Great Article On Internet Gaming. SIMMD related.
Hey, Sport, Want to Take a Real Gamble?
By Bill Alpert
You gotta love those Internet casino stocks.
No, not uBid and E*Trade. I mean the other Internet casinos -- the ones
taking the old-fashioned kind of bet, online from legal gambling havens like
Antigua. In the time it takes a penny-stock lawyer to rename a shell
corporation, the shares in dozens of these operations have appeared
over-the-counter where they're juicing up volume on the bulletin boards of
Nasdaq and Yahoo.
"Five years down the road, this industry could dwarf the size of some of the
casinos out in Las Vegas," says Steven M. Abboud, the modest chief executive
of one such bulletin board stock, Global Entertainment Holdings/Equities. If
the successful online bookies aren't acquired by the Trumps of the world, he
fantasizes, then the casinos of cyberspace may well acquire their
bricks-and-mortar rivals.
Online wagering sites exploded over the course of the last year, from about
15 to nearly 300, according to Interactive Gaming News, an industry
newsletter. With the legality of U.S. bets still uncertain, Internet gambling
has a back-alley feel that's perfect for penny stocks. Start with baccarat,
slots, parimutuel ponies and Final Four bookmaking. Add the thrill of OTC
traders slamming each other 'round the ring, while the message board at
"ragingbull.com" jeers at the masked short-seller. Can you resist?
The StreetDice Website lists some three dozen Internet gamers in its Internet
Gaming Index, although only a few have much of a stock-market capitalization.
The gaming establishment is waiting out this phenomenon, so the industry
giants so far are YouBet.com, Starnet Communications International, Global
Entertainment Holdings, and Canada's Cryptologic. Only Starnet and
Cryptologic, which trades on the Toronto Exchange, have much in the way of
revenues. But as Abboud shows, they've got big dreams. Like their humdrum
relations in branches of e-commerce like bookselling, the Internet casinos
measure their opportunity by the size of the existing conventional business.
The House take of the legal gaming industry in the U.S. today is about $40
billion, on annual wagers of about $480 billion. Worldwide, says Abboud, the
legal handle is $1 trillion.
From legal never-never lands like Antigua and Costa Rica, the online bookies
ask prospective players to prove they're not kids and, in some cases, that
they're not placing bets from the U.S. Then players use credit cards to post
a minimum cash deposit-sometimes $1,000-for their wagering. If they blow
through that, the gambler has to buy more virtual chips before betting again.
The site Sportsfanatik.com says that consistent winning in sports betting is
not about luck, but rather about the time and effort put into research,
objective analysis and long-term discipline. Sounds sort of like the ads in
certain Wall Street tabloids.
The Internet gambling firms that aren't negligible penny stocks tend to have
some kind of software business. Toronto's Cryptologic has software that
supplies the action at a dozen online casinos. Listed on the TSE since
September, Cryptologic earned $17 million, or $1.10 per share, last year on
revenues of US$23 million. At year-end 1998, it had working capital of $24
million. With its shares quoted at a recent C$17.35, Cryptologic's stock
market value was C$265 million. With a pile of warrants in the hands of the
company's financiers, the Canadian company's diluted share count is 15.3
million.
Youbet.com is an OTC bulletin board outfit in Los Angeles that takes bets on
horse races simulcast from 20 tracks around the country. Bettors pay a
monthly subscription of $5.95, and Youbet gets a percentage of each wager
from the bookmaker -- which in this case is a U.S. subsidiary of
London-listed hotel and gaming giant Ladbroke Group. Youbet hasn't reported
financial results since September 1998, but it promises that, after beginning
to take bets in late '98, its revenues are more impressive than the $100,000
reported through September. At a recent share price of $14, investors seem
willing to bet on the come by valuing Youbet at about $150 million.
Steven Abboud runs Global Entertainment from Omaha; his brother Bryan runs
the computers at a subsidiary in Curacao. That subsidiary doesn't run games
itself, claims the former, but it does operate the systems for the bookmakers
who license the firm's software in exchange for an upfront payment,
maintenance fees and a cut of the House. So far, Global Entertainment has
three licensees, including VIPsports.com and sportsbetonline.com.
Although the firm claims 1998 operating earnings of 11 cents a share, or
$345,000, on revenues of $980,000, the write-off of a failed sports-drink
venture pushed the 1998 net loss to 11 cents a share and left Abboud's
venture temporarily insolvent. But Abboud says his customers' business is
booming, and bravely predicts his software licensees will come across with
$6.5 million in 1999, producing net income for Global Entertainment of $4
million, or $1.25 a share. Those great expectations make Abboud call his
stock "undervalued" at a recent $14, which puts a $45 million stock market
value on the firm's 3.2 million shares.
To scrape up enough capital for a listing on the Nasdaq SmallCap market this
summer, Global Entertainment's attempting a $4.5 million private placement.
The placement agent is Harmonic Research, a New York boutique operated by
veterans of Whale Securities-which brought investors such blue-chip stocks as
Presstek. "There's a lot of stigma about being on the bulletin board," says
Abboud, who assures us that his Global Entertainment is not a "pump and dump."
Online gaming is regulated in several major countries, including Germany, the
Netherlands and Australia. Only one U.S. state has criminalized the action --
not surprisingly, Nevada. Congress rejected a national ban proposed last year
by Sen. Jon Kyl (R., Arizona). But Kyl has revived his bill, with some
changes, so the OTC cyberbookies probably don't have to worry about
competition from the likes of Steve Wynn until the air clears.
Although Abboud and his peers in the Vancouver-based "self-regulatory" group
called the Interactive Gaming Council are not betting against a U.S.
prohibition, the online casinos warn that it won't work.
"Alcohol was prohibited in the 'Twenties," says Abboud, "and it didn't work
because there was too strong a demand for it." Some online casinos try to
screen out Americans, but Global Entertainment doesn't insist its licensees
do so. Says Abboud: "It's not our place to police the various nations."
Whatever the future, the industry's legal limbo has attracted many penny
stock companies that have a past. For the kind of investor who plays some of
these stocks, however, that's part of the draw. This is the part of Wall
Street that thrills to a whisper that "the fix is in." Before Vegas became a
family town, many patrons were glad the place was founded by Bugsy Siegel and
not Father Flanagan.
Typical of the racy, if legal, names is Vancouver's Starnet Communications.
After failures at promoting celebrity golf tournaments and then gelato,
Starnet merged in 1997 with a firm purveying something a bit hotter:
hard-core porno at sites called Sizzle, Live Women and Chisel. The last-named
is among the Internet's top gay porno addresses, says the firm. These sites
boast over 10,000 subscribers in 60 nations. There are hundreds of
competitors, but none offering Starnet's range of services, the company says.
If Sizzle is Starnet's floor show, then worldgaming.net is its casino. From
Antigua, Starnet also licenses its software to other penny-stock
cybercasinos. Starnet's betting site makes book on sports, horses and
greyhounds (some of these books are still under development). It also takes
bets on blackjack, roulette and slots, in eight languages. Even if you
confess you're under 18, you can still play for fun. Starnet's got an
endorsement deal with Stefan Johansson, an auto racer on the Formula One and
CART circuits. Last week, it added a deal with an OTC-traded sports agency
called ISM Holding and forecast another half-dozen endorsements by
celebrities in racing, golf, soccer, football, baseball, basketball and
boxing.
Starnet revenues for the January '99 quarter were US$2.7 million, about
triple the year-earlier period. Less than a third of those revenues came from
Sizzle and Chisel. Earnings were $81,000, or four cents a share. With 24.4
million shares out, trading on both the OTC Bulletin Board and the Berlin
Stock Exchange, a recent $12 share price valued Starnet at nearly $300
million.
Rest assured that the Internet casino milieu is as colorful as Vegas. Last
month, Mounties raided the home of British Columbia's premier Glen Clark, as
part of the investigation of Clark's neighbor, who was arrested for running
an illegal casino. That neighbor and a partner were seeking the blessing of
the Clark administration for a legal casino. The partner, one Steve Ng, turns
up on a list of Starnet investors in a 1996 financing arranged by a financier
on the South Pacific island of Vanuatu. The island allegedly is a haven for
banks of the funny-money center variety.
A March 5 Starnet press release "clarified" that Steve Ng had never been an
employee of the company, and says Ng sold his 25,000 shares last fall. The
premier, too, has stated he had no involvement in his neighbor's alleged
casino activities.
Even if banned in the U.S., the 'Net makes this industry the ultimate
floating crap game. Abboud says gamblers in the rest of the world wagered
over a half-trillion dollars last year. Coupling the growth of the Internet
and international gambling, he says, "there's nothing that touches the
potential growth rate of this industry."
Investors may want to consider all these stocks "circled games" -- the
designation bookies use to signify that the maximum bet on a contest is
restricted because the athletes are hurt. |
