Can Online Betting Change Its Luck?

http://www.businessweek.com/magazine/content/04_51/b3913097.htm

Can Online Betting Change Its Luck?
DECEMBER 20, 2004

The feds are keeping the heat on offshore Web sites, but a global backlash is building

When he got the subpoena, Pro Football Weekly publisher Hub Arkush didn’t know whether to take it seriously. The U.S. Attorney in St. Louis was demanding that the Chicago tabloid turn over its accounting records, e-mails, and phone logs related to ads from online gambling outfits — ads that sports papers like PFW had run for nearly a decade

What got the attention of Arkush’s lawyers was an accompanying letter hinting that he could face felony charges. In September, 2003, Arkush caved: He pulled the ads, took a $2 million revenue hit, and laid off 22% of his staff. “It has been a pretty miserable year,” he says. “We’re not breaking any laws, but who wants to battle the Justice Dept.?”

Apparently not Discovery Communications, Infinity Broadcasting, or Clear Channel Communications (CCU ), all of which yanked ads for online gambling after receiving similar subpoenas and letters. Indeed, Justice’s sweeping offensive against overseas-based Internet gaming has squeezed everyone from credit-card issuers to the PR firms that defend gambling companies in the court of public opinion.

The Justice campaign has sent a chill through several industries despite the fact that there is no explicit federal law against online gaming — something lawmakers want to remedy. In House testimony last year, Deputy Assistant Attorney General John G. Malcolm endorsed tough tools to combat online betting, which he said encourages fraud, money laundering, and underage wagering.

Now the $7.4 billion online industry, which operates thousands of sites legally outside the U.S., is fighting back against what execs say is a heavy-handed and possibly unconstitutional assault on a free-market enterprise. Casino City Inc., a Louisiana operator of Internet gambling portals, is suing Justice for violating its First Amendment rights. And Internet gambling companies are hiring Washington lobbyists to burnish their image, establish alliances with the $70 billion U.S. wagering business, and tantalize lawmakers with a potential new source of significant tax revenue. “Our revenues are greater than Yahoo!’s (YHOO ). Our profits are greater than Amazon’s. It’s ridiculous,” says Alex Czajkowski, marketing director for Sporting Bet PLC in London, which processed $2.5 billion in wagers last fiscal year for a $39.5 million operating profit.

While many in the U.S. still view gambling as a matter of morals, the tiny island nation of Antigua has managed to turn it into a trade issue. On Nov. 10, Antigua won a World Trade Organization ruling that the U.S. violates international trade rules by, among other things, allowing credit cards to be used for domestic gambling but not online wagering. And Britain is set to liberalize online gambling rules and could allow its operators to accept wagers from U.S. customers.

For advocates of click-to-play, the timing could be right. All states but two allow some form of gambling, New Jersey is experimenting with an interactive online lottery, and an Idaho tribe last year won a key court ruling allowing it to sell lottery tickets on the Web. Texas Hold ‘Em is the new national pastime, and World Poker Tournament players boast of using gaming Web sites to hone their skills.

U.S. casino operators say cybergaming is inevitable and reject Justice’s claims that the online industry is rife with fraud. “We frankly find attempts at prohibition to be very shortsighted,” says Alan Feldman, senior vice-president of the MGM Mirage (MGG ) in Las Vegas. Its online gaming site on Britain’s Isle of Man, Playmgmmirage.com, folded last year after 21 months because it couldn’t turn a big enough profit. Part of the problem: To avoid risking its Nevada and Mississippi state casino licenses, the site refused wagers from U.S. players, who make up an estimated 70% of the global online take. “It’s clear the public is [gambling online] in ever-greater numbers,” says Feldman. “The logical thing to do is legalize it, regulate it, and tax it.”

BULLYING COMPANIES?
Still, Justice shows no signs of backing down. “The gambling is taking place both where the bettor is located and where the online site is located,” says one federal law enforcement official. “If anyone takes bets from residents in New York, they’re doing business in New York.” To get at the offshore sites, the agency is targeting U.S. companies that do business with them. Justice levied a $10 million fine against PayPal, and in April the feds seized $3.25 million from Discovery — money paid to it to run ads for Tropical Paradise, a Costa Rican poker site. Under pressure from the feds, MasterCard and Visa began tracking online wagers; soon after (in a deal with New York Attorney General Eliot Spitzer), the nation’s largest banks, including Citibank and Bank of America, stopped accepting charges for online bets.

In the near term, the industry’s hopes are pinned on the Casino City case. But even if Casino City loses, industry lawyers say other suits are waiting in the wings. They concede that Justice has put the brakes on growth but say that in the long run U.S. policy is unsustainable. “They’re bullying a lot of companies into being afraid to do business with us,” says Rod Myers, CEO of the Sports Gaming Players Network, a Las Vegas consultant. “But you can bully only so long before the little guy starts swinging back. And Antigua has taken the first swing.”

Even with a WTO ruling in its pocket, though, Antigua has the clout of an ant. But Britain could be different. “[It] will be the first First World nation where there’s really going to be a test,” says Frank J. Fahrenkopf Jr., CEO of the American Gaming Assn., a trade group. Online gambling can only hope that global pressure, plus a possibly less righteous Justice Dept. under new Attorney General Alberto Gonzales, will be its lucky pair.

By Lorraine Woellert in Washington