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October 26, 2006

Blog 7 - Online Gambling, Where Now?

The information revolution of Internet and World Wide Web in the mid-1990's redesigned geographic markets for many industries. Retailers could sell to the entire world via internet instead of relying on physical locations. Furthermore, the internet introduced a new market for online services such as VOIP communication or information search.

The gambling industry has also been turned around through the introduction of the internet and its creative entrepreneurs. There are hundreds of online betting sites online allowing web surfers to bet on almost anything.

Although gambling is addictive and has negative social effects such as increasing crime, it is legal in many states. In these states, gambling is highly regulated by the government and most important of all, it is taxed heavily. Therefore, allowing the public via the government to take advantage of the larger profits casinos produce.

What makes online gambling so unique and disturbing, from the government's point of view, is the fact they cannot tax it. Most online gaming sites are located in tax shelters such as the Cayman Islands and they are not regulated. Furthermore, the internet allows users to gamble from anywhere at anytime due to its high accessibility. This gives politicians to have a unique political incentive to stand against the industry.

In 2005 two IPOs of huge gambling giants 888 and PartyGaming portrayed the peak this industry was at. However, the US government was not ready to give up revenues from gambling and allow the continuation of the cash flows out of the United States.

On Sep. 30 the US congress passed a bill ( click here ) that tries to eliminate online gambling of US citizens. The ban limits the transfer of money from US credit card companies to the operators of the websites. Analysts predict this act would effectively bar online-gambling companies from operating legally in the United States, changing their business models and perhaps forcing some companies out of business.

The recent act has caused gambling sites significant losses of revenues and large decreases in the prices of the stocks ( click here ). This stock crash caused industry leaders such as 888 (loss of 26%) and PartyGaming (loss of 58%) billions of dollars in market value. Both online giants stated they will suspend their US service if President Bush signs the new bill. However, they will be looking into changing their collection strategy. In an attempt to recover losses and reorganize their businesses for the battle against the US government, both gambling giants are considering a merger). This merger will allow both companies a better financial structure to combat US legislation and reenter the US market.

Online Casino
What is your stance on online gambling?

Recently the UK announced that it will host an international conference to discuss regulation for online gambling ( click here ). The British wish to seek regulated online gambling through international agreements. This will allow each country to collect the tax and prevent the destruction of the industry. The United States refused to attend this conference.

We believe that gambling should be limited and regulated in the United States and throughout the internet. The move by the US congress to ban online gambling by passing on the enforcement to the credit card companies is a right move. However, we think it is not a smart decision. Instead of finding a way to collect taxes, like the British, the US is declaring a war on online gambling. It is a matter of time until the operators of these websites figure out a new sophisticated way to collect payments.

For example, online gambling companies can simply relocate their main operations to a different country, where online gambling is allowed (i.e. off shoring). In fact, many of the top companies are already on the move of doing this. Empire Online, for example, have said that it had “terminated its US operations, and…planned to develop its non-US operations” (( click here to read the article). Because internet is not “located” in a physical area, it is simply too hard to regulate. This being said, politicians do not make their decisions based on economic analysis – political processes are determined by the amount of political capital that politicians can capture. Given that November elections are around the corner, it would have been detrimental for any politician to take a stance against banning online gambling.

Where do we stand on the issue? The demand for gambling is very inelastic, especially in a rich developed country, like the United States. Online gamblers are not going to quit gambling because U.S. companies move to a different website based on a different location. The government needs to recognize this need and instead of fighting it, they should accompany and limit it with economic methods such as a high tax. They must remember that trying to regulate online gambling simply encouraging offshore business, which only makes it even harder to hinder its operations. And perhaps they need more advisors who can advise them on internet technology.

Posted by orshotan at October 26, 2006 12:34 PM

Comments

This totally makes sense and is exactly what they are saying in the UK. If people want to gamble they will find a way round the system and there is no stopping them. Considering the fact that some online casinos are still risking it, if you want to wager online and you live in the US there are ways and means. Why not try and manage it by imposing strict regulations on player spending and customer support.

These are very similar points to an article I read on a British site www.betastic.co.uk, where they were discussing all the ways people have found to beat the system.

Posted by: charleslitterick118@yahoo.co.uk at December 6, 2007 06:03 PM

They have similar problems now with the skill games industry and they will have more and more until they find a way to handle it in a way that will benefit the government financially.

my online casino was once the main source for us online casino players, but now is mainly trafficked from Europeans.

Posted by: don@context-link.com at January 23, 2008 10:27 AM

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