Here is a recent article that may help explain Simulator Systems motives for expanding into Internet Gaming. It applies to many other companies with unrelated businesses as well. Article follows:
OUTLOOK: ON-LINE GAMBLING Internet
gambling stocks a crapshoot
Monday, April 12, 1999
TYLER HAMILTON
Technology Reporter
Casinos, sports betting and bingo are natural fits for the World Wide
Web, but analysts warn that investing in Internet gambling stocks may be
more of a risk than rolling the on-line dice.
Hundreds of Internet casinos and sports betting sites run rampant today
on the Web, acting as conduits for millions of dollars worth of
transactions and being touted as high-octane generators of profit.
Most of these operations are privately held, though a growing number
are turning to the public markets in hopes that the investment fever
infecting the shares of Internet bookstores, auction houses and portals
will eventually spread to gambling.
"It's a business where you can make a ton of money," said Brandon
Osten, an analyst with Sprott Securities Ltd. in Toronto. Some research
firms estimate the industry will pull in $7.4-billion (U.S.) in revenue by
2004.
This growth potential has tempted existing public companies to either
extend their businesses to the Web or completely overhaul their
operations to become pure Internet plays.
Bingo company Dion Entertainment Corp. of Vancouver announced
last month it will take its bingo business on-line -- and investors worked
themselves into a frenzy. Within three weeks, Dion's stock climbed
nearly 900 per cent to $4.99 from 57 cents on the Toronto Stock
Exchange.
Then there's Tropika International Ltd., the juice company turned
Internet casino architect. The Toronto-based company decided about
two years ago that getting into Internet gambling was a great way to turn
itself around. With its transition complete, Tropika began catching the
attention of investors in February when 7-cent stock began its climb to
$2 on the Canadian Dealing Network.
Analysts say most of these companies trade over the counter, many
reporting investor information irregularly and seldom providing a
complete financial picture when they do.
"A lot of these guys on the bulletin boards put out one report a year,"
said John Dutton, an analyst with the Investors Research Institute in
New York.
In this sense, companies often come across like players in a card game,
holding very closely the numbers they've been dealt and donning poker
faces that are difficult to read.
Some, for example, will release statements that emphasize gross revenue
over net revenue. In the gambling industry, gross revenue is the amount
of money wagered on the site while net revenue is how much is kept by
the company after winnings are paid out.
Mr. Osten said net revenue is usually about 3 per cent of gross revenue
and that investors should be aware of the difference.
Go Call Inc. of Cambridge, Ont., reported in February "record wagering
revenues" of $2.1-million for the month of January. The company didn't
reveal how much it got to keep.
The day after Go Call issued its statement, the over-the-counter stock
soared nearly 400 per cent from 50 cents (U.S.) to $1.94.
Douglas Rogers, an analyst with Managesource Research in San
Francisco, said when financial information on these highly volatile
stocks is sketchy or unavailable, investors should do some research on
the style, background and current decisions of management.
Mr. Osten said investors should also consider whether management is
leading a charge into a market already dominated by established brands.
"If you're just getting in now, it's tough," he said.
Dion Entertainment is a case in point. The idea of launching bingo on
the Internet sounds logical, but Dion's announcement follows in the
footsteps of Bingo.com of Vancouver and Buffalo-based Dot com
Entertainment Group Inc., which recently purchased the rights to
two-year-old CyberBingo.
"Don't think in the case of Dion they're the only company that's going to
have Internet bingo out there," Mr. Osten said. "Another thing to ask is
when are they going to be coming on-line? They may be a year out from
those plans."
It's also important to distinguish between gambling site operators and the
technology companies that supply software and licences to the sites.
John Dutton, an analyst with Investors Research Institute in New York,
said most of the solid investments will be the franchisers of these sites,
not the sites themselves.
"Would you want to go out and buy [stock in] an individual McDonald's
franchise, or buy the shares of all of McDonald's?"
Mr. Dutton said Web site operators often use the same software licenced
from the same company. Claiming one site is better than the other, he
said, is "like a McDonald's franchise claiming it's the top hamburger
company."
That's why firms such as Toronto-based CryptoLogic Inc. and Starnet
Communications International Inc. of Vancouver have gained a lead
-- and respect -- in the Internet gambling market.
"While most of them do own their own gaming sites, a large percentage
of their earnings have come from licencing their technology [to other
operators]," said Mr. Rogers, adding that every licenced gaming site
represents a new stream of revenue flow.
A handful of companies seem to be doing well by this model.
CryptoLogic, for example, had 1998 revenues of $22.9-million
(Canadian), 73 per cent of which was profit. The company also has
$40-million in cash on hand and now has a market capitalization of
$200-million.
CryptoLogic's stockwas down 75 centsFriday to$23.30on the Toronto
Stock Exchange, but shares were up 35 per cent for the week.
Mr. Osten said it is possible to reduce risk in this market but still reap the
rewards by investing in proven companies with strong fundamentals. He
said investors shouldn't view penny stocks as the only way to get a huge
return on investment, because more established players still have a long
way to go to reach the "stratospheric valuations" of the Yahoos, Ebays
and Amazon.coms.
"If these things catch on, it will be the established ones that go crazy."
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