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From...
Industry Standard

Gambling online? You bet!

gambling

INTERACTIVE

Have you ever made a wager online?

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In this story:

Betting on the ponies

Is Microsoft betting too?

Is it legal?

Group calls for regulation of Net gambling

Prosecutors focus on sports betting

Internet Gambling Worldwide, Past and Future

RELATED STORIES, SITES icon



May 4, 1999
Web posted at: 6:13 p.m. EDT (2213 GMT)

by James Ledbetter and Steve Viuker

(IDG) -- It's illegal for Americans to offer gambling over the Internet, right? That's why the industry is hidden in Caribbean shadows, right? Tell it to Kenny Rogers.

The singer who immortalized "The Gambler" is not, his associates say, much of a gambler himself. But in mid-1998, he authorized the construction and operation of Kenny Rogers Casino on the Internet, where Web surfers with credit cards can hold 'em and fold 'em until they walk away (or run).

It's true that, in keeping with most people's perceptions of Web gambling, Kenny's virtual casino is not physically located in the United States. It resides a few dozen miles off the coast of Venezuela, in the Netherlands Antilles. The outfit that handles its cybercash transactions is in Toronto. And Kenny's site maintains a squeaky-clean distinction that many similar sites do not: A disclaimer in tiny type on several pages reads, "This site does not allow for gambling for money by persons within the United States." Unless you have a credit card registered with a non-U.S. address, a U.S. citizen can't trick the casino into letting him or her gamble, except in a free "practice" area.

But for all that fastidiousness, Kenny Rogers Casino is essentially controlled by a company in the United States. Not only can you walk right into its San Diego headquarters, you can buy its stock on the Nasdaq. Yes, the casino's license is held by a firm called Bardenac, but the substantial duties of operating the site - building it, advertising it, maintaining customer service - fall to a consulting company called Worldwide Media Holdings, which receives a percentage of all casino profits. WMH is a wholly owned subsidiary of Inland Entertainment, a San Diego-based company that trades under the ticker symbol INLD.
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Inland was initially founded in the 1980s as a consultant to the Barona tribe of Mission Indians, which operates a casino on a reservation near San Diego. A few years ago, the Barona tribe decided to bring in Kenny Rogers as a spokesman. "It was very successful, in the sense that Indian gambling was still going through a lot of political challenges," says Fritz Opel, Inland's chief of online gaming. California's governor - and much of the local business community - opposed the Barona casino, and Rogers' involvement was a political turning point.

"People said, 'How can it be so bad if Kenny Rogers likes it?'" recalls Opel. As Internet gambling became a technological reality, Opel says he "saw some parallels" to the Indians' situation, and reached out to Rogers again. "He's been very helpful in creating credibility. It's important with our players to know they're dealing with a legitimate business." Rogers and Inland are not alone. Increasingly, the world of "legitimate" business is throwing its weight behind online gambling.

Betting on the ponies

Online horse racing has been an especially active area of late. In early 1999, a Los Angeles-based firm called Youbet.com started Webcasting live races over the Web from 18 tracks across the country and offering surfers the ability to wager over the Internet. It is perfectly legal in 40 states and the District of Columbia to place a bet on Youbet.com. In late February, the New York Racing Association approved online Webcasts on its own site of horse races in the state (although bettors, for now, will still have to call an 800 number). This summer, TCI and News Corp. plan to launch the Television Games Network, which will feature four to six races per hour packaged into a live, hosted television program, with access to a full menu of wagering opportunities from tracks across the country.

The explosion of online betting isn't limited to the ponies. In March, a site called Bingohour.com went live. It enables players to buy virtual bingo cards for $1 and win jackpots as large as $100,000.

Playboy has announced that it will offer a line of casino-style games on its Internet site that, like those on Kennyrogerscasino.com, U.S. citizens can play only for fun. But Playboy.com will also link to offshore gambling sites that play for real money. With such upstanding media corporations dipping their toes into the pool of online gaming, some in the Internet industry are betting that the day when a "legitimate" online casino opens in the United States is not far behind.

Is Microsoft betting too?

The potential action is too compelling for even the largest tech tycoons to resist. One of Microsoft (MSFT)'s less-publicized adventures is Ninemsn, an Australia-based Internet service to which Bill Gates has pledged tens of millions of dollars. His equal partner is Australian tycoon Kerry Packer of the Crown Casino in Victoria. Packer is a man with a voracious gambling appetite.

That partnership leads many observers to believe that an online casino - using Microsoft platforms, of course - is in the works. A Ninemsn spokesperson says that the site does not now offer online gambling and would not comment on future plans. Tony Cabot, an attorney specializing in gaming issues, says flatly, "When you see Kerry Packer get together with Microsoft, you have to believe there is a future for this type of wagering."

You might think that the prospect of competing against the likes of Microsoft would terrify a $20 million company like Inland. But they say the more bettors, the better. Says Opel, "Bringing in the big names and established companies only adds credibility and visibility to what we're already doing."

Is it legal?

A few hurdles have to be cleared before such ventures can take off - beginning with the federal government. The Justice Department doesn't think that online casinos (including those that offer gambling on sports events) can legally conduct business in the United States, even if they are based in places where gambling is legal. In a highly publicized March 1998 "raid," Mary Jo White, the U.S. attorney for the Southern District of New York, indicted 14 managers of six Internet companies for offering gambling on their sites. The defendants, many of whom live abroad, were threatened with up to five years in prison and $250,000 fines.

More than a year later, however, no cases have come to trial, and nine defendants have accepted plea bargains for state misdemeanor charges with no jail time. That may suggest that, as some legal observers have argued, the 1961 federal Wire Act is too old and too loosely written to prohibit online gambling. In 1998, the Senate passed, by a large margin, an amendment prohibiting Internet gambling, but that bill died before becoming law.

But the growing acceptance of online betting and the Internet's inherent ability to shatter jurisdictions bring the inconsistencies of American gaming law to a boil. Why should it be legal to bet online on a horse race in another state, but not legal to bet on a basketball game in one's own state? If Native American tribes can establish new, legal, physical places where adults can gamble, why shouldn't someone be able to do the same in cyberspace?

Gambling is as at least as old as Christianity (that is, if Ben Hur can be trusted). About 2,000 years later, Bugsy Siegel took the concept a step further and built the Flamingo Hotel in the desert town of Las Vegas. For decades, Vegas was about the only legal option for gamblers. In the '70s, Atlantic City legalized casino gambling; in the ensuing decades, state lotteries, Indian casinos, gaming ships, offtrack betting parlors and card clubs have sprouted across the landscape.

Today, Americans spend some $600 billion a year on legal gambling, making it by far the favored national pastime. As Timothy L. O'Brien observes in Bad Bet, his comprehensive account of America's gambling industry, "Judging by dollars spent, gambling is now more popular in America than baseball, the movies and Disneyland combined."

The amount spent on Internet gambling is harder to calculate. Estimates range from $650 million to $1 billion a year, worldwide - a tiny fraction of the amount spent on more traditional formats. Even the precise number of online casinos is hard to calculate. In 1997, published reports put the total number of operating online casinos at 15. Today, a roster on one "gambling portal" site lists well over 200. That figure exaggerates the size of the Internet gambling sector, since some companies operate more than one online betting parlor. Inland, for example, operates two Web sites in addition to the one bearing Kenny Rogers' likeness: Casinoaustralia.com and Goodluckclub.com. Together, these sites have about 4,300 registered customers in 96 countries around the world.

Running an online casino carries all the usual challenges of Internet businesses, from low click-through rates to servers that fail. But according to Inland CEO Don Speer, elusive profits need not be one of them. He claims Inland's Internet gambling business went slightly into the black in March, on annualized revenues of about $1 million. (The company's Indian casino and Web-development divisions make more.) "This is the really exciting point, because I know where it goes from here," Speer said in an interview.

One major barrier to profitability is the law. "Think about what would happen to Wal-Mart (WMT), General Motors or Microsoft if these companies had to continue to dodge federal roadblocks to access their customers," says Sebastian Sinclair, senior associate at Christiansen/Cummings Associates, a management consulting firm.

Take Interactive Gaming and Communications, another publicly traded company, located in Blue Bell, Pa. At one point, Interactive Gaming looked like it could be an industry leader. But following a 1997 indictment, the state of Missouri settled a suit against the company and its president, Michael Simone, for about $35,000. But the travails associated with fending off lawsuits have essentially put the company out of business. (The company did not respond to repeated requests for an interview.)

Group calls for regulation of Net gambling

For years, another barrier to the growth of Internet gambling has been strong opposition from those most threatened by gambling sites: legal American casinos. The American Gaming Association, a trade group of gaming firms, maintains this view regarding online wagering: "The industry has been state-regulated and we think it should remain that way. The Internet is presently unregulated and we support a federal law regulating Internet gambling."

But over the last several months, at least some traditional casinos have pursued the time-honored strategy of joining an Internet gambling trend that they can't beat. In most cases, this means operating out of Australia. In November 1998, for example, a division of Hilton Hotels acquired the company that runs Centrebet, a Web and telephone sports-wagering system based in Australia (www.centrebet.com.au). Anyone over the age of 18 can set up an account with Centrebet and place money on a variety of worldwide sporting events, including U.S. college and professional sports.

Similarly, the Las Vegas-based public company American Wagering, owner of Leroy's Horse and Sports Place in Nevada, also operates a sports gambling site located in Canberra called MegaSports (www.megasports.com.au). In January, MegaSports began taking Internet bets from Australians; it expects soon to allow global gambling on sporting events.

So how is it that these companies appear to operate legally, but a dozen Caribbean cowboys found themselves under felony indictment?

It's not because they operate in any fundamentally different way. Almost all online gambling sites work the same. Would-be wagerers open an account with a credit card, although some sites also accept cash and cashier's checks. The minimum amount to begin an account varies. Casino games are available on a site or via downloadable software. They almost always include slots, blackjack and video poker, but many sites carry more exotic games, from baccarat to pai gow. Bets generally range from $1 to as much as $300.

Although it uses a CryptoLogic template similar to several other online casinos, Kennyrogerscasino.com may be unique in letting bettors wager as little as a penny at a time. "We get daily reports, and you'll see these people who spend a couple of hours gambling, and the total amount they bet is like $1.81," says Thomas Holmes, Inland's head of technology.

Prosecutors focus on sports betting

Intriguingly, though, all the bets that make up the U.S. attorney's case involved the casinos' sportsbooks. FBI agents placed bets on games - uniformly National Football League matches, although many other options are available - and followed up, whether they won or lost.

The prosecutors' focus on sports bets appears to stem from legal precedent in the law they relied on. Their case is based on the 1961 Wire Act. Passed during the term of crime-fighter Attorney General Robert Kennedy, the law was intended to outlaw betting over telephone lines. Like the Communications Act passed in the 1930s, technology has now leapfrogged the law. The Wire Act obviously has no mention of wagering over the Internet.

Nonetheless, some experts think the case could be made to stick. "The telephone is being used to facilitate these wagers and I believe the government has a solid case," explains Tony Cabot, a Las Vegas-based gaming lawyer and author of a book on Internet gaming. "And it is possible that records could be subpoenaed of various banks where these companies maintain accounts."

The office of U.S. Attorney White has proceeded slowly and quietly. White's hesitancy suggests that the law may not be as solid as she thought when she indicted. Her higher-ups in the Justice Department appear to agree. The Standard obtained a Department of Justice analysis of the bill S. 474, introduced into the Senate by Arizona's John Kyl in 1997 as the Internet Gambling Prohibition Act. Justice believes that any legislation addressing criminal misuse of computers or computer systems (including the Internet) should have three vital characteristics.

First, legislation should treat physical activity and cyberactivity in the same way. If an activity is prohibited in the physical world but not on the Internet, the Internet becomes a safe haven for that criminal activity. If, on the other hand, an activity is in the physical world - betting on horses, or casino betting with Indian tribes - it becomes subject to federal criminal sanction when it occurs in cyberspace.

Second, legislation should be technology-neutral. Legislation tied to a particular technology may quickly become obsolete and require further amendment.

Finally, the DoJ believes that any federal law must recognize that the Internet is different from other communications media: It's a multifaceted communications medium that allows for both point-to-point transmission between two parties (like the telephone), as well as the widespread dissemination of information to a vast audience (like a newspaper). Failure to account for that specificity in legislation could stifle the Internet's growth or chill its use as a communications tool.

The original version of Kyl's bill failed most of these tests. Kyl introduced a revised version earlier this year, removing some of the more onerous and hard-to-enforce provisions. According to an analysis by Sue Schieder of Rolling Good Times, the online gambling magazine, the new legislation would not punish the casual bettor. Nor would it prohibit online fantasy sports leagues, online lotteries in states where they are legal, or online betting on any live horse race where it would otherwise be lawful to wager. Legislators have considered enlisting Internet service providers to patrol for undesirable sites, although Internet gambling insiders consider that proposal dead on arrival.

But even if Congress comes up with the best-crafted legislation in history, there are significant factors beyond its control. "Federal legislation will make it difficult but not impossible for Internet gamblers in the U.S. to gain access to offshore sites," says Sebastian Sinclair of Christiansen/Cummings. "Ultimately, Internet gambling operators are selling a product. The vast majority of customers will satisfy their demand for commercial gambling through less onerous and risky alternatives, such as lotteries, bingo, pari-mutuels and casinos."

But a hard-core base will continue to turn to Internet betting for its clear advantages. For one thing, gambling from one's home allows for a variety of techniques that would get one tossed out of a regular casino. Blackjack players can very easily count cards, or even consult odds charts; the Kennyrogerscasino.com site actually has a printable chart showing the best strategy for every possible hand of blackjack. And for sports bettors - who make up a majority of online gamblers, according to industry insiders - the ease of using cyberbookies can't be beat. "I use the service because it's convenient and I have access to it when I want," says one online gambler. "I wager on football games and usually bet in the neighborhood of $1,000 every weekend. I've not had problems being paid."

If such gamblers are not satisfied by options available to U.S. citizens, it will be increasingly tempting for them to turn to locations abroad. One Australian state, Queensland, is already awarding licenses for online gambling, and others may follow soon. That makes for an Internet gambling environment too porous for U.S law enforcement to plug.

All the sites indicted by the U.S. attorney's office theoretically operate out of the Caribbean. (However, an HBO sports program attempted to locate one of these ventures in Aruba, and ultimately found that the genuine server was in a residential neighborhood in Bethlehem, Pa.) And the Caribbean nations would like to keep their haven status. Aruba, for one, is refusing to extradite any indicted individuals to the U.S., and thus far the U.S. has had little cooperation from any other nation.

Does the seeming invincibility of online gambling make it an enticing business? Jason Ader of Bear Stearns, urges caution. "Since there are no controls at present regarding Internet wagering, I would urge investors to shun these firms at present," he says. Even the firms that have enjoyed some stock-price popularity - such as Youbet.com - have shaky fundamentals. But as more and more traditional firms become involved, the consumer will look for the brand name. Says Sinclair of Christiansen/Cummings: "You are going to feel more comfortable wagering with a Hilton than you will with Joe's Casino."


Internet Gambling Worldwide, Past and Future

1997

1998

1999

2000

2001

Adult Home Internet Users
(In Millions)
46 81 121 145 159
Percentage of Users Conducting
Online Transactions
15% 18% 21% 24% 27%
Potential Internet Gamblers
(In Millions)
0.9 14.5 25.4 34.8 43.0
Per Capita Expenditure $146 $154 $155 $160 $165

Potential Internet Gambling
Revenue (In Millions)

$1,009 $2,182 $3,922 $5,555 $7,080
Estimated Actual Internet
Gambling Revenue (In Millions)
$0 $651 $811 $1,520 $2,330

Source: Deutsche Bank; Christiansen/Cummings Associates


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