The Future Looks Bright for ISW

The first quarter for the fiscal year of 2001 showed a profit for International Sports Wagering, Inc. (ISW) and the company is hoping that is just the beginning of great things ahead.

The profit is a direct result of ISW’s licensing agreement with Global Interactive Gaming (GIG) to distribute ISW’s SportsXction program. The company boasts that SportsXction is the world's only real time play-by-play betting platform that allows gamblers to wager on everything from what the next play will be to how many yards the play will be. The program can be used for wagering on baseball, football, basketball, soccer and many more sports.

ISW’s president, Bernard Albanese, says the GIG agreement was the catalyst in his company showing up in the red.

"We are extremely pleased by the results of the first quarter, which show the positive effects of our licensing agreements with Global Interactive Gaming," Albanese said. "We are confident that we will earn approximately $2 million, or about $0.25 a share, for the fiscal 2001 year, based on our contractual schedule of minimum license fees. We also anticipate that GIG will launch their version of the SportXction game in 2001."

ISW Investor Relations spokesperson Matthew Hayden says GIG was formed as a direct result of SportsXction.

"Things are definitely going very well," Hayden explained. "SportsXction has played a pivotal role in that. It was the functionality and the market opportunities with SportsXction that drew the Kirch Group to the company and that is when they formed the subsidiary GIG."

Based in Little Falls, NJ, ISW has patented the platform that allows users to wager during the course of a sporting event.

The SportXction system accepts bets not only on the outcome of sporting events, but also on discrete parts of events and on specific game situations, such as whether a team will get a first down, whether a batter will get on base or whether a player will make two foul shots.

The system is unique in that it permits betting while the game situations are in progress, such as between downs or pitches, permitting more frequent placing and cashing of wagers.

The interactive element of the system is a player betting station (PBS), which is a personal computer with a touch screen, operating a "windowing" system which displays a television picture of a live sporting event in the upper left-hand quadrant of the PC monitor.

A list of available bets together with the terms of those bets (including the amount of the wager necessary to receive a particular pay-out and the contestants upon whom the wager is being placed) and other details relating to the event being watched and the bets previously placed are displayed on the remainder of the monitor.

By touching the screen, a bettor can place a variety of bets within seconds on the sporting event being viewed. The system is capable of permitting bettors to select from multiple sporting events being televised simultaneously, thereby allowing the bettor to bet on numerous games while using the system.

"It is the only software platform that allows a person to bet play-by-play on any sporting event in real time," Hayden said.

Although profits are starting to turn up for ISW, it wasn’t always that way. Hayden says a trail-and-error period came along with the development of SportsXction.

"The company originally began to market itself," he said. "It was doing a lot of marketing in the Las Vegas area to nine different casinos. They did about 1.2milllion transactions in a couple of years."

Business was going well, but ISW knew there was more potential for its patented software.

"The problem was Vegas was not the right venue," Hayden said. "The right venue is someone sitting at home."

Once the focus has been changed from the Vegas sportsbooks to a more global approach, the licensing agreement reflected that stance.

GIG has the rights to license SportsXction worldwide. ISW did leave the Las Vegas market out of the deal, allowing the company to explore that option once, if ever, Internet wagering becomes legal.

"There are some other opportunities for the technology outside of gaming, but GIG and the Kirch group have rights for the next 14 years for SportsXction and the distribution of it," Hayden said.

It's safe to say that for the next 14 years ISW will reap the rewards for developing its revolutionary software.

Under the agreements, ISW will be paid 25 percent of the gross profit for the use of its technology for contests or other transactions. For wagering, the company will be paid the lesser of 25 percent of the gross profit or 1 percent of the gross handle. The company will bear no share of the cost of equipment, facilities or other operating expenses of GIG. These percentage fees are subject to guaranteed minimum annual license fees of $3 million in the first year; $5 million in the second year; and increasing by 20 percent per year thereafter.

That means ISW expects to see a total windfall of $250 million over the 14-year term of the agreement. At all times the minimum license fee for the next four quarters is kept in a third party escrow account. As of December 31, 2000, ISW had received $2.75 million in connection with the agreement, and there was $5 million being held in the escrow account.

"It gives them an either/or," Hayden said. "They have a minimum licensing fee that is collected, but they also have a revenue participation as GIG rolls the service out this year."

Hayden said while GIG's licensing fees to ISW increase every year, ISW’s expenses are scheduled to remain even at about $2 million a year.

"Moving into this year the company has already broke through the profitability mark," he said. "As they move into the next year's $5 million in payments they are going to receive about $1.25 million in revenue and that will equate to about $750,000 of net income."

ISW is focusing on three modes of distribution for SportsXction. The first launch of the program will center on the Internet. The second mode of distribution is interactive television, both through wireless and cable methods of delivery. Hayden said this mode will likely take off more in Europe than it will elsewhere.

"In Europe, Interactive television is wildly popular with over 6 million units currently installed," he said.

The third mode of delivery will be through wireless cell phones and PDAs. Hayden says it'll be a couple of years before this mode of distribution will be fully tapped.

What makes GIG's involvement in the deal really interesting is that media mogul Ruppert Murdoch owns a 25 percent stake in the Kirsh Group. Murdoch also owns BSkyB and a host of other cable outlets.

The Kirsh Group has many of the pieces in place to take full advantage of its relationship with ISW and SportsXction. Not only does Murdoch play a key role in the company, but the firm also has a stronghold on some major sporting events.

The Kirsh Group owns the rights to the Wimbledon Tennis Tournament and soccer’s World Cup in 2002. Hayden said Wimbledon is the first major target for the Kirsh Group to start seeing rewards from SportsXction.

"A ridiculous amount of people watch Wimbledon worldwide," he said. "They are moving towards Wimbledon in 2002. They are anticipating that to be a huge payday for them. That gives them about a year and four months to fine tune everything."

In October 2000, the first phase of in-house acceptance testing was completed on the second version of SportsXction. On March 19, GIG will conduct acceptance testing at ISW’s headquarters. Once that step is completed rolling out the new version to the public will be the next phase.

"Once that step is completed GIG will be ready to start implementing it," he said. "We are expecting them at any moment to announce their network provider. Once the acceptance does is done and the network provider is in place you can start to do little stress tests or beta tests in specific markets."

It is expected that it will take about a month to get the network integrated in place.

The biggest upgrade on the second version of the program is an increase in the amount of transactions that can be processed.

"The first upgrade has already been delivered," Hayden said. "There had to be a second version because of scalability. We wanted to be able to do 5,000 transactions a second. The second version has that up to 8,000 transactions a second."

Once everything is in place with a network supplier GIG will start to outsource its efforts. Hayden says the global approach will be attacked with a regional assault.

"They are going to do 32 different regions," he said. "Those 32 different regions will be outsourced to a network integrator and service provider."

The United States is not in the immediate plans for GIG, considering the legal issues with Internet gaming.

"They are targeting countries where gaming is legal or has been legal," he said. "The United States is not even an option at this juncture."

Although SportsXction is the breadwinner for ISW, Hayden said the company is looking into other areas in which the program can be used. The real time trading platform naturally lends itself to the financial industry and ISW is exploring options in that sector.