E-gamers face credit card crunch

Jul 2, 2002 7:15 AM

Internet gaming companies could see their growth potential cut in half over the next year as major banks refuse to accept online gaming transactions, according to a new study by Bear Stearns senior managing director and gaming analyst Jason Ader.

Ader predicted that growth rates in the industry could be sliced in 2003 from 43 percent to 20 percent, or to roughly $4.2 billion in total industry-wide revenues.

"This is a real challenge for e-gaming companies," said Ader. "Credit card transactions are their life blood, without them it will be tough for the sites to thrive."

Many large credit card issuers, such as Bank of America, Fleet, Direct Merchants Bank, MBNA, and Chase Manhattan Bank have already begun to block Internet gaming transactions. More recently, Citibank, which controls approximately 12 percent of the U.S. credit card industry also joined in.

These moves by banks, as well as an unprecedented amount of negative sentiment toward the Internet gaming industry on both a state and federal level, could have several implications for the fast-growing e-gaming sector.

According to Ader, market contraction, an accelerated shift to international markets and possible consolidation could all result.

"While we have not yet scaled back our overall industry estimates, we may look to do so if we do not see a fundamental shift in operator business models in the near-term," Ader said.

The online gaming industry has come under increased scrutiny from U.S. lawmakers on a federal level since September 11. Moreover, over the past 12 months there has been an unprecedented amount of negative sentiment toward the industry in general, mostly stemming from the U.S.

There are two bills circulating in Congress that would effectively shut down Internet betting in the U.S. if they are passed (neither is given much chance this year).

Some analysts say other forms of online payments could replace the loss of credit card transactions. However, credit cards are relied upon heavily by U.S. gamblers, who make up the bulk of Internet users.

U.S. customers comprise between 50 percent and 70 percent of total operator revenues (depending on the operator), which puts those operators accepting U.S. wagers at risk.

Due to this latest news from Citibank and other credit card companies, as well as the continued risk that the overall negative sentiment poses to Internet operators’ business models, Bear Stearns is expected to halve its 2002-2003 growth estimates (from 43 percent to 20 percent), which would imply an estimate of approximately $4.2 billion in total industry-wide revenues in 2003.

Ader added, however, that there still remains an enormous amount of potential within the online gaming industry.

"The industry continues to grow at a rapid pace, and operating margins continue to be healthy," he said. "Moreover, we also believe the international (non-U.S.) customer base, which only comprises 30 percent of operator revenues in some instances, represents a substantial growth opportunity for the industry."