Poker BIG BUSINESS - Enjoy the article


Dormant account
Feb 1, 2005
Americans have fallen in love with poker around the kitchen table, on television and now, inevitably, on the Internet. Fueled by the public's newfound fascination and the success of televised tournaments like the World Series of Poker, online poker has become one of the biggest, hottest, most lucrative games in the global gaming business.

Consider the numbers: More than 200 online poker sites collectively are generating about $2 billion a year in revenues, equal to 40% of last year's $5 billion in gambling revenues from all of the Las Vegas "Strip". An estimated 1.7 million players are active online, meaning they've played in the past six months. And about 150,000 people play on an average day, according to PokerPulse, which tracks the online poker market. Americans are thought to account for more than 70% of all players.

Nearly all online poker companies are privately held, which means financial data are hard to come by. The top six sites, which control about 75% of the market, may boast operating profit margins of around 60%. The economics of a successful poker site are compelling, because the operator takes a cut of each pot, called a rake, or, in the case of increasingly popular online tournaments, an entry fee. The rake 2% to 5% of the pot, or the total amount of bets in a single game typically ranges from 50 cents to a maximum of $3. Tournament entry fees range from $1 to $20 per person.

Unlike casino gambling, in which players bet against the house, online poker players gamble with one another, just as in the home games played by millions of Americans. The poker site provides a virtual table for play, a random-number generator to deal the cards, an accounting system to track winnings and a carefully monitored chat feature that allows players to communicate with one another but not to discuss their hands.

The industry's low-risk business model is eBay-like in its power and simplicity, and puts bricks-and-mortar gambling ventures to shame. Whereas Steve Wynn, chairman of Wynn Resorts, is spending $2.7 billion to erect yet another pile of glamorous bricks and mortar in Vegas Wynn Las Vegas is slated to open in April an online poker company needs nothing but a Website. PokerStars, the No. 2 site, took in about $37,000 in entry fees from a single tournament Feb. 13. In contrast, a poker table in a casino might generate $60 to $70 per hour in revenues, and that's before labor and overhead.

The growth of online poker has been explosive. Industry revenues have doubled in the past year, and are up more than tenfold in the past two years. The number of players tripled in 12 months, and continues to grow by about 10% a month, says Dennis Boyko, who runs the PokerPulse site.

Is this a fad? Time will tell, but it hasn't paid yet to bet against the growth of the gambling industry. "The poker market around the world is colossal," says Nigel Payne, chief executive of Sportingbet, a British online-gambling company that owns Paradise Poker, the No. 3 poker site. "We believe there are 100 million poker players worldwide today, and only about 1% of them play online. You don't have to be a rocket scientist to see there is the potential for very significant growth online, indeed."

An estimated 60 million to 80 million Americans play poker, and the game is growing in popularity in Europe.

The online poker industry was born about five years ago, but didn't take off until the summer of 2003, when an unknown but aptly named player, Chris Moneymaker, won the World Series of Poker in Las Vegas, taking a $2.5 million prize, after qualifying for the tournament on PokerStars. ESPN televised the event, which became an unexpected ratings hit.

PartyGaming, the parent company of the dominant poker Website, PartyPoker, reportedly is considering an initial public offering in London that could value the four-year-old company at more than $5 billion. PartyPoker is estimated to control as much as 50% of the market.

Sportingbet, meanwhile, has seen its London-listed shares nearly triple to 287 pence since it purchased Paradise Poker in October. Now valued at 870 million, or $1.6 billion, it is the purest online-poker investment play because the other big poker sites are privately held. Poker accounts for 40% of the company's profits and most of its earnings growth.

Sportingbet has been buoyed lately by speculation it could become a takeover target of British hotel and bookmaking giant Hilton Group, which owns Ladbroke betting parlors. But the poker company denies it's in any merger talks.

Despite the run-up in its shares, Sportingbet isn't expensive. The stock is trading for about 10 times annualized pretax cash flow in the quarter ended Jan. 31. That's below the valuations of some U.S. gaming companies, which are growing more slowly. Sportingbet trades for about 25 times projected earnings per share for the fiscal year ending July 31, but its price/earnings multiple is just 16 based on a fiscal 2006 estimate from Investec Securities. The U.K. firm carries a Strong Buy rating on the stock.

Sportingbet will release complete financial results Tuesday, but already has said it expects to report pre-tax profits of at least 21 million for the January quarter, up 70% year to year, largely due to the Paradise Poker deal. Its pre-tax profits are comparable to U.S. ebidta, or earnings before interest, taxes, depreciation and amortization.

Sportingbet also operates, a leading online sports-wagering site. Sportingbet's Payne believes online sports gambling and poker make a powerful combination, because "half of active sports-betting customers play poker and half of active poker players bet on sports."

The surge in Sportingbet's stock has occurred amid a gambling frenzy on Wall Street. Shares of MGM Mirage have nearly doubled in the past year to 78, and Wynn Resorts has risen 120% to 74. Las Vegas Sands, an operator of casino properties in Las Vegas and Macau, went public in December at 29 and now trades for 50, giving it an industry-high market value of $17 billion.

The operators of all the major poker Websites, including Paradise Poker, are domiciled outside the U.S., because of online poker's dubious legal status here. Paradise Poker and PokerStars are based in Costa Rica and are regulated by the Kahnawake Gaming Commission, which is located on a Mohawk Indian reservation in Canada, near Montreal. PartyPoker has operations in Bangalore, India.

It's tough to determine the owners of many poker sites, although one of the principal owners of PartyGaming is said to be Ruth Parasol, who formerly ran an adult-entertainment business. One condition of Sportingbet's purchase of Paradise Poker was that the owners of Paradise not be disclosed.

The U.S. government deems online poker and other forms of Internet gambling illegal, based in part on an interpretation of a 1961 statute known as the "Wire Act," which prohibits gambling done over the telephone. The government hasn't sought to prosecute any poker sites, however, nor are there any known state prosecutions of Americans for playing poker online.

To be sure, there is a risk the U.S. government will pursue the operators of offshore poker Web sites. But Sportingbet believes it would be difficult for the government to prosecute successfully an offshore company with no American presence.

The business challenge for poker sites is to develop critical mass, because players want to go where the action is. Given that market leaders such as PartyPoker, PokerStars, Paradise Poker, Prima Poker and Pacific Poker are well entrenched, it may be difficult for newcomers to gain much traction.

Thanks to TV broadcasts of the World Series of Poker, Celebrity Poker and the World Poker Tour, millions of Americans now are playing Texas Hold'em, the most popular game among poker pros, and on poker Websites. In Texas Hold'em, players initially get two cards face down, and then form their best hands based on five subsequent community cards. What's more, certain poker phrases are entering the vernacular, including going "all in," or betting all your chips.

Online poker is popular among college students and has a strong following on Wall Street, where analysts and traders often play at the end of the work day or at home. Most players are believed to be men, between the ages of 18 and 45. Poker pros such as Phil Hellmuth, Annie Duke and Scotty Nguyen, meanwhile, have become celebrities.

Skillful poker players often can win big money, especially in online games where many novices play. This contrasts with casino games such as blackjack and craps, in which it's tough to beat the house. "In blackjack, you bet before you see the cards," says New Yorker Jack Lau, a regular online-poker player. "In poker, you bet after you see the cards. That's a big difference."

Online poker also is less intimidating than casino poker games, which often draw hard-core and mathematically astute gamblers.

Successful online players try to gauge opponents' betting patterns, and seek to play the odds by calculating whether it pays to play out a hand or fold. Poker sites say they have sophisticated software to identify players who are colluding or using "bots," special software to guide their betting. Such players are banished from the games.

Size increasingly is important for a poker site, because much of the industry's growth has come from tournaments. They allow players to bet $1 to $600 and go up against as few as four or as many as 5,000 players. The prizes are large and the playing field is level. Each tournament entrant puts up the same amount of money and starts with an equal number of chips, so deep-pocketed players don't get an edge. Once a player loses all the chips, he or she is out of the tournament.

While online poker can be played around the clock, Sunday has become the big day for tournaments. The main event at PokerStars on Feb. 13 featured 2,496 entrants, each of whom put up $200, resulting in a total prize of nearly $500,000. The winner got just over $100,000 roughly 20% of the total purse after nearly seven hours of play. All told, the top 225 tournament players won money.

Tournament players tend to like big prizes, which means they gravitate to the sites with the most players. PokerStars and other sites make money from entry fees, usually set at 6% to 10% of the tournament "buy-in," or bet. In the Feb. 13 tournament, players paid fees of $15 apiece.

In addition to tournaments of varying sizes and stakes, all the poker sites offer continuous play in so-called ring games. Players can enter and leave these games when they want. Bets range from as little as 50 cents each to as much as $30 or $60. In the U.S., players can wait an hour or more in the evening to join a high-stakes game at a site such as PokerStars. Most players have high-speed Internet connections, but online games also accommodate slow-speed, dial-up players. Ring games once dominated online, but tournaments now are the big draw.

Gaming companies such as MGM Mirage and Harrah's are latching on to the poker boom by devoting more casino space to poker. Harrah's has 191 poker tables in its U.S. casinos, up from 63 at the end of 2003. Yet, a poker table is not an especially profitable use of casino space, considering a single slot machine can generate $350 in profits per day.

In contrast, a poker table with eight or nine players generates an average of $60 to $70 per hour of "rake," or revenues, for the house, and perhaps $1,000 per day. But poker players also tend to be big gamblers who play more profitable games for the house, like craps, blackjack and roulette.

The U.S. gaming giants probably would buy some of the big poker sites if online poker were legalized and regulated in the U.S. But there's little hope of that happening soon. In the meantime, Harrah's plans to start a poker Website based on the World Series of Poker, which it owns, though the site will be closed to U.S. residents, which likely will limit its growth. Because poker accounts for a tiny percentage of Harrah's revenues and profits, the company isn't a poker play.

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