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Analyst Slashes Internet Gambling Revenue Estimate

25 June 2002

by Liz Benston

LAS VEGAS -- Recent actions by major credit card companies to stop accepting online wagers may reduce revenue for Internet gambling operations by as much as 20 percent, a Wall Street analyst said.

Bear, Stearns & Co. gaming analyst Jason Ader expects Internet casinos to generate revenue in 2003 of $4.2 billion unless they can overcome the credit card issue. The $4.2 billion is down from Ader's earlier estimates that started at $6.2 billion and were initially cut to $5 billion because of the credit card problem.

Ader said a new Bear Stearns report -- due for release later this week -- paints a picture of an industry "fraught with a tremendous amount of uncertainty" and tempers the optimistic forecasts of a vocal group of Internet gambling proponents who may be understating the potential long-term implications of reduced credit card transactions.

The announcement came as a newly launched conference on Internet gambling kicked off in Las Vegas this morning at the Bellagio hotel-casino. The conference focuses on marketing issues faced by online gambling sites and is sponsored by Boston Media Corp., a marketing company that counts such large wagering sites as Casino on Net, William Hill and Centrebet as clients.

"The cheerleaders for the industry will be wrong," Ader said. "This will dramatically curtail business for everyone," he said, though larger companies are in a better position to withstand the impact.

Boston Media representatives could not be reached for comment to respond to the Bear Stearns report.

Citibank, Wells Fargo, Bank of America, MBNA and Chase Manhattan Bank are among the major banks that have blocked online gambling transactions using their cards.

This month, Citibank reached an agreement with the New York Attorney General to block Internet wagers. The agreement, which included a settlement of $400,000 to gambling counseling groups, ends Attorney General Eliot Spitzer's investigation of the issue.

Companies will be hurt by such developments unless they can figure out how to successfully market to non-U.S. customers, now a minority of the gamblers who bet online, Ader said. American gamblers now make up at least 60 percent of the market.

Some software companies that supply Internet operators have said that their clients' revenues already have been slashed by as much as half due to problems accepting credit cards. Suppliers also have felt the impact.

Shares of Canadian software maker CryptoLogic Inc. tumbled last week after warnings of lower revenues due to banks blocking online transactions. The company lowered second-quarter earnings estimates to $2 million to $2.2 million or 15 cents to 17 cents per share.

The old estimate was $2.5 million to $3 million or 19 cents to 22 cents.

Larger operators such as MGM Mirage, Sun International Hotels Ltd., William Hill PLC and Ladbrokes Ltd. have significant advantages over competitors because of their international reach and well-known brands, Ader said.

"The brand equity they carry will become even more important as the revenue pie shrinks."

Las Vegas-based MGM Mirage has been the most aggressive of the major Strip operators to pursue opportunities in Internet gambling. The company has been granted one of three coveted licenses issued by the Isle of Man, a tiny island nation off the coast of Great Britain and a proponent of online wagering.

MGM Mirage hasn't yet detailed its plans, and the island's semi-independent government is still hashing out regulations on Internet betting.

Other Isle of Man licensees were Sun International and Littlewoods Ltd. U.K.-based Littlewoods and WagerWorks Inc., a California company that has created "play-for-fun" sites for several Strip casinos, are among the three entities recently granted licenses by regulators in Alderney, which is part of the British Channel Islands.

"Once companies like MGM get their operations going, that's going to be a positive for the industry," Ader said. "They are an established, highly-respected operator with experience marketing to international customers."

Smaller operators, largely non-U.S. companies based in more loosely regulated jurisdictions such as the Caribbean, may soon lose market share to larger competitors with stronger worldwide marketing capabilities, he said.

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