Last summer, MaharajahClub, a new online gaming company, jumped into the $12bn market after a splashy launch at London’s Hotel Russell. Three months later, the US effectively barred the 23 million Americans who gamble online from their pastime with the passage of the Unlawful Internet Gambling Enforcement Act. With one pen stroke, the new law, which bans online poker, sports wagering and casino games, but not state lotteries or horse racing, inked out $8m from the market.

Call it prescient or call it luck, but MaharajahClub CEO Sachin Pawa was unconcerned for good reason: his new business does not rely at all on the US market. “From day one, we never looked to the US market for customers,” he says. “We never planned to spend a penny there or take a penny from the market.” That is because MaharajahClub is only targeting south-east Asian communities around the world.

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According to Mr Pawa, his website is the first to market to gamblers based on ethnicity. It has also been duly licensed by the Gaming Commission of Curacao, Netherlands Antilles, giving site users the assurance of regulatory oversight.

Market movement

Trends that are coalescing now in the industry suggest that Mr Pawa may be on to something. It is not just the new legislation, although few believe that it will remain in place as it is written. More weighty factors, namely aggressive marketing of the online gaming industry by many locales to establish legitimate, regulated operations, as well as the impact that gamblers from emerging markets are expected to have, could eventually marginalise the US market. The US market was once deemed to be the low-hanging fruit of the industry and, according to one projection, is set to nearly double to $22.7bn by 2009.

The US law has been a blow to many of the gaming operators – the publicly traded ones in particular – and few can lay claim to having a wholly non-US user base, as MaharajahClub says it does.

“Clearly there has been a massive shift for public companies as evidenced in share prices,” says Bill Mummery, the head of e-gaming development in the Isle of Man’s Department of Trade & Industry. Consolidations and mergers – not always a pleasant process – are likely to lie ahead. The US law “is a major crossroads for the industry”, he says. “Yes, there will be an immediate and obvious downside, but I do believe it will have significant upside as well because the industry will be forced to realign itself to reduce its dependency on the North American market.”

New choices

 

Site selection is a multi-faceted process for any company and the e-gaming industry is no exception. The usual factors – the availability of an appropriate workforce, infrastructure and regulatory environment – must all be given due consideration. Consider, for instance, what would happen if an operator were to misjudge its broadband capacity needs. Some games, such as poker, are significantly more demanding of the tech infrastructure because more participants are involved and the various plays must be in real time. Because the e-gaming industry is still emerging, a mis-step in calculation is easier to make and much harder, if not impossible, to overcome.

The same reckoning applies to a site’s regulatory environment, especially as countries rush to implement new laws and regulations.

Mr Mummery and others believe that with the US momentarily out of the game, other locales – Gibraltar, Costa Rica, and Turks and Caicos Islands, to name a few – will step up efforts to position themselves as favourable operating environments for the gaming industry. “One country’s weakness is another country’s opportunity,” says Joe Gallagher, a US-based consultant who advises gaming sites on such issues.

These efforts will range from the participation of a robust financial community that is not afraid of the industry, to friendly tax treatment, to adopting industry standards aimed at making online gaming safer. For instance, some regulatory authorities around the world are starting to adopt industry association eCOGRA’s standards for safe and fair gaming. Based in London, eCOGRA, which stands for e-Commerce and Online Gaming Regulation and Assurance, was founded in 2003 and has awarded about 76 ‘Play It Safe’ seals to gaming sites that meet its criteria.

Most recently, the Philippines-based Cagayan Economic Zone Authority, through its master licensor, First Cagayan, signed up to eCOGRA’s agenda. Other regulatory agencies that have accepted the standards include Malta regulator Lotteries and Gaming Authority and the Kahnawake jurisdiction in Canada. According to the association, eCOGRA is in discussions with several other national regulators as well.

Enticing play

The Isle of Man is already able to boast of strong ties to London’s financial community as well as a strict probity and due diligence process for licence applicants, Mr Mummery says. Last April, new tax regulations became effective that are expected to entice more business to the locale, including e-gaming operations. A 0% corporate tax rate now applies to all online gambling and e-gaming licensed operators. The Isle of Man also issued a personal tax cap on an individual’s worldwide income of £100,000 ($197,680) per annum. Personal tax is payable at a standard rate of 10% after allowances, with a maximum higher rate of 18%.

These measures are having a cumulative affect, Mr Mummery reports, and the jurisdiction is gaining a reputing among the world’s online gaming establishments. The new law in the US did not hurt either; Mr Mummery’s office announced it has had more inquires than usual about the registration process.

Latin America is another area that has attracted a growing number of online gaming sites in recent years, many of which are former US corporate refugees, Mr Gallagher says. These firms had been willing to tolerate US regulatory influence in exchange for the “legitimacy” in the eyes of their US customers of a US-based website. In many cases, the trade-off was no longer worthwhile and sites migrated south, he says.

Forced migration

The new law is bound to spur such migration; US online gaming sites that want to remain in business have no choice and, best of all, they now have a rationale for an offshore location that is easily understood by American users, most of whom were irked by the new law. Indeed, Mr Gallagher believes the law was in part responsible for the anti-incumbent wave that characterised the US elections in November 2006.

He predicts that, because the law has been so widely panned, it is likely to be changed at some time, introducing the US consumer back to the market. Even if the law remains, Mr Gallagher says he believes that the financial services industry will develop a way to harvest those revenues.

Currently, the law bans credit card companies and other institutions from processing online gambling bets placed from the US, but how those prohibitions will be enforced or penalised is still unclear, leaving ample room to develop alternative channels, says Mr Gallagher.

“Maybe payment will be based on debit cards or personal cheques. But there is no way the financial community is going to walk away from this industry,” he says.