Top Stories of 2005

	See Also: A Look Back at 2005 The Best and Worst of 2005 A Glance at 2006

1. I-Gaming takes the London Stock Exchange by storm.
2. European gaming interests battle over the preservation of state monopolies
3. Consolidation in the I-gaming space has finally arrived.
4. Slowly, the United Kingdom modernizes its gambling laws.
5. Tasmania legalizes betting exchanges
6. The World Trade Organization upholds its ruling that U.S. I-gaming policy is not compliant with WTO trade arrangements.
7. I-gaming advertising slowly seeps back into the U.S. mainstream media.
8. The industry struggles to deal with cheating.
9. Authorities in several international jurisdictions crackdown on Internet gambling.
10. The mood shifts ever so slightly toward regulation in the United States.

Float Fest 2005

It was a rollercoaster ride that won't soon be forgotten, and there are probably more twists and turns to come in '06. Hoards of I-gaming companies lined up throughout 2005 to list on the LSE's Alternative Investments Market, but the "party" really got rolling in June, when Gibraltar-based PartyGaming, operator of the world's largest and most successful online poker network, floated on the main exchange to the tune of US$9 billion, instantly qualifying the company for the FTSE 100.

But then PartyGaming reported in September that the growth of its network was slower than expected, and the investment community immediately went sour on I-gaming. Virtually every LSE-listed company in the I-poker/I-gaming space saw its share price take a hit, and companies with upcoming IPOs, most notably 888, had to scale back their projections significantly. Analysts began to question whether floating the AIM was still a viable option for I-gaming companies and cited the example of online casino group 32Red, which abandoned plans for a £10 million float for a scaled-back IPO that raised £300,000. Other companies, including Betfair and Zone4Play, scrapped their IPO plans indefinitely.

Despite warnings that the I-gaming "bubble" was beginning to burst, positive reports in November and December from industry leaders PartyGaming, Sportingbet and 888 Holdings seem to have stabilized the market . . . for now.

For those keeping score, the following companies floated on the London Stock Exchange in 2005: 32Red, 888 Holdings, BetOnSports, Empire Online, Fairground Gaming Holdings, FireOne Group, PartyGaming, Sportswinbet Plc and TV Commerce Holdings.

The Never-ending European War

Depending on whom you ask, either the days are numbered for Europe's gambling monopolies or EU policy will allow member states to close their borders on foreign gambling services. The Gambelli ruling of 2003 continues to be a factor, but the state-protected monopolies are standing by their argument that restricting gambling serves to limit gambling-related fraud and addiction. While battles are being fought all over Europe, the central battleground remains the Netherlands, where the courts have ruled that the De Lotto monopoly is in compliance with European Law under the terms laid out by the Gambelli verdict. The tide could be shifting, however, as a ruling in December from the Administrative Court of Breda states that the state monopoly on casino gambling is not effective and that there is no specific evidence to substantiate that the Netherlands' restrictive casino legislation is coherent and consistent. Further, the European Commission has warned the Netherlands government against proceeding with its proposed monopoly scheme for online games of chance, advising that such a policy would not be compatible European Laws establishing the freedom to provide services in other member states. The European Betting Association, meanwhile, has filed complaints with the European Commission challenging the gambling monopolies of several European member states. On the other hand, the European Parliament voted in November for the exclusion of gambling activities from the Directive on Services in the Internal Market.

M&A Action Galore

Why did online gambling companies race to float on the London Stock Exchange throughout the year? Virtually all of them stated that they were going public to raise money for acquisitions. Consolidation in the I-gaming space had been on the horizon for a few years, but in 2005 it finally arrived. Perhaps foreshadowed by Sportingbet's acquisition of Paradise Poker in late '04, there were far more acquisitions made in the industry in 2005 than in any other year. While blockbuster deals like William Hill's purchase of Stanley Leisure's betting shops, BetanWin's purchase of Ongame and IGT's purchase of Wagerworks stole the headlines, numerous small, but very significant purchases were being made by companies looking to position themselves for consolidation. And while most of the news marked growth and progress, the biggest story on the M&A front was the proposed sale of troubled online poker group Empire Online. The ride began in September, when Empire, which floated very successfully on the AIM in June, received a bid from I-gaming giant Sportingbet. The deal fell through, however, and Empire then endured a series of events that dramatically drove down its volume. Empire was among the many I-gaming businesses hurt by PartyGaming's scaled-back growth projections in September and was hit even harder in October when PartyGaming announced that Empire and three other "skin" sites were being shut out of the PartyPoker network. Empire's market cap fell by £290 million over the course of 10 days, and a pending sale to PartyGaming subsequently fell apart. Now Empire is suing PartyGaming for the damages incurred through the cancelled skins contract.

Long Time Coming

A long time in the works, the modernization of England's gambling laws finally became official in April with the passage of the U.K. Gambling Act. The new policy revamps England's gambling laws from top to bottom and will be implemented gradually over the course of the next two years. In very general terms, the law accomplishes two things: It brings all of the country's gambling businesses under the watch of the newly formed Gambling Commission, and it enables a vast expansion of gambling through the liberalization of regulations. One of many results will be the legalization of online casinos, but there are worries that the tax regime will not be attractive to lure operators from tax-friendly jurisdictions where they have been very successful.

Tasmanian Leap of Faith

The long-awaited review of Australia's 2001 Interactive Gambling Act brought zero change to the country's federal I-gaming policy, but one thing it did do was place the decision on whether to regulate or prohibit betting exchanges in the hands of the state. Following the review, the world's leading betting exchange, Betfair, signed a partnership agreement with Publishing & Broadcasting Limited and immediately began its push to obtain a state license in Australia. After short-lived speculation that the Northern Territory might be the best bet, the company turned its attention to Tasmania, where Premier Paul Lennon pronounced his support of a bill to allow the state to issue betting exchange license. Much to the dismay of racing interests based in other states (particularly in Victoria), the bill was passed in November, and Betfair subsequently received a license. The company says it wants to get its Australian operations off the ground as soon as possible and could launch in a matter of days, but those who oppose legalized exchange betting are still fighting to keep it from happening.

The WTO Sticks to Its Guns

The World Trade Organization Appellate body in April upheld the Dispute Settlement Body's ruling the United States' policy of prohibiting licensed foreign online gambling services is not compliant with the General Agreement on Trade in Services , and both parties in the dispute--the United States and Antigua--claimed victory. The U.S. trade representative maintains that the country needs only to tweak its policy to come into compliance. Antigua, meanwhile, insists that the existence of U.S. law allowing licensed race betting services to operate their services online means that the country must open its borders to all types of gambling services to stay in compliance. The United States has until April 2006 to bring its laws into compliance. Whether the U.S. policy changes are sufficient remains to be seen, but it is widely accepted that the United States won't make any changes it doesn't want to make and that U.S. officials won't lose very much sleep over an unresolved conflict with Antigua. Now, if the United Kingdom were to submit a complaint similar to that of Antigua, then things would begin to get interesting.

Show Them the Money

Many months removed from numerous threats made by the U.S. Department of Justice to businesses and media outlets involved in advertising for online gambling services, the mainstream media in the United States appear to be warming up again to I-gaming. In the midst of a crackdown that spanned 2004, poker operators with lots of ad dollars to spend took to the "dot-net" advertising strategy--an end-around in which media outlets run ads for I-gaming sister sites that don't offer gambling for real money. In the last six months, the media have begun to lower their guards and accept ads for "dot-com," real-money gambling sites as well. Meanwhile, online gambling portal Casino City continues with its federal case in which it is seeking a declaratory judgment on whether it has the right to carry I-gaming ads. The U.S. District Court for the Middle District of Louisiana dismissed the case in February on the grounds that Casino City does not have standing. An appeal is underway.

Cheaters Abound

It was a year of cheating in the gambling circles. A handful of match-fixing scandals rocked the industry, with German football referee Robert Hoyzer taking the fall in one of the ugliest chapters in the history of sports betting. (Hoyzer and others face charges relating to the manipulation of more than 20 German soccer games.)

Hitting closer to home for the interactive gambling industry was a series of race fixing allegations that brought the betting exchange model under the microscope. In a nutshell, numerous racing insiders (jockeys, trainers, owners, etc.) have been accused of either throwing races or using inside information about the condition of certain horses to make big money on the exchanges, which allow users to bet against horses. Betfair, the world's leading betting exchange, has responded to the problem by signing agreements with numerous tracks and racing groups to share information on betting activity. Many in the racing industry still contend, however, that Betfair is part of the problem and not the solution.

"Inside" betting on the outcome reality TV shows continued to be problem in 2005 as well, with the biggest such scandal to date coming down in December. In this particular case, Betfair suspended the accounts of five customers pending an investigation into a possible scam related to the show "X Factor." It is suggested that someone involved in supplying the phone lines for the show tipped the bettors of as to who was going to win.

Finally, the burgeoning Internet poker industry is dealing with warnings that cheating among players in poker rooms is becoming a big problem. The use of intelligent strategy software and collusion among players (or a combination of both) are a growing concern. Online poker providers insist that cheating can be held in check, but they inevitably face the challenge of making sure customers don't lose confidence in them.

Cracking Down . . . Everywhere

Action taken by law enforcement against individuals and companies involved in illegal gambling activity is nothing new, but 2005 was a particularly big year for crackdowns all over the world. While efforts continued in the United States, the real action was in China, where more than 1.16 million people were arrested during the first nine months of the year for illegal betting offenses. More than 163,000 cases were investigated and nearly US$300 million was seized. Among those arrested were nearly 9,000 government officials. Many of the busts involved Internet gambling operations, and aiding the government in these efforts was the implementation of new laws increasing the penalties for objectionable Internet content. Similar efforts are in the works in Italy, where the government wants to pass laws requiring ISPs to block access to unauthorized gambling sites, and in Israel, where authorities have raided the offices of media outlets that carry advertising for online gambling services.

A Turning Tide?

This is an ongoing theme: The longer the United States goes without prohibiting online gambling, the more likely it is that policymakers will opt for a regulatory approach. Four major developments contributed to the "regulatory momentum" in 2005:

1. There continues to major activity on the state level. Nevada passed a law allowing its casinos to offer gambling view wireless devices. A push for a bill legalizing online poker was made in North Dakota. South Dakota passed a bill legalizing Internet gambling on horse racing, and horsemen in New York urged legislators there to do the same. The legislatures of Texas, Illinois and Georgia debated the legalization of Internet lotteries, and North Carolina's new law enabling the establishment of a state lottery creates a framework for Internet sales.
2. The poker craze has turned Internet poker into an acceptable form of home entertainment. The bigger it gets, the more difficult it will be to criminalize it. Finally I-gaming has rooted itself in mainstream American culture.
3. U.S. institutions are investing heavily in the industry, and it is becoming increasingly evident that I-gaming is a huge money maker. This, of course, translates to a potential windfall for the government in terms of tax money.
4. As stated above, with each failure to pass a federal prohibition bill, the chance of a regulatory bill getting serious consideration increases. There's a consensus among legislators that I-gaming presents threats in terms of fraud, money laundering and problem and underage gambling, and the option of addressing these issues through a regulatory bill grows more viable every day.

Additional Top Stories:

• Yahoo UK finds its way into the I-gaming space with bingo and betting exchange ventures. Poker could be next.
• Rep. Leach and Sen. Kyl continue their efforts to pass a federal U.S. I-gaming prohibition bill.
• The skill games industry takes shape with companies like WorldWinner, Fun Technologies and GameAccount establishing themselves as leaders.
• Hackers continue to target I-gaming sites with extortion threats.
• Payment-related fraud remains a key concern for the industry as a whole.’
• Operators and suppliers seek solutions for age and identity verification.

Stories that Weren't

• The supposed I-gaming "bubble" bursts, as investors bail out on I-gaming stocks.
• The Kyl bill passes, making the seven-year effort to prohibit online gambling successful.
• The WTO ruling leads to significant change in U.S. policy.
• Australian states (other than Tasmania) realize that betting exchanges are here to stay and turn their attention toward regulating.
• North Dakota legalizes Internet poker.