The banning of online gaming in the US in October 2006 was a watershed moment for UK gambling firms such as PartyGaming and 888. PartyGaming lost 60 per cent of its value in a day's trading and was ultimately forced into a merger with traditional bookie Bwin. 888's experience was no less traumatic and it too has been the target of several takeover attempts by larger rivals, but has so far maintained its independence.
Six years on from the ban, which in true Byzantine fashion was tacked on to a bill regulating security at US ports, the legal position of online gaming across the pond is no clearer. However, recent moves by some companies to increase their strategic exposure to the US point to movement on the core issues.
However, don't take that to mean that the US is about to open up - the industry has had its hopes dashed before. Take Sportingbet, which was the object of a recent approach by Ladbrokes. According to gaming consultancy GBGC, before the US banning internet gaming in 2006 Sportingbet drew 57 per cent of its turnover from North America and 95 per cent of its operating profit. Europe, by contrast, contributed just 26 per cent of sales and only 1.3 per cent of the company's operating profit. So when the US authorities brought the shutters down on online gaming, the strategy of betting the farm on a country without a clear regulatory framework proved disastrous. But the attraction still remains, with US poker sales of $8.3bn (£5.3bn) forecast by GBGC next year. There is serious money to be made, which is why the operators are positioning themselves to offer services to US customers if and when the drawbridge is lowered.
Playtech is the latest gaming firm to look at strategic partnerships in the US. The Israeli company, largely controlled by billionaire Teddi Saggi, confirmed that it is talking to several US firms about establishing partnerships there this year. That follows hot on the heels of Ladbrokes taking a tentative step westwards with a small £3m acquisition of a US software company. William Hill has a long-established presence in gaming-friendly Nevada, which could be rapidly expanded to include all of the country if the law changed in its favour.
Double or quits
All this activity has fuelled speculative buying of internet gaming shares - Sportingbet is up 23 per cent alone. The frenzy was heightened by the announcement by the US Justice Department (DoJ) in December that it is reinterpreting the Wire act, which was previously used to suppress online gambling, in such a way that would allow casino, poker and lottery gaming sites to operate. Interestingly, the prohibition would still apply to sports betting. The change in emphasis from the DoJ would, in theory, allow individual states the freedom to legislate for online gambling in their own territories and originally came about because of a request by New York and Illinois for clarification over internet lottery tickets, which had previously been governed by the Wire Act.
Whether UK firms will be able to get back into the US market is the main topic of conversation at the industry's conferences this year, according to Lorien Pilling, a director at GBGC: "The actions of the DoJ in closing down 'illegal' sites such as Full Tilt can be seen as clearing the decks for operators without a history of running sites before 2006." But Mr Pilling thinks that companies are not necessarily coming back to compete with big domestic retail operators such as MGM resorts: "A lot of the deals we have seen recently are about providing services and software to existing US operators. After all, there was no call for online gaming software after the ban came in 2006 and European and Israeli companies have built up a technological edge since then," Mr Pilling added.
However, it may not all be plain sailing for the industry after years of disappointment. Mr Pilling observed that, without a clear over-arching federal mandate, gaming legislation will be implemented only as quickly as individual states are prepared to move. This could leave the industry facing a patchwork of regulatory regimes across the country all demanding different standards and tax rates, which is probably why the big operators such as Ladbrokes and William Hill have stuck to buying retail gambling estates in regulated markets such as Nevada, he said.
IC VIEW:
The caution that characterised William Hill's and Ladbrokes' approach to North America means that both companies have clean records as far as the DoJ is concerned. That could help them in the long term if the market liberalises further. Caution is not a bad strategy. Despite recent share price rises, online gaming firms still underperformed their land-based equivalents by more than 5.5 percentage points in 2011.
| FAVOURITES |
| Playtech seems to have the clearest approach to getting involved in the US gambling scene. The company recently said it is in talks with potential partners in the US. While nothing definite has been confirmed, Playtech has been notably bulking up its software offering with the £11m acquisition of Geneity. In addition, joint-venture agreements with South African company Peermont and German company Gauselmann shows Playtech's strategic interest in markets that are going through regulatory change. |
| OUTSIDERS |
| Sportingbet and 888 should be the main candidates for a push back into the US market given their previous experience. However, their involvement in running sites before the 2006 act that outlawed internet gaming introduces an element of uncertainty as to how US law enforcers will view them. For example, Sportingbet alone had to cough up $33m in 2010 to allay criminal charges. But, fundamentally, it comes down to whether it is worth participating in what could be a very disjointed market over the next few years. |
