Is Internet Gambling the Next Internet Explosion?; Bear Stearns unveils a comprehensive report on what could be the next big investment opportunity on the Internet

Business Wire, Jan 12, 2000

Business, Internet & Gaming Editors

NEW YORK--(BUSINESS WIRE)--Jan. 12, 2000

Fueled by the combination of two hot industries, Internet and Gaming, E-Gaming is on the verge of exploding, according to an extensive report developed by Bear Stearns senior managing director and gaming analyst, Jason Ader. In just the past few years, the number of e-gaming sites has climbed to more than 650 and continues to grow every day. However, according to the report, this rapid growth is not without question marks. Legal quandaries exist which have the potential to either fuel or doom industry growth. "It is currently unclear whether this is an opportunity for investors to see their money skyrocket or a legal quagmire that will choke profits," says Ader.

Incredible Growth

Not only are gaming sites growing beyond the approximately 650 sites that exist today, but profits are also climbing. Expected revenues in 1999 totaled $1.2 billion and could grow to more than $3 billion in 2002. One casino company, based in the Cook Islands and mentioned in the report, claims to have earned more than $4 million in its first four days on line. "It is clear the dynamics are there for this industry to succeed. People are spending more time on line, they are becoming more comfortable with e-commerce and they love games of chance," says Ader. "Just look at the recent success of TV shows like Who Wants to be a Millionaire and Greed. It is clear games of chance with the potential for big payoffs attract a huge audience."

Innovation is not lacking on the Web, either; among the e-gaming sites that have been established are ones that let consumers play traditional casino games and Bingo as well as bet on horse racing and other sporting events, and, in some instances, play the lottery. Some casino sites are fronted by celebrity pitchmen, like KennyRogersCasino.com. Others are even billing themselves as gaming and social experiences, like TheSinglesCasino.com. E-gaming sites are also becoming more mainstream on the Internet. Iwon.com, a division of CBS Broadcasting, gives away $10,000 a day, a million dollars a month and 10 million dollars a year, to people using its search engine. "E-gaming has the potential to be everywhere on the web," says Ader. "It is not unrealistic to believe that someday when you buy a CD on line you will also get a chance to spin a roulette wheel for extra discounts."

Legal Questions

Despite the growing number of sites on line and the money being spent and earned, there is a major problem when evaluating e-gaming companies, according to the Bear Stearns analyst. The legality of e-gaming in the United States is unclear. Different states have different rules and the regulatory bills that have gone before congress have stalled. As a result of the uncertainty, many e-gaming companies have located their operations outside the US, in countries such as Antigua, Australia and Sweden. Foreign soil has been much more welcoming to online gaming companies. Thanks to the borderless world of the Internet, it is extremely difficult to keep those companies from serving customers in the US. "Whatever congress decides," says Ader, "they will want to do it quickly because of the rapid expansion in the popularity of these sites."

Consumer Confidence

Consumer confidence is another factor which must be considered when evaluating the potential for the e-gaming industry. While users are feeling more and more comfortable with e-commerce, gambling on line is another story. "Some people are a bit skeptical betting on cards and slots that they cannot feel and touch," says Ader. As a result the Bear Stearns analyst believes companies must do everything they can to establish their authenticity. To that end, some companies have formed alliances to self-regulate the industry. "Ultimately, trust will play a large role in whether these companies are successful, so they would be well advised to make sure security is tight and that they are offering fair and reliable odds," says Marc Falcone, a Bear Stearns vice president and gaming analyst who worked on the report.

Consumers are not the only ones who are skeptical of participating in on line gaming. Credit card companies are also hesitant to become involved thanks in part to incidents like the one in which a California man refused to pay $70,000 in gambling debts he incurred on his MasterCard. The man cited "bettor's remorse" in court and was actually cleared of paying the charges.

Companies to Watch

Despite the question marks that face e-gaming companies, the potential of Internet Gambling is hard for investors to ignore. Several companies have put themselves in position to weather any regulation or consumer confidence issues and still profit from on line gaming. The report mentions many of these companies, including Online Gaming Systems (OTC BB: OGAM), Cryptologic (CRY.TSE), American Wagering (NASDAQ: BETM), YouBet.com (NASDAQ: UBET), eLottery (NASDAQ: ELOT)--a subsidiary of Executone (NASDAQ NM: ELOT), Starnet Communications International (OTC BB:SNMM) and UWin! -- a subsidiary of GTECH (NYSE:GTK).