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Analyst Lowers Estimate for Online Gaming Industry

26 September 2002

by Liz Benston

LAS VEGAS -- A prominent Internet gambling analyst has scaled back revenue estimates for the multi-billion dollar Web casino industry by as much as 10 percent on concerns that credit card companies are blocking online bets.

Still, the moves are only a "bump in the road" for the still-lucrative sector, Sebastian Sinclair of Christiansen Capital Advisors LLC said.

The revised estimates, part of an approximately 200-page report to be released over the next several weeks, mark the first time Sinclair has scaled back revenue projections since initiating coverage on the Internet gambling market in 1998.

Estimates for 2002 were slashed 10 percent, to $4.09 billion. In 2003, estimates are 5 percent lower, at $6.03 billion. Estimates dropped 4 and 3 percent for successive years, to $8.38 billion and $10.37 billion, respectively.

Another Wall Street observer has been more pessimistic on the sector. Bear Stearns & Co. analyst Jason Ader has said that moves by credit card issuers to block Internet gambling transactions will hurt the industry. Ader initially scaled back 2003 revenue estimates from $6.2 billion to $5 billion. In late June, Ader said next year's estimates could fall further, to $4.2 billion, if Web casinos can't overcome the credit card problem. Other experts are more optimistic, citing efforts by many Web casinos to set up third-party online payment systems that don't require cards.

The report, co-authored by Internet gambling consultant the River City Group, comes amid a rising debate about whether online casinos should be outlawed altogether or legalized under a regulated environment.

Regardless of whether their casinos have openly supported Internet wagering, many executives have said that prohibitions won't prevent Americans' desire to gamble online.

Critics, however, are voicing fears that the pervasiveness of the Internet will open the door to underage gambling and lead others toward gambling problems.

Sinclair, whose research has served governments as well as online casinos, has long maintained neutrality on the issue. More recently, however, Sinclair has argued that banning online wagering could backfire.

"I think the evidence overwhelmingly suggests that ... prohibition can be marginally effective at best," he said.

Outlawing Web casinos could hurt consumers by pushing the industry underground and into the hands of illegitimate companies, he added.

The report also coincides with investigations by federal and state governments.

This week, the U.S. General Accounting Office issued a preliminary report on the Internet gambling industry at the request of the House Committee on Financial Services, which is considering legislation that would ban financial transactions on Internet gambling sites. A final report by the GAO -- the nonpartisan, investigative arm of Congress -- is due in November.

Various parties have mixed views on whether Internet gambling transactions are succeptible to money laundering, the report determined.

Law enforcement officials believe online casinos can be a "significant vehicle" for money laundering, while banks and gambling regulators believe it doesn't pose much of a threat.

However, banning the use of credit cards for online wagers could actually create more of a problem because cards create a record of the transaction and are subject to relatively low spending limits, the GAO report said.

Credit card associations such as VISA and MasterCard have developed coding systems that allow member banks to block transactions themselves. A blanket prohibition policy for all members would be difficult given that online gambling is legal in some jurisdictions, the associations told federal investigators.

Many of the largest U.S. credit card issuers, along with most to all smaller community banks, have opted to block such transactions, the report said. Larger card issuers such as American Express and Discover also have policies that prevent online casinos from becoming merchants.

Still, rogue merchants may be able to bypass bank firewalls by disguising codes for gambling transactions, the report indicated. Also, card holders can set up third party payment systems for a variety of services online, making it more difficult to determine each payment's destination.

Companies are rushing to create alternative processing systems that don't require credit cards, Sinclair said.

Sinclair said he's received "hundreds" of business proposals for third-party processing systems -- and none for online casinos -- since VISA began to crack down on miscoded transactions.

"One person's problem is another person's opportunity," he said.

Nevada gaming regulators recently received word from the U.S. Department of Justice that Internet gambling over state lines is illegal. The state Gaming Control Board is now studying ways it can offer online gambling legally, such as limiting bets to Nevada residents

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