MarketWatch Interview with Nigel Payne

Sportingbet CEO sees consolidation

By Bambi Francisco, MarketWatch

SAN FRANCISCO (MarketWatch) – If online poker becomes legalized in the U.S., Sportingbet’s CEO expects regulation to ignite consolidation in the online gambling industry.

Whether online poker becomes legal or not, Sportingbet plans on being a “consolidator and not consolidated” in 2005, said Nigel Payne, Sportingbet CEO.

Sportingbet owns Paradise Poker, one of the most popular poker sites in the world in one of the fastest growing and lucrative online businesses. Payne said that in 2005, online poker revenue and profits will overtake the total revenue earned in all casinos are the world. Since Sportingbet purchased Paradise Poker, shares of Sportingbet have rocketed 200 percent.

Payne also attended a hearing on the legalization of online poker held by the North Dakota state Senate earlier this week. He spoke to MarketWatch about what took place at the hearing, and whether he’s more or less confident that a bill would pass to legalize online poker in North Dakota.

Here are some highlights of the interview with slight editing.

Payne: We’re not more or less confident because the issues that are before the North Dakotan legislature are largely unresolved. There was some progress made. We are an industry crying out for regulation. There are around the world about 2 million people who play poker online. That’s expected to grow by 400 percent over the next three years. To put this into context, Paradise Poker every day plays over 1 million games a day. That’s equivalent to 10 games per second.

MW: Opponents say that online poker is difficult to regulate and it’s addictive. What are your arguments against those issues?

Payne: There are four issues that people use to say it’s difficult to regulate. We need to protect children. We need to make sure that minors can’t bet. We need to protect against potential for addiction, people betting too often. There’s a theoretical ability to launder money. We also have to deal with the possibility of collusion with two players against each other. Those that don’t support regulation say those four things cannot be effectively controlled There is a software system that can verify who you are and how old you are. You can prove your adulthood. The child-protection service has warranted the system.

MW: How much in taxes can North Dakota collect from online poker? How quickly can the bill become a law?

Payne: If we were to relocate to North Dakota, we’d pay $8 million to $10 million in taxes. The Senate has to approve the bill. If that happens, the bill will clear those houses. However, this has to go before a vote of the people. That’s some time in November 2005 or June 2006.

MW: Who will pay the taxes?

Payne: The North Dakota legislature proposes a user fee of $10. That charge is levied on the operator.

MW: How much revenue will Paradise Poker bring in this year? And, what are the margins on that?

Payne: Paradise Poker is expected to generate $100 million in gross sales, bottom-line profit of $60 million. Of that $60 million, two-thirds comes from the U.S., but a third from rest of the world. The rest of world is fastest-growing percentage of the market today.

MW: Sportingbet purchased Paradise Poker for $300 million. Will you be acquiring more companies?

Payne: Most definitely. The industry will consolidate. And, Sportingbet will be a consolidator and not a consolidated. We’re not shy of acquiring businesses that focus in the U.S. market. We are expressly legal. There are 84 jurisdictions around the world that regulate this industry. To the best of my knowledge they all allow bets to be taken from U.S. citizens.

MW: If online poker is illegal in the U.S., how are you able to run your business here?

Payne: I refute the fact that online poker is illegal in the U.S. The only piece of legislation is the Wire Act. Poker does not fall under the wire act, I’m not aware of legislation that determines poker to be illegal. If people are playing online poker with my business, those transactions are being managed and handled in countries that allow it. To make it illegal, you have to be violating some law. The courts have held that it’s not illegal under the Wire Act.

MW: If the entire online poker business was regulated in the U.S., how much revenue would the U.S. collect in taxes?

Payne: If the entire online gambling biz was regulated in the U.S. we would receive $2 billion in taxes per year. That money exists already. It’s a redistribution of income that other people – offshore banks, credit card companies — are keeping that the U.S. could keep for itself.

MW: If online poker became legal in the U.S., how would this change your business?

Payne: In the U.K., there are 25 major brands. In America there are literally 1,000. Why are there 1,000 in America? It’s quite simply because America is not regulated. If America was regulated, those who are not running their business to the standard would be squeezed out. There would be fewer operators, more taxes generated, and you’d have a regulated industry. Basic premise is one of scale. If I’m running my business for one dollar, or 1 million, the cost of operating my business is the same. Scale is important. Organic growth of 30 percent compounded per annum. Most of the gross profit of the business you acquire falls straight to the bottom line. It’s extremely earnings enhancing.

MW: PartyGaming, the parent company of PartyPoker.com, is expected to go public this spring. You were quoted as saying that there were nine companies that you knew of that are lining up to go public. Can you give us some names?

Payne: I think the number is up to 15. PartyGaming is to list around May/June. Quite a few will follow in the U.K. One of the most important reasons for that is that the U.K. regulates the industry. If you’re licensed in the U.K., you can do what you’re doing.

MW: Thanks, Nigel

The full article, as well as the actual interview can be found here:
http://www.marketwatch.com/news/story.asp?dist=&param=archive&siteid=mktw&guid=%7B42CEBD69%2D10E3%2D4D72%2DBD77%2D39D61A0E2105%7D