Friday, October 27, 2006

PartyGaming Plc, the world's largest online poker company, lost 75 percent
of its revenue when the company shut down its U.S. sites to comply with a
new law enforcing a ban on Internet gambling. That hasn't dented Chief
Executive Officer Mitch Garber's optimism. ``Chaos breeds opportunity and we
will seize that opportunity,'' Garber said on a conference call Oct. 20,
when he laid out the Gibraltar-based company's strategy for international
expansion, particularly in Europe. ``The European Union is run in a way that
favors our business.'' The U.K., Italy and Belgium are opting to regulate
Internet gambling, rather than outlaw it, as players turn increasingly to
the Web. The EU is pushing countries to scrap any measures that protect
domestic companies when those nations open their markets. On Oct. 12,
regulators told members such as France and Austria to stop discriminating
against international bookmakers and casinos. The changes may give U.S.
gamblers more ways to evade the ban on Internet wagers at home, says William
Eadington, a professor at the Institute for the Study of Gambling and
Commercial Gaming at the University of Nevada at Reno. ``A sub-industry in
circumventing the rules will evolve,'' Eadington says, pointing to the
failure of Prohibition, which banned the sale of alcohol in the 1920s.
``American gamblers may find themselves pushed into a market that's in the
hands of Europeans.'' Italy next year will let companies offer online
lotteries, bingo and betting on sports or games of skill. The U.K. will
begin licensing private Internet gaming sites in September. Belgium is
working to change its legislation as well, and private companies are already
allowed to offer sports betting in Austria.

U.S. Revenue

The world's biggest Internet gambling companies lost $7 billion of market
value in a day after Congress passed legislation on Sept. 30 to prevent
credit-card companies from collecting payments for online bets. U.S.
President George W. Bush signed the law on Oct. 13.

PartyGaming stock has fallen 75 percent to 27 pence since the legislation
was approved.

888 Holdings Plc, one of the world's biggest online casinos, gets about half
its revenue from outside the U.S. and has fared better than many of its
rivals. Shares of the company, which is also based in Gibraltar, have
dropped 35 percent to 93.5 pence.

The U.S. accounted for half of the $12 billion Internet gambling market last
year. New York-based gaming consultant Christiansen Capital Advisors LLC
expects the global market to double to $24 billion by 2010. It said it
hadn't revised its outlook to take into account the U.S. measures.

`Regulation, Not Prohibition'

Julian Easthope, an analyst at UBS AG in London, says it's too early to say
which companies will be able to take advantage of opportunities in Europe
because the regulations are still developing. The EU's gambling market is
valued at about $70 billion.

Paul Renney, a partner specialized in the Internet at law firm Addleshaw
Goddard LLP in London, says he expects lobbying to increase to open the EU
market further.

``European countries like the U.K. that take a more enlightened approach of
regulation, not prohibition, stand to gain,'' he says.

There are still pockets of resistance. The leaders of Germany's 16 regions
last week proposed banning all private betting companies, including Internet
and traditional operators, and to extend the government's betting monopoly
to almost all forms of gambling.

Soccer Jerseys

France on Sept. 15 detained the co-CEOs of Vienna-based Bwin Interactive
Entertainment AG for three days on charges of violating gaming laws. A court
in the Paris suburb of Nanterre will decide whether to charge them within a
year, according to the company, which says its Gibraltar license gives it
the right to operate across Europe.

``Money games in France are very strictly regulated,'' French Budget
Minister Jean-Francois Cope told reporters on Sept. 19. ``It's not an
economic activity like any other, and it's out of the question to let it
explode in an unconscious manner.''

The government may jack up fines on international firms that advertise their
services in France from 4,500 euros ($5,655) to five times ad costs,
possibly including sports sponsorships, he said. The French soccer league
has banned Bwin from putting its logo onto AS Monaco's jerseys, while
stopping 888 from backing Toulouse FC, citing the risk of legal proceedings.

The French state's role in controlling the country's $24 billion gambling
market has evolved little since 1539.

French Charlatans

That's when King Francois I established a lottery in Paris to stamp out
``charlatans'' so his subjects didn't ``spend their time, labor, virtues and
necessaries in games of hazard,'' according to the Web site of La Francaise
des Jeux, France's state-controlled lottery.

Challenges to its authority, however, have multiplied.

Paris-based Groupe Partouche SA, operator of the Cannes Palm Beach casino,
in March filed a complaint with the European Commission alleging unfair
competition by La Francaise des Jeux, which is allowed to operate on the
Internet. Partouche is considering going on line in Belgium when the law
changes there.

``We just want to do our job on line as a casino operator,'' says Frederic
Vinzia, head of Partouche Interactive. He estimates there are 2 million
French people who gamble on line. ``It's a tremendous opportunity.''

In May, gambling was excluded from an EU accord to dismantle national
barriers to providing services across the trade bloc.

Falling State Monopolies

PartyGaming's Garber says countries like France and Germany will only be
able to hold out for so long. PartyGaming is developing multilingual Web
sites and putting together marketing campaigns in new markets, Garber said.
He declined to be more specific.

``The gaming and lottery monopolies are the last to fall, and they are
falling and will fall,'' he said. ``You're going to see a lot more tolerance
in Europe.''

Paddy Power Plc, Ireland's largest bookmaker, may open gaming Web sites in
Italy, Spain and Poland to take advantage of the legislative changes, Chief
Executive Officer Patrick Kennedy said in an interview in Dublin on Oct. 24.
The company started a German language service in April.

The European Commission put Italy, Germany, Hungary, the Netherlands,
Sweden, Denmark and Finland on notice in April for letting state lotteries
offer online sports betting, while barring rivals. On Oct. 12, Financial
Services Commissioner Charlie McCreevy targeted France and Italy for
shielding domestic sports bookmakers, and scolded Austria for restricting
advertising by foreign casinos.

Harrah's in London

The actions represent an initial threat, which would be followed by a more
detailed opinion before the commission could file suit at the EU's highest
court in Luxembourg. Poland separately got a final warning before a possible
lawsuit for taxing foreign lottery winnings more than domestic jackpots.

``Internet gaming is here to stay,'' says Andrew Lynch of Schroder
Investment Management, which owns more than 5 percent of Groupe Partouche.
``There's going to be plenty of saber rattling and fighting talk by the
government monopolies, but it's a trend that's going to happen.''

The changes in national gambling laws in Europe are part of efforts to boost
competition in an industry long dominated by state monopolies.

Italy, where online poker will continue to be banned, is increasing the
number of betting outlets and letting bars and restaurants take wagers.

The U.K. legislation allows for 17 new casinos, one of which will be
Europe's first ``mega'' casino, with about 1,250 slot machines. That's
sparked a flurry of acquisitions including the $570 million offer for London
Clubs International Plc by Las Vegas-based Harrah's Entertainment Inc.

`Security and Prestige'

Licensed sports betting companies in the U.K. take Internet wagers under a
1963 law that lets them do business by phone. In 2001, the country scrapped
a tax on gamblers' winnings and replaced it with a 15 percent tax on gaming
companies' gross profits to help U.K. enterprises such as William Hill Plc
compete with overseas rivals and bring offshore companies back inland.

The U.K. Gambling Act approved last year will extend the Internet licenses
from bookmakers to gaming companies. Chancellor of the Exchequer Gordon
Brown may include fiscal incentives in the 2007 budget for offshore
operators to seek the new licenses.