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Crystal Ball Gazing Among I-Gaming Leaders

25 June 2004

By Fred Faust

Three experts in online gaming see possibilities for the industry's eventual legalization in the United States. None of the three, who were part of a forecasting panel at the Global Interactive Gaming Summit & Expo (GIGSE) last month in Toronto, dared to make a firm prediction, but each suggested scenarios that could lead to legalization in the industry's biggest market.

"If a major jurisdiction such as the U.K. opens up and is able to successfully introduce online gaming, it would certainly contribute positively to the image of the industry. . . ."

- Andre Wilsenach

Alderney Gambling Control Commission

For Gord Herman, chief executive of Neteller, a payment service based in Canada that's used at many online gaming sites, the road to U.S. legalization could go through online poker.

"I thank the poker people for bringing out a brand new product," Herman said at the GIGSE session. "It has changed the demographic of our average customer. What we're seeing now is younger, more highly educated people coming online. . . . I think that's going to cause a legalization. Once the U.S. starts taking a major look at that, I think we're going to see a change from the U.S. side, which is going to cause the world to look at legalization of Internet gaming."

Herman said later that he envisions a gradual process of gaining legitimacy in the United States over a period of four or five years.

Andre Wilsenach, chief executive of the Alderney Gambling Control Commission, also hailed the growth of new products like poker. But he said it is the pending legalization and regulation of online casinos in the United Kingdom that could inspire change in the United States.

"The U.K. will be the first major onshore jurisdiction to open up for online gaming," Wilsenach said. "That will bring about major changes just in the thinking about online gaming, including from a jurisdictional point of view. . . . It also might have an impact on the thinking of the U.S.A. in the future. If a major jurisdiction such as the U.K. opens up and is able to successfully introduce online gaming, it would certainly contribute positively to the image of the industry. . . ."

Lee Richardson, chief executive of Chartwell Games Corp., a subsidiary of Canadian software developer Chartwell Technology, agreed that England's action could lead to major changes on the part of other governments, starting with Europe. He outlined what he conceded was "a very benign scenario" in which the U.K. gaming reform, which includes the legalization of online casinos, proceeds on time and without any hitches.

"Three or four years from now, there would be an inexorable move from other European governments to adopt the U.K. model . . . ." Richardson said. "Then in seven, eight or nine years, in that sort of time frame, you would have to think that with a successful European deregulation based on a successful U.K. model, the U.S.A. would eventually have to change its political stance and realize that there is proper money to be made from the U.S. Who knows what that might do for the industry? I would think a doubling of the market globally in the legitimate regulated area would be a minimum forecast."

Herman, Wilsenach and Richardson were part of a roundtable called "I-Gaming 2010" on the final day of GIGSE. Herman said the biggest challenge facing the industry over the next six years is legalization.

"With legalization comes regulation, and regulation has a whole pile of meanings that I don't think a lot of us are prepared for."

- Gord Herman


"With legalization comes regulation, and regulation has a whole pile of meanings that I don't think a lot of us are prepared for," Herman said. "Legalization means things like guaranteed payouts, audited financial statements, opening up the books and allowing the world to see that in fact the customers' accounts are segregated from your own operating accounts."

Neteller, Herman said, is in the process of becoming regulated in the United Kingdom, where it was publicly listed this spring. The company will be regulated there by the Financial Services Authority. "What that means is that we're treated like a bank," he said. Neteller will have to prove to the FSA that it doesn't co-mingle clients' funds or merchants' funds with its own operating funds.

Herman called on the entire online gaming industry to create its own "compliance division." "If we took that step to be self-regulated, to weed out bad players, bad merchants, bad payment plans and were compliant, we would have a much cleaner industry and a much more socially accepted industry that would allow legitimacy and legality much sooner," he said.

Wilsenach said governmental regulation has made progress over the last two years. "There's a general increase taking place in the standard of regulating the industry," he said. "The big brands and software providers clearly want to be regulated; they want to move to regulated jurisdictions. It's proven now that the industry can be successfully regulated. There's also a realization that regulation brings certain benefits to the industry."

Wilsenach expressed hope that jurisdictions will agree on a uniform set of standards.

"The International Association of Gaming Regulators, at their international meeting in Brisbane (Australia) last year, agreed for the first time since its existence that there is a need to look at the harmonization and standardization of regulation among jurisdictions that regulate online gaming, and has asked Alderney to play a facilitating role in that," he said. "Regulators from across the world are meeting for the first time in June in London to start discussing standards, and to talk about things like the most appropriate approach to testing software."

Two other members of the roundtable--Steve Ives, director of gaming for Betfair, and Raymond Casey, president of the New York City Off-Track Betting Corporation--discussed the future of wagering on horse racing and other sports. Both noted that horse racing is the only sport that financially depends on betting.

Betfair, based in the United Kingdom, is the world's largest betting exchange. The rapidly growing exchanges are peer-to-peer Internet sites, which are radically different from traditional bookmakers that offer fixed odds. Exchanges simply guarantee payments among bettors who set their own odds. The exchanges charge a commission to the winning bettor. Exchange bettors can bet against a horse or a team, by offering odds, whereas bettors at fixed-odds sites can only bet for a horse or team, by accepting the fixed odds.

Wagering on horse races, Ives said, is better suited to the exchange format than wagering on other sports that usually entails simply a win or lose bet. He told IGN that 60 to 80 percent of Betfair's business is horse racing.

Ives predicted that traditional bookmakers will continue to move away from their old staple of horse racing towards more emphasis on other sports, and on fixed-odds games such as the virtual racing that has proved popular in the United Kingdom. These are "higher-margin products," he said.

"In the context of exchanges," Ives added, "you'll see many more startups over the coming years, and even more failures, many failures." He said newcomers to the exchange business will underestimate the challenges. There'll be room for no more than 10 competitors, he said, and some of them will probably start to specialize by sport and by geography.

"Horse racing is going to see significant changes," Ives said. "The industry by 2010 will have embraced betting exchanges. The speed of that embrace will vary by country. I think you'll see pari-mutuel tote betting systems integrated with exchange betting platforms and offering something that's significantly more dynamic to the horse race wager than is available today. It will enable a real explosion of in-running betting. The exchange platform will start to drive the win and the place markets."

One of the changes that Ives believes is coming is the high takeout rate at pari-mutuel tracks. (The takeout is the money from the betting pool that the track keeps.) Pari-mutuel betting began in France in the 19th century, he said, and the term is derived from the concept of "betting amongst ourselves." For many years, the takeout rate at tracks in Paris was about 5 percent, he said, but worldwide the rates have climbed higher and higher to the point that most rates are above 15 percent.
"I think that trend is going to start to reverse," Ives said. But with a more attractive proposition for the bettor, turnover (handle) will increase and "more than compensate for those reduced margins."

Casey praised Betfair as "a very innovative model," and said such models would push the horse racing industry "into being a little bit more creative." But he said horse racing interests in the United States are concerned about new methods of wagering that threaten to eliminate the wagering proceeds that are directed to the racing industry itself.

"As an example," Casey said, "just one betting pool in New York, out of a high takeout of almost 20 percent, almost 15 percent of that does not stay with New York City OTB, but goes back to various racing interests in the state of New York. So there's an extraordinary amount of money that the industry gets from operations like OTB. The challenge in trying to move to interactive TV and hopefully to wireless will be to be able to find ways to continue to support horse racing."

For many people, Casey said, wagering on horses is a social activity. "Many folks do not want to bet at home. Customers will bet in an OTB parlor or restaurant or sports theater because they want to bet with their friends." While the New York City OTB has been closing some of its parlors, Casey said, it has opened new operations in restaurants and sports bars. Those can be set up for less than $100,000, he said, while an OTB parlor costs about $1 million. Such venues attract a broader demographic than the tracks, he said.

Casey also endorsed the legalization of sports books. He said billions of dollars is bet illegally in the state of New York, and it would "engender a lot of public good to be able to remove that money and that currency from organized crime."

"I reckon in the next three to four years, the scales will tip where wireless will overtake what's being done on the Internet."

- Con Kafataris


Con Kafataris, chief executive of SportOdds and Centrebet, bookmakers based in Australia, told the roundtable that his industry is helped by the growing publicity for sports. Newspapers are publishing more and more statistics that are useful to bettors, he said, and television stations in Australia and in many European countries are devoting more time to shows that deal with sports betting. He also said that traditional sports books will survive the challenge of betting exchanges by catering to the small bettor who hopes to win a lot of money without much risk.

"Sports punters are pretty much the same around the world," Kafataris said. "If you look at betting exchanges, their key market is the sophisticated punter. They'll probably have that market exclusively in the near future, if they haven't got most of it already. That's not such a bad thing from a traditional sports book's perspective, because as another speaker said, people are time-poor. To get the benefits out of the exchange; you've got to put the effort in there and the time to get the value. But you've got the small sports punter who just wants to place his one-dollar bet."

Kafataris's reference was to Lee Richardson of Chartwell, who said that time-use surveys show that more consumers in Europe and North America are working longer hours and at different times of the day.

"There's much more of a 24/7 culture in Europe than ever there was," Richardson said. "Increasingly, the way in which people spend their time in leisure is inexorably changing. People are having far, far smaller pockets of time in which they have their entertainment, their leisure, their excitement, their experience with others. . . .

"We expect that the proportion of people in fixed Internet positions is going to decline. We certainly see mobile applications as something that will be much, much more significant by the end of the time frame that we're using." Already in Europe, he said, there are more mobile phones than there are fixed land lines.

Games designed for mobile phones have to be "very short, very punchy, very quick," Richardson said, and suited to the fact that people will be playing in more frequent, but shorter, blocks of time.

Kafataris agreed that the growth will be in wireless. "Ninety-five percent of our business is done on the Internet," he said. "I reckon in the next three to four years, the scales will tip where wireless will overtake what's being done on the Internet. That's for sports betting and horse racing as well."

He also predicted that casino-only Web sites will decline. "They've got to combine with sports books and other wagering products," Kafataris said. "They've got to offer a full suite of gambling products to stay competitive." And he said gambling on interactive TV will grow, to the point that there will be a digital TV channel for roulette, another for blackjack, another for sicbo, etc.

Crystal Ball Gazing Among I-Gaming Leaders is republished from

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