Mainstream and industry media and the message boards remained dominated
today (Tuesday) by debate, speculation and not a little panic regarding
the weekend passing of US legislation designed to disrupt financial
channels used by American online players. By the end of the day, losses
in terms of company value through share price declines were said to
have topped GBP 3.5 billion as online gambling companies tried to
figure out the business consequences, official company positions and
probably any loopholes in the new legislation.
Among the losers in an investment sense will be pension fund managers who bought into the online gaming sector because they run tracker funds that must invest in FTSE 100 constituents, such as PartyGaming.
Party Gaming was the biggest casualty yesterday on the London market, losing almost GBP 2 billion of its market capitalization after its shares crashed 58 percent to 45p. Sportingbet saw two-thirds, or GBP 500 million, wiped off its valuation, while 888 Holdings lost 26 percent of its value, or GBP 128 million.
Mitch Garber, the chief executive of PartyGaming, which makes three-quarters of its revenues from the US, said the new law, if signed, would make it "practically impossible" to provide US customers with access to its sites. Exiting the US meant its financial performance would fall "significantly" short of City expectations. 888, which makes half of its profits in the US, and Sportingbet issued similar warnings.
Some of the biggest names in global internet gaming seemed poised to abandon the lucrative business in the US when President Bush signs off the shock legislation that has the potential to disconnect a substantial market from the $13 billion industry. Party Gaming and 888 Holdings advised an intention to stop accepting bets from US-based customers as soon as the bill is signed.
Party Gaming spokesmen said that as the first piece of Federal legislation dealing explicitly with internet gaming: "...it [the new law] does make clear that the US government intends to stop the flow of funds from Americans to online gaming operators through criminal sanction."
Lobby groups and City analysts expressed skepticism that the law would be enforceable. Frank Fahrenkopf, president of the American Gaming Association (AGA), which represents land gambling businesses in the US, said he did not believe the legislation would be enough to enforce a ban on online gaming. "Money always has a habit of finding its way to where it wants to go," he said.
The American Gaming Association, which represents land casino operators based in Las Vegas and elsewhere, had previously asked Congress to fund a commission that would study whether online gambling can be regulated and taxed in the U.S. The lobby group's hope is a study may eventually let major casino operators such as MGM Mirage and Harrah's Entertainment Inc. enter the lucrative online business.
John Anderson, 888 Holding's chief executive, said: "It's a shame for the American consumer. This will just drive it underground. Look what happened with Prohibition. We will step up a gear in terms of looking at the rest of the world. It's a devastating loss. Most of the rest of the world is quite sensible in terms of regulation. If you look at the prohibition of booze in the U.S., gangsters made a lot of money from that.''
Sportingbet said it intends to lobby the World Trade Organization to find out whether the legislation would "violate" US commitments under the general agreement of trade and services struck recently. The UK group said it was "unclear" how the US Treasury and Federal Reserve, which will have 270 days to decide how to crack down on internet gamblers, might enforce the bill against non-US corporates.
The Guardian reported that an unidentified senior executive said it was possible that groups representing US banking interests could lobby to get non-credit card payments, such as money transfers via Western Union, exempted on the grounds that it would not be practical to identify the use of the proceeds. Only credit card companies use a coding system that identifies internet gambling transactions. Another executive said it was possible cash bets could be exempted from the legislation.
UK companies linked to the internet gambling sector also suffered. NETeller, which processes payments, lost 61 percent of its value, or around GBP 260 million, while Playtech, a software provider, was worth GBP 220 million less at the market close, valuing it at GBP 310 million.
"This bill was having trouble getting through Congress so a lot of investors thought this was not going to happen,'' said Brian Tora, investment director at Gerrard Ltd. in London. "Suddenly no one really knows how much these companies are going to make in terms of profit.''
Another broker, Jamie Coleman at EFG Wealth Management said: "I can't believe they actually managed to get it through, I'm pretty damn shocked, and I'm pretty damn shocked at the way they went about doing it as well.''
Meanwhile, Republican politicians mainly responsible for the bill were crowing. "Internet gambling has been illegal since the inception of the Internet, but there has been no way to enforce it,'' Representative James Leach, an Iowa Republican, said. "By making it illegal to use a financial instrument to settle an Internet wager, Congress is putting responsibility on the financial community."
The legislation directs the Federal Reserve and Department of Justice to issue regulations within nine months to banks establishing policies and procedures for blocking transactions.
"There was an assumption tied into the price of these stocks that the legislation was not going to make it through,'' said Paul Leyland, an analyst at Arbuthnot Securities in London. "Unless Congress can ensure the act will be policed, this could very quickly transpire to be a toothless piece of legislation,'' he added. "The devil of all this will be in the detail.''
Sportingbet tumbled 64 percent to 66 pence. The company said the new U.S. rules prompted it to abandon talks to buy World Gaming Plc, whose shares slid 76 percent Monday.
There were 23 online gaming-related stocks on London's Alternative Investment Market at the end of August.
Empire Online Ltd., whose online gambling brands include Club Dice, fell 16.5 pence, or 25 percent, to 50.5 pence. Leisure & Gaming Plc, whose brands include VIPsports, lost 75 percent to 9.75 pence in London. NETeller Plc, a U.K. provider of money transfers for Internet gaming, fell 215 pence, or 61 percent, to 140 pence.
Excapsa Software Inc., a Toronto-based maker of software for gambling Web sites, slid 71 percent to 13 pence in London. CryptoLogic Inc., another Canadian maker of online gambling software, was 15 percent lower in Toronto as European stock markets closed.
Playtech Ltd. a British Virgin Islands-based gaming-software developer, tumbled 41 percent to 145.75 pence. Bwin Interactive Entertainment AG slid 35 percent in Vienna.
FireOne shares dropped 66 percent in London.
In Canada, companies involved in the industry found their stock similarly stricken by the news.
Vancouver-based Chartwell Technology Inc. was down 25 cents or 11.6 percent to $1.90; shares in software firm Las Vegas From Home.com tumbled four cents or 25.8 percent to 11.5 cents and Internet Bingo firm Parlay Entertainment Inc. lost 25 cents or 16.7 percent to $1.25.
Most industry observers were hoping that the fear and speculation so evident on Monday would give place to more rational and considered assessments and a calmer market today.