Online gaming companies, led by giant PartyGaming PLC (PRTY.LN), are expanding the traditional gaming industry they were once expected to thwart, as they attract new clients and big windfalls.

The $13 billion online gaming industry is growing at a rapid pace by attracting a new generation of players: generally younger, tech-savvy men with a disposable income on the lookout for a quick and potentially profitable thrill.

This bustling online business, supported by fast broadband connections and a consumer shift to Internet shopping, has had a knock-on effect on the entire gambling industry, said ABN AMRO analyst Michael Pacitti. Traditional gaming companies, like MGM Mirage (MGM) and Wynn Resorts Ltd. (WYNN), who once wanted to ban their Internet rivals, are now clamoring to collect online profits.

"It seems to have the impact of increasing the number of people who visit casinos," Pacitti said. "At the same time, people tend to play different things online: Online poker is something relatively new compared to online sportsbetting."

Online gaming is the fastest growing segment of the overall market and is expected to expand at a compound annual rate of more than 14%, reaching $25.2 billion by 2010. By then, the sector is expected to represent 7.7% of the international gaming industry, which garners about $258 billion in gross gaming yield, according to Global Betting and Gaming Consultants in the U.K.
Gross gaming yield is gross turnover minus winnings paid out.

PartyGaming is the world's largest online gaming company due to its extensive poker and online operations. Sportingbet PLC (SBT.LN) is another heavyweight. It also has poker, casino, games and backgammon games on its website. So far, online gaming is concentrated in the U.S. and to a lesser extent Europe, but analysts predict that as Asian technology use expands, the online business will grow too.

Many years ago, gambling was broadly considered a dark hobby. Over the past decade, a handful of conservative U.S. politicians have been trying to get online gaming banned and up until recently have had the support of casino operators in Las Vegas and Atlantic City.

Those casino operators were part of the powerful American Gaming Association, which insisted that the online gaming industry was bad for business.

But the story is very different now. Gaming is more widely viewed as a valid leisure activity. And the AGA has even made a change, calling this week for a congressional study to examine the regulation and taxation of the online gaming market.

The AGA said the study may also review recent rulings by the World Trade Organization, which suggest that a ruling by the U.S. attorney general prohibiting traditional companies from hosting online gambling sites in the U.S. may violate international trade rules. The new stance could be a boon to an expanding industry.

"We are now even more confident that the current prohibitive bills, and any future bills, placed before the House of Representatives will fail," brokerage firm Numis said in a recent note to clients. "This should be taken very positively for the online gaming stocks."

In a regulated online gaming industry, U.S. casino operators would be free to exploit their name and brand and set up their own online operations, Investec leisure analyst Matthew Gerard.

"They're missing out on a high-growth market," added Gerard.
"At the moment, by being excluded it certainly does them no favors and I think they realize that. They would like to see the industry regulated," said ABM Amro's Pacitti.

The big casinos could also build their traditional businesses with the online sites. "There must be cross marketing opportunities for them, to attract online users and than attract them into their casinos," Pacitti said.

Online players vary greatly from traditional gamblers who like to have a flutter on slot machine or a table during a night out with friends. Traditionally, around 70% of bets placed with U.K. bookmakers were on horse and greyhound racing for example. But online punters place bet on other events, Pacitti said.

"Online, it tends to be a case that younger people place bets on different events, like football or golf," he added.

While players in the U.S. and Europe are enjoying the online gaming phenomena, Asian players still prefer traditional casinos, due in part to slow Internet connections and fear of using credit cards online.

"Broadband still has relatively low penetration in mainland China for example and it's still a cash base society so people are a bit reluctant to use their credit cards," added Pacitti.

In a bid to capture some of the untapped online gaming market in Asia, U.K.-based Playtech Ltd. (PTEC.LN) runs a "live casino" out of a warehouse in the Philippines.

The casino, which was set up almost three years ago, is filmed with real dealers and a live CNN television screen to prove its real-time authenticity to players. The games are beamed onto licensed gaming websites, a Playtech spokesman said.

The casino was set up to "penetrate into Asia," he added. Playtech declined to provide any player or earnings numbers from the casino.
For the time being, land-based gaming companies will have the Asian gaming market largely to themselves, particularly in Macau, a special administrative region of China with a booming casino market.

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Gambling911.com News Wire

Originally published May 2, 2006 10:20 am EST