’Net casinos fighting dubious odds

Mar 27, 2001 7:25 AM

For the second time in three months, Bear Stearns has done an about-face in its revenue projections for the online gaming industry.

In a report issued two weeks ago, Bear Stearns predicts the Internet gambling market will grow from about $2.4 billion this year to about $5 billion in 2003.

At the American Gaming Summit in January, Bear Stearns said it had "revised downward" its projections for online gaming revenue from over $6 billion in 2003 to only $2.7 billion.

The sharp turnaround in revenue projections is based on "significant differences" that have occurred in the online gaming industry, according to Bear Stearns analyst Marc Falcone.

"There is a great deal of potential, evidenced by the number of sites that are sprouting up," Falcone said, noting the number of gaming websites has doubled in the last year, to 1,200 or 1,400.

Other factors that contributed to a rosier outlook include the introduction of legislation in Nevada to legalize online gaming for existing licensees; and alliances of gaming giants MGM MIRAGE and Harrah’s with gaming website developers WagerWorks and Chartwell Technology, respectively.

Whatever the reasons for the dramatic flip-flop in estimates, they illustrate the schizophrenic nature of the Internet gaming industry. For instance, another organization, Private Media Group, estimates online gaming revenues of $810 million this year, but they could reach as high as $4.5 billion in 2002 and $10 billion in 2003.

The River City Group, a trade organization that promotes online gaming, predicted online bookmaking would jump from last year’s $26.5 billion to more than $60 billion in 2003. (Bear Stearns estimates $1.8 billion in sports and horse betting by 2003.)

"The projections are our best estimate," Falcone said. "But because it’s not an institutionally-sponsored industry yet, it is constantly reshaping and reconstructing itself."

The main challenge in gauging the size of the market is that website operators aren’t required to report winnings. Moreover, many still operate a bit short of legitimacy in offshore jurisdictions where "regulation" is questionable, at best.

"The dubious nature of the Internet gaming industry makes it extremely difficult to project the size of its revenues over a period of time," Falcone said. Bear Stearns & Co., a leading investment banking and securities trading firm, developed "proprietary models" to formulate estimates of the size and scope of online gaming, he added. Those include player profiles and estimates of how much money they will spend at an online betting site.

Another area that lacks consensus is the future of online regulation in the United States. Some analysts cite Nevada’s proposed legislation and a similar bill in New Jersey as harbingers of the inevitable.

Others cite court cases such as one in New York that relied on the 40-year Wire Act to convict an online bookmaker as proof that Internet gambling is illegal under federal statutes.

Still others argue that there is no real ban that could block the growth of the industry because attempts such as the Kyl Bill have failed to pass Congress. Nevertheless, as audiences and the number of websites grow, the online stakes will rise. And so will the interest in jurisdictions such as Nevada in addressing the issue of regulation.

But don’t expect a clear consensus from the states, either. While Nevada and New Jersey examine bills to legalize Internet gambling, others are moving toward prohibition. Oregon is considering two bills, one to prohibit Internet gambling and operating online betting sites.

And last month, California introduced Assembly Bill 1229, which targets the operators of gambling web sites as well as their players.

At this point, the best guess on the future of online gambling is that it will be decided state by state, venue by venue, the same way bricks-and-mortar gambling is determined.