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3/28/2007
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Online Gambling Gone Wild: U.S. Crackdown Sparks Offshore Boom

Far from slowing its growth, a government crackdown on online gambling has sent many sites offshore and many others underground. But it's a good bet that Internet poker will remain a booming industry.

[Update, March 31, 11:30 am. On March 30, the World Trade Organization said that the United States had failed to comply with an earlier ruling, which mandated that the U.S. lift its ban on online gambling. Experts say the WTO decision could result in possible commercial sanctions.]

Daniel Negreanu tends to understand the odds pretty well. As one of the most successful poker tournament players in the world, "Kid Poker" was in 1998 the youngest player to win the World Series of Poker -- an honor he held until 2004 -- and he continues to dominate high-stakes games throughout the poker-playing world.

Full Contact Poker, which decided to stay in the U.S. market, allows people to play with no limit.

(click image for larger view)


Full Contact Poker, which decided to stay in the U.S. market, allows people to play with no limit.

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However, in December 2005, wary of increasing government hostility toward Internet gambling, he knew it was time to fold. "Clearly, it wasn't going to be possible to live in the U.S. and run an online poker operation," he said. So he sold his successful online poker site, Full Contact Poker, to Big Stack Enterprises, based in Curacao.

Negreanu, as usual, was ahead of the game. It wasn't until 10 months later -- Sept. 30, 2006 -- that the shot heard round the online gambling world was fired when Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA) as part of the larger Safe Ports Bill. In less than two weeks, President Bush signed the bill into law, and the global online gaming industry -- which derived as much as 60% of its revenue from the U.S. market -- took a devastating hit.

The event couldn't have been timed worse from the point of view of Jez San, the former director of 3-D game developer Argonaut Software and the founder of PKR.com, a United Kingdom-based online poker site that was still in beta test at the time the bill was approved. Congress passed the legislation just 24 hours after San had finalized his first round of financing -- and after he had sunk $1 million of his own money into his venture. "We had to make a decision, and we made it immediately not to launch into the U.S. market," said San, whose company has never allowed any U.S. citizens to play for money. "I like America. I want to be able to keep visiting without getting arrested. It was very important to me that we were legitimate."


At PKR.com, players create their own avatars, complete with customized facial expressions and gestures to bring a real-life component to the game.

(click image for larger view)

At PKR.com, players create their own avatars, complete with customized facial expressions and gestures to bring a real-life component to the game.

view the image gallery
At the same time, passage of the bill caused a host of companies that had previously been operating in the United States to withdraw. These included some of the largest and most successful online gambling sites in the world, including PartyPoker.com and 888 Casino-on-the-Net, both publicly traded and listed on the London Stock Exchange.

But not everyone was so easily spooked. A large number of online gambling companies chose to keep their casinos open. Although now operating illegally according to U.S. Justice Department rules, they're reporting that business is pretty much as usual. Although there are fewer dollars overall, there are less gambling houses vying for those dollars, and the ones who agreed to talk concur that after a dip in the second half of 2006, revenue is already on its way back up.

"We were growing 300% last year, and although we lost some ground last summer, things have since rebounded, and we expect to be back up to our summer 2006 levels within the next month or so," said a senior executive at one of the top online gambling sites that has chosen to still accept U.S. customers, who declined to be identified for fear of prosecution.

Another executive who asked for anonymity said that revenue had already shot past mid-2006 levels and showed no sign of abating. "U.S. citizens still want to gamble, and we intend to keep allowing them to," he said. Indeed, a host of new online gambling establishments are expected to quickly fill the void left by the ones that decided to bow out.

A PKR.com player shows a classic poker face when viewing his cards.

(click image for larger view)


A PKR.com player shows a classic poker face when viewing his cards.

view the image gallery
"Some sites have no downward loss of patrons at all. Even those that have lost customers are still making money -- more than last year. It's a major blip, but still just a blip, and people will find ways of getting around it," said I. Nelson Rose, a professor of law at Whittier Law School in Costa Mesa, Calif., and an expert on online gaming laws. Joseph Kelly, a professor of business law at State University of New York College in Buffalo and co-editor of the Gaming Law Review agreed: "This is just a hiccup."

Along with many others, Kelly believes that online gambling will eventually be legal in the United States. "The panic created by the DOJ's actions will eventually subside, new legislation will be passed, and we'll see a regulated industry emerge," Kelly said. When that will happen is anyone's guess. But "the notion that you can put a definitive stop to online gambling is a ludicrous one," he said.

San himself is characteristically ebullient about what lies ahead. His company -- which provides poker players with an immersive experience using the 3-D technology standard in video games and virtual worlds such as Second Life -- is growing at 50% per month. It will be profitable this year despite barring U.S.-based players. "Nothing is going to be able to stop this industry," he said.

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