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Betting on Gambling's Global Boom

18 April 2002

New York - As reported by Forbes.com : "Want to bet on gambling's global boom? You won't find many blue-chip stocks--this is still a rough-and-tumble industry. But try the hardware suppliers. International Game Technology (IGT) in Reno, Nevada, is the powerhouse of slot and video poker machines, with 70% of the North American market and contracts in Australia, Europe, the Middle East and Africa. In its Las Vegas showroom, Sinatra Slots serenade players with the crooner's greatest hits and beckon in Frank's voice: "All you need is one lucky break and--pow!--liftoff."

"Last year, IGT won contracts for 11,900 machines in California. The company also has 40% of the U.K. market, which Merrill Lynch thinks is likely to grow by 40,000 slots after deregulation. Gtech, with a 60% share of the lottery machine market, is IGT's counterpart in that hot line of business.

"Casinos? Big names like MGM Mirage and Park Place have the wherewithal to go international, though the latter company showed a loss for the past year because of writedowns from some setbacks in Nevada. But even if the industry undergoes a competitive big bang, smaller operators may be a more profitable play.

"Beware of online gambling. The sector looks appealing, particularly with nutty reports from Merrill Lynch estimating a take of $180 billion by 2015, versus about $7 billion now. The business does seem to be doubling every year, thanks to low barriers to entry. (An entrepreneur needs only about $250,000 to buy a domain name, license the gambling software and hire a company to manage the site.) But there are major roadblocks to growth: credit card companies' blocking payments; the absence of the thrill of gambling in a casino--the yelling, the cash-in-hand; and, most important, its questionable legality in the all-important U.S.

"How about software suppliers to the games of both online and real casinos? The three largest--Boss Media, Cryptologics and Chartwell Technology--have all been around since the beginning of the boom and have healthy trading volumes. "Because of the legal uncertainty about online gambling [in the U.S.], you don't get many institutional investors interested in these stocks," says Marc Lesnick, founder of Streetdice.com in Miami, Florida, which follows online gambling outfits. "If a stock is trading at a volume of less than $500,000 per day, then guess what? You've got private investors, and they can't maintain a high share price."

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