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Editorial: Dotcom Bubble or i-Gaming Bull Market?

27 June 2005

By Eugene Martin Christiansen and J. David Wargo

On June 2nd PartyGaming plc, the world's biggest online poker company, said it would offer up to 23% of its shares in an initial public offering (IPO) on the London Stock Exchange. The issue was tentatively priced on June 15th at 111 pence to 127 pence; the mid point of this range would value the company at £4.76 billion. Earlier estimates were higher. In early June CNN News put the deal's size at about $1.8 billion, valuing PartyGaming at $7.8 billion; some analysts said PartyGaming would be worth $8 billion to $10 billion, or £4.4 billion to £5.5 billion. The lower than expected price probably reflects fund manager concerns (shares will be offered to institutions only; retail investors will have to buy in the after-market) about the risk that Washington will try to derail the IPO: PartyGaming says it sources 80% of its revenues in the U.S. Even at 111 pence the float would make PartyGaming the U.K.'s largest initial public offering since Friends Provident plc raised $2.7 billion in July 2001 and would catapult the online poker company into the FTSE 100. Assuming a stable after-market, PartyGaming's market capitalization will comfortably exceed that of an older corporate icon, British Airways (£2.9 billion), and might equal BSkyB's (£10.14 billion). PartyGaming probably won't buy British Airways, but using its new stock as currency it could. That's not bad for a company that was founded in 1997.

Something's going on here, but what? Are current i-gaming valuations sustainable? Does the PartyGaming IPO and the 2004 four-fold increase in the share price of SportingBet plc following its October 2004 acquisition of Paradise Poker-- the third-largest online poker company-- signal the start of an i-gaming bull market? Or are we looking at another dotcom bubble? The latter possibility shouldn't be discounted; some prominent economists notwithstanding, financial markets don't always reflect fundamental values. Remember AOL? TimeWarner does.

One thing's for sure: there will be more i-gaming IPOs. Empire Online, a marketing company founded in 1998 that drives traffic to Casino-on-Net,, Pacific Poker and other gambling sites, hired Numis Securities to advise it concerning an initial public offering of shares in its poker subsidiary, Tradal Ltd.; Lord Leonard Steinberg, the chairman of Stanley Leisure plc and one of Britain's wealthiest peers, has accepted a position as Tradal's non-executive vice chairman preparatory to the IPO; in the event Empire Online completed a £123.5 million ($223 million) IPO at a company value of £512 million ($926 million) on the London AIM (Alternative Investment Market) on June 10th;; trading began on June 15th, with shares initially priced at £0.175. But not all the prospective action is poker. Betfair, the betting exchange started by Andrew Black and Edward Wray in 1999, is widely rumored to be exploring an IPO; in this market Betfair, highly profitable and growing explosively, would have a market capitalization in the billions of pounds sterling. Egged on by salivating investment bankers, other i-gaming IPOs are waiting in the wings.

It's hard to contemplate billion dollar online poker companies without thinking of AOL, which had a market capitalization of $164 billion when it acquired TimeWarner in 2000 and might be worth $8 billion to maybe three times that today if Richard Parsons, TimeWarners's chairman, decides to sell it (he says he won't). Analogies between the e-commerce fantasies of the late 1990s and the global poker mania of 2005 come easily; after all, isn't poker just a game?

It is just a game, of course; but then so are soccer and basketball. These are games very many people play and like to watch on television. Maybe the analogies between the Internet bubble that burst in 2000 and what is shaping up to be the hot i-gaming IPO market of 2005 come a little too easily. Let's look at some of the fundamentals underlying the current crop of i-gaming IPOs.

1. With a handful of exceptions, the first generation of dotcoms was unprofitable. Growth, not profitability, was the business strategy, and the money to fund growth was raised in equity markets. When equity markets closed shortly after AOL and TimeWarner merged, the music stopped. I-gaming businesses, in contrast, are profitable. PartyGaming says its 1stQ05 revenues were $222 million, up 93% from 1stQ04; operating profit jumped 81% to $128 million.

2. Napster was a new Internet business model that had no counterpart in the physical world, and just as Nick Negroponte (Being Digital) said it would, digital distribution changed older music industry business models forever—in ways the recorded music industry is still trying to come to terms with. Betfair, an Internet business model with no counterpart in the physical world, is doing exactly the same thing: changing the business of betting, whether at fixed or pari-mutuel odds, for good, by lowering consumer prices through more perfect information and making new kinds of betting easy, possible and fun.

3. The Internet bubble's collapse was so spectacular that it obscured an important fact: enormous new wealth was created in the process. AOL isn't worth $164 billion today but it generates about $1 billion in cash a year for TimeWarner and it's worth a lot of money. Barry Diller's InterActive Corp. is worth a lot of money (about $16.9 billion on 6/17/05). eBay's market capitalization is $51.2 billion; Google's market capitalization (about $77.02 billion) is just shy of TimeWarners's (about $78.72 billion); Yahoo is attracting advertising dollars that once flowed to broadcast and cable television and so on through a very long list. I-gaming is similarly creating new wealth on an enormous scale. Inevitably portions of this new wealth will be offered to the public and trade in the form of common shares on global stock exchanges. SportingBet's market capitalization is about £926 million ($1.68 billion), small in relation to Google but comparable to a mid-sized U.S. casino company like Aztar, which had a market capitalization of $1.1 billion on June 3rd.

4. The global Internet gambling market is large and growing rapidly. Christiansen Capital Advisors forecasts global consumer spending on Internet gambling to rise from an estimated $8.2 billion in 2004 to $22.7 billion by 2009, a compound annual growth rate of 22%. The numbers are too big for financial markets to ignore.

As London's financial press noted, one very large risk factor hangs over PartyGaming's IPO: the possibility that the United States will try to stop it. Poker accounted for 92% of the company's 2004 revenue (PartyGaming also operates online casino and bingo sites, including Starluck Casino and Party Bingo). PartyGaming says about 80% of its poker revenue is generated in the United States. The United States Department of Justice considers online poker an illegal activity. Concerns about the legality of Internet gambling in the United States could cost Dresdner Kleinwort and PartyGaming the backing of major financial institutions and force the company to lower its target price even further—or even abandon the public offering.

These numbers say a couple of things. They say millions of ordinary Americans play poker online. They say Federal policies against Internet gambling don't prevent Americans from engaging in it. And they say something else. Dresdner Kleinwort's PartyGaming road show will skip the U.S. PartyGaming's IPO, assuming it goes off as planned, will take place on the London Stock Exchange, not on the New York Stock Exchange or NASDAQ. Unless (as appears unlikely) Federal policies change, this will be the pattern with i-gaming IPOs in the years to come. In this scenario, American investment banks and financial institutions will not participate directly in what could develop into a second dotcom boom. Nor will American companies. Watching other people get rich isn't something Wall Street likes to do. A lot of people on both sides of the Atlantic are going to watch PartyGaming's IPO. It could be a milestone in the evolution of the interactive sector of the global gambling industry.

Editorial: Dotcom Bubble or i-Gaming Bull Market? is republished from