We are fast reaching the point where gaming investors will have to understand electronic gaming in all of its forms, from internet to mobile.
Until now, it was possible to focus on brick-and-mortar companies and ignore the bewildering proliferation of e-gamers in various countries licensed in such tiny places as the Isle of Man, Malta, Gibraltar and Antigua.
No more.
The brick-and-mortar and e-gaming worlds are merging in their business models, their technology, their games and as businesses. And soon e-gamers will be household names like Harrah’s, Wynn and MGM Resorts.
Consider:
- Giant companies are forming. PartyGaming was the first to sport a multibillion-dollar market cap. Now, mergers promise to create more. The most recent proposed is the combination of London-listed PartyGaming and Austrian-listed Bwin. Their marriage will inspire others.
- Land-based companies are morphing into international internet giants. Not long ago, Paddy Power and William Hill were stodgy operators of betting shops in Ireland and Britain. Now, they are fast-growing international sports betting companies. Both are listed in London.
- Brick-and-mortar companies are joining the party. Lottery giant Lottomatica bought Swedish e-gaming software maker Boss Media. IGT owns designer WagerWorks, Churchill Downs has purchased Youbet.com, Harrah’s has a foreign-based i-gaming operation, and Bally and Shuffle Master are developing internet strategies.
- E-gamers are going in the opposite direction. Betfair has purchased TVG, the American account wagering company. And privately held Bodog recently set up its first land-based gaming operation as part of a promotion. This blending and growing are inevitable, and driven by the following factors:
- The internet empowers people, making stirring innovation faster than government can regulate, and even making regulation somewhat futile.
- Technology creates its own momentum for change, especially in a free market. As technology changes, it makes the internet and mobile gaming more practicable and more appealing.
- Free trade is built into our financial regulatory systems. As a result, the European Union Court of Justice is forcing one member nation after another to open their internet gaming markets to competition. So far, that has led to a gold rush of e-gamers into Italy and France. Germany is the latest country to have its state monopolies knocked down, and it’s a bigger gold mine than France or Italy. Likewise, the World Trade Organization has ordered the United States to open its market to competition from foreign internet companies. So far, the U.S. government has resisted compliance, but the day will come when some combination of forces causes the government to relent.
- That cause might be the legalization of internet gaming in the United States if Rep. Barney Frank’s internet gaming bill passes.
Or it could happen piecemeal, with individual states such as California and New Jersey legalizing intrastate gaming.
What may happen in the United States is that states such as California legalize intrastate poker, and Congress repeals the law banning financial transactions on the internet for gambling purposes.
What would happen beyond that is unclear, but the precedent will have been set.
Even if not all of America is open to internet gambling, enough of it will be to attract companies.
Betfair is the first, but it won’t be the last foreign e-gamer to tread on American shores. Likewise, the big American casino companies, which performed so badly at earlier efforts to establish i-gaming overseas, may decide the better way to go is to buy an established and successful player like PartyGaming.
The casino companies, especially those operating in multiple markets such as Harrah’s, understand the potential to cross-market land-based and internet, and to use the internet to cultivate new players and send them to their resorts.
Not all of this will be easy. As Britain found out, you can regulate internet betting, but if the tax rate is not competitive, the William Hills and Victor Chandlers will relicense in places like Gibraltar.
More important for investors, picking winners will not be a slam-dunk.
The regulatory framework is changing fast. Investors did not foresee billions of dollars of market value disappearing from the London-listed giants such as PartyGaming. Then the U.S. ban on i-gaming transactions came along. Fortunes were lost and some entrepreneurs even landed in jail.
The greater risk as the world liberalizes will be good, old-fashioned competition in a rapidly changing industry.
A few years ago, for example, Cryptologic appeared to be a no-brainer. It was the dominant i-gaming software company with a strategy of going with blue-chip names. It had cash on the books, no debt, and even paid a dividend.
Today, CRYP is burning through cash, has suspended its dividend, and a stock that once traded at $30 was at $1.19 as of this writing.
As Warren Buffet points out, it was easy a century ago to see that the automotive industry would be hugely successful. It was far more difficult to see which of the several thousand carmakers would survive to become the Big Three.
That will be the investor’s challenge.
