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Emily D. Swoboda
 

I-Gaming 2010 - A Dismal Outlook

1 December 2006


IGN's Take

Industry analyst Michael Tew probably went a little overboard with his doomsday projections for global I-gaming revenues.
[Read More]

Michael Tew's outlook on global Internet gambling revenues is grim.

The co-founder and vice president of political consultancy firm Capital HQ this week released revised projections for I-gaming revenues, estimating that the industry will be nearly halved by 2010 as a result of the U.S. Unlawful Internet Gambling Enforcement Act (UIGEA).

Prior to the enactment of the UIGEA, Tew estimated that the industry would grow by 8.7 percent annually to reach US$15 billion in 2010. But since the legislation passed, he has taken a doomsday approach. Now he predicts the industry will shrink to $5.5 billion in revenues by 2010.

Tew's estimations, published in the November issue of Casino Enterprise Management magazine, are based solely on the events of the last four months, beginning with the July arrest and federal indictment of then BetonSports (BoS) CEO David Carruthers, and the indictments of 10 others connected with BoS, on charges of conspiracy, racketeering and fraud. He also blames the subsequent arrest of former Sportingbet chairman Peter Dicks and the passing of the UIGEA, which makes it illegal for payment processors, credit card companies and financial institutions to process transactions within the U.S. relating to Internet gambling.

Tew suggests in his report that while people enjoy online gaming, the average U.S. citizen does not like to feel like he is breaking the law, and this, he says, will be a major contributor to the drop-off in the industry.

His admittedly conservative analysis indicates that the industry will begin to noticeably shrink in 2007. But the industry will not feel the brunt of the impact, he suggests, until 2008 because of the legislation's built-in 270-day implementation period.

Tew's bottom line is that near-term prospects for the industry are diminished because of the mass exodus of publicly traded gaming companies from the U.S. market, and he is warning investors and consumers to be wary.

He further asserts that most operators will stop taking U.S. bets. While the unpleasant scenario has become a reality for a number of major players (Party Gaming, Sportingbet and Leisure & Gaming, etc.), a greater percentage of operators are sticking around, at least for the time being. But Tew believes this will end quickly.

"I don't believe (those who say they will continue taking U.S. play)," Tew said. "Any publicly traded company that accepts bets from U.S. citizens, somehow their CEOs will end up in jail prosecuted criminally or civilly at some point. So, I don't know anyone that would want to take that chance, especially considering there are legitimate businessmen involved in online gambling companies that are publicly traded over in the U.K. I think it would be a very unwise decision for them to do that."

Tew says his projections are based on an increasing rate of decline.

"My 2006 estimate was $10.6 billion going down to $5.5 billion in 2010, he said. "I didn't take into account any additional growth. It's obviously a conservative estimate. The way you formulate estimates is not about cutting out markets; it's about estimating the decline in the market size annually, and the first year I've conservatively estimated the market declining by 10 percent. The implementation (of the UIGEA) probably won't take place until sometime within the middle of next year. So, I estimated 10 percent next year, 25 percent in '08, 15 percent in '09 and then a small 10 percent in 2010, and that doesn't take into account any additional growth in international markets, so it's obviously extremely conservative."

Tew's projections come to public light during a period in which most analysts are hesitant to make predictions. Observers agree that U.S. policy changes will have a major impact, but most are saying it's too early to determine just what that impact will be.

One long-time industry researcher, who requested anonymity, says Tew's numbers are off the mark.

"Specifically," the source said, "his expectation that most operators will stop accepting bets from U.S. citizens does not appear to correspond with current facts. While publicly traded companies have either ceased accepting bets from U.S. residents or gone out of business there is considerable evidence (press releases, etc.) to indicate that privately held companies, in poker, betting services and gaming, are staying in the U.S. market and are attempting to supply the American demand formerly supplied by publicly traded online gambling companies. How successful these privately held companies will be in this regard out to 2010 is, I think, impossible to say."

Tew recommends in his report that operators look to the Asian market as a new location to recover losses from pulling out of the United States, although many I-gaming businesses were expanding into new markets prior to the passage of the U.S. prohibition.

"Since online gambling is increasingly becoming a licensed and regulated activity in global terms, global e-gambling consumption should continue to rise," the source said. "To what extent this growth will offset contraction of the U.S. market will not be clear for some time."

Sebastian Sinclair, the president of market research firm Christiansen Capital Advisors, said he does not plan to revise his projections until the industry has a better handle on the legislative situation.

"We haven't updated our numbers, and I do not intend to until we know a little more about what has happened and is happening, i.e. a measure of the what, by most accounts, is phenomenal growth in PokerStars and Bodog and other companies that are ignoring the ban," Sinclair said, "and secondly, what enforcement measures come out of Washington, so I can make an educated guess at how long it will take the industry to get around them. In other words, any revisions made at this point would most certainly be wrong."

London-based Global Betting and Gaming Consultants (GBGC) is a bit closer to producing numbers. GBGC partner Simon Holliday says the firms researchers are re-evaluating projections on the scope of the industry in the wake of the UIGEA.

Tew, meanwhile, plans to revise his numbers following the full implementation of the UIGEA.

"I will look to revise my industry estimates up only, probably not down," he said. "I'm sure I'll be revising them up."

I-Gaming 2010 - A Dismal Outlook is republished from iGamingNews.com.
Emily D. Swoboda
Emily D. Swoboda