used by online gamblers in over 200 countries. And the company is profitable, with EPS of $1.40 on $32 million in revenues for 1999.
The company boasts a network of 17 licensees, including UK and Asia-based bookmaker William Hill, Jupiters Limited in Australia and the Canadian International Thunderbird Gaming. Thunderbird itself operates four casinos and a video gaming hall in Guatemala and Panama. And, perhaps most important considering the international market for gambling Web site operators, Cryptologic consistently gets high marks for its ability to deliver language-specific products.
Double Down
Given the corporatization of Las Vegas over the past 30 years and the proliferation of state-sponsored lotteries, slots and casinos, Web-based gambling will inevitably become legal in some way, shape or form in the U.S. If for no other reason than the gargantuan and ultimately impossible task of preventing users from placing bets on offshore gambling sites. And (just as states are falling like dominos in introducing slots to keep horse tracks afloat) federal, state and local governments will not be able to pass up the potential upside in tax revenue. Watch the non-U.S.-based first-mover (most likely Flutter.com) establish its business internationally and then come crashing into America.
In the meantime, you can't build a gambling site without the right software, and Online Gaming Systems and Cryptologic are making this happen. Though the market for online gambling is nowhere near commerce- or advertising-supported Web plays, the profit potential is there in spades. And over time it can only get bigger.
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