Internet gambling emerging: Questions arise on how Las Vegas will compete

David Strow

Friday, April 20, 2001 | 5:05 a.m.

The question has been asked many times since Atlantic City legalized gambling in the 1970s: If gamblers can get a game close to home, will they bother coming to Las Vegas?

It's a question that has been floated and analyzed with each new gambling market: the casinos on the Boardwalk, the riverboats dotting the Midwest, the tribal casinos springing up nationwide, especially in California.

At least one new casino market -- tribal casinos nationwide -- became a larger gaming-revenue generator than Nevada in 2000, the first time the state has relinquished that title.

Yet Nevada continues to grab more and more gambling dollars -- $9.6 billion in 2000, half of that on the Las Vegas Strip.

Now, however, a new form of gambling is emerging. While Atlantic City, Midwest riverboats and tribal casinos put gambling in Las Vegas visitors' back yards, the Internet is threatening to bring gambling into their homes.

This push is likely to get a boost if Internet gambling is legalized and regulated by states with experience such as Nevada.

This type of access is unheard of, even in Las Vegas.

Which raises the question: Is Internet gambling stealing customers from traditional casinos and video poker bars, or is it expanding the pool of gamblers?

Informal interviews indicate the jury is still out. A few gamblers said they likely won't abandon their favorite gaming sites in favor of online gambling. Others, however, prefer the convenience of gambling at home.

While having lunch at the Stock Exchange, a tavern on West Sahara Avenue, Las Vegan Jim Thomas said he plays video poker casually, a few bucks at a time while sitting in a bar. He also uses the Internet daily at work for doing everything from checking stock prices to looking up Clark County records.

But combine the two? Forget it.

"I sit at a PC all day long at work ... I certainly don't want to do it at home," he said. "(Gambling) is kind of a social thing, really. I don't want to sit at home to do it."

"I'm a touchy-feely person," said Jeff Kesar, owner of the Stock Exchange and a regular video poker player. "If I put my money in, I expect to get it out right away. I wouldn't do it. I know that for a fact. I'd never click it on."

Some who have tried online gambling were soured by the experience. Michael Konik, a Los Angeles author and frequent Internet sports book patron, is devoting a chapter in his latest book, "Telling Lies and Getting Paid," to his online experiences.

Konik started using Internet sports books because he was tired of trekking across the Mojave Desert each time he wanted to place a sports bet. The experience was troubling -- most Internet books, he said, welsh on promises to pay cash bonuses that were offered with each cash deposit. Some are even bolder and simply disappear, taking betting deposits with them.

"What I found is that there's a lot of charlatans, con men, thieves, bullies and thugs out there," Konik said. "When you play on an Internet casino, you suddenly see just how safe Nevada gambling really is.

"In Nevada, they can't screw the customer without being fined or losing their licenses."

But Konik says convenience is important -- after three years, he's found about a half-dozen reliable online sports books, and he still makes most of his wagers on the Internet.

"It's quite a schlepp from Hollywood (to Las Vegas)," Konik said.

But even people with gambling in their back yards play online. One such player is Don, an Internet poker player from Scottsdale, Ariz., who didn't want his last name used.

Within an easy drive of Don's home are at least eight tribal casinos. Yet for up to 10 hours a day on many days, Don turns to his computer when he wants a game.

Don says he's aware of the risks of Internet gambling. He's especially aware that his faceless opponents could collude against him.

No tokes

But he also knows that on the Internet he's assured of a fresh pool of opponents from around the world every time. He doesn't have to "toke" a dealer after every win.

And, of course, there's the convenience.

"I don't have to make a special effort to get dressed, no special effort to get over there (to the casino) ... there's so many things I don't have to do," Don said. "If it could ever get to the point where the possibility (of cheating) didn't exist, it would be the Promised Land for poker players."

There are 4 million Internet players like Don and Konik around the world, and the number is growing. Even by conservative estimates, online gamblers lost $1.5 billion in 2000 -- and they could be losing as much as $6.3 billion a year in 2003.

The Las Vegas Strip still generates more gambling revenue, but when one considers it only costs a few million dollars to launch an Internet casino -- and that the lowest-cost major Strip resort built in the last four years was New York-New York at $460 million -- the attractiveness of investing in Internet gaming becomes quite clear, Las Vegas attorney Tony Cabot said.

And in 10 years?

Cabot, an internationally recognized expert on Internet gaming, thinks it will make $20 billion to $30 billion annually by then, driven by the ultimate marriage of the Internet and television.

"That central (television) box will be the method of delivering gambling to every household in America," Cabot said.

But the biggest hurdle is a legal one. Although the Nevada Legislature is considering a bill that could make Internet gambling legal under state law, it's far from clear whether it would be legal under federal law.

The catch is the Wire Act, passed 30 years ago to crack down on bookies taking and making bets across state lines. Although that bill dealt solely with telephones and telegraph lines, the Justice Department has taken the position that the Wire Act's prohibitions against interstate betting extend to Internet casinos as well.

Cabot said he doesn't think that's the case, but the issue is being tested in court. And Nevada gaming regulators would be loath to attempt legalizing Internet gaming without a resolution.

"We need to not get caught up in this frenzy of market share and profit that we create a bigger problem by not addressing this (the integrity and legality of Internet gaming)," state Gaming Control Board member Bobby Siller said.

Since Internet casinos have been relatively inexpensive to launch -- and since the profits for some online gaming operators have been so high -- there's been a gold rush of sorts in the Internet gaming world during the past several years.

Gaming analyst Marc Falcone of Bear Stearns estimates there may be as many as 1,400 gambling websites, double the figure reported just 12 months ago. He estimated the gaming revenues of Internet casinos were $1.46 billion last year, a 37 percent increase over 1999.

Falcone is projecting that growth rate will continue through at least 2003. But as long as Americans don't know whether Internet gambling is legal, the pool will remain limited, Falcone said.

"While there (are) 1,400 sites, there's a limited customer base," Falcone said. "(Internet casinos) don't know who they're marketing to. It's difficult to get people to gamble online without any clarity into the legalness of it."

Falcone estimates the industry will gross $2.46 billion this year and will continue to grow at an annual rate exceeding 35 percent.

Established, "longtime" Internet casino operators find it a profitable business.

"The early adopters are just throwing off cash like crazy, with net (profit) margins of 50 to 60 percent," said Sebastian Sinclair, gaming analyst with Christiansen Capital Advisors.

Sinclair's estimate on the size of the Internet gambling market is nearly $1 billion higher than Falcone's. One reason for no exact figures is that few Internet casinos are publicly traded. Fewer still operate in jurisdictions that release detailed gaming revenue numbers.

While Internet gambling has been roaring ahead, Nevada's gaming corporations are slowing down. Legalized gambling has exploded across America in the past decade -- and Nevada companies have gone along for the ride. But new markets appear limited.

And the returns for new Strip casinos have been disappointing, running only about 20 percent per year before taxes and interest expenses.

Once you throw in those expenses -- and since casinos are built largely with debt, interest expenses can be massive -- it leaves a meager return to show investors. As a result, it's becoming harder to convince banks and investors to bankroll billion-dollar resorts.

To make matters worse, many observers predict Nevada could be facing a shrinking market because of factors ranging from competition from California tribal casinos to an economic slowdown nationwide.

"Domestically, (Nevada gaming companies) have nowhere to go," Cabot said. "To grow their stocks, they need to bring more revenues to the bottom line. They're looking for ways to expand.

"The only other major market is the Internet."

Competition

Brands are everything on the Internet. Before the dot-com meltdown, investors placed hundreds of billions of dollars in market value almost solely on the strength of brands such as Yahoo!, Amazon and eBay.

Properties such as Caesars Palace, MGM Grand, Mirage and Harrah's have the best-known gambling brands in the world.

Therefore, many believe Nevada's operators could grab a massive share of the Internet gaming market in a short period. Cabot estimates their share could hit 60 percent to 80 percent in as little as three years.

"We have the best brands in the world in Las Vegas, and people are attracted to brands," Cabot said. "This industry will be dominated by the brands, by the MGMs and Caesarses of the world."

And that isn't just because of name recognition, Konik said.

"If they're owned by the same companies that own the land-based casinos, I'd (play) in a second," Konik said. "Their parent company is highly regulated, and they have nothing to gain and everything to lose by screwing online customers."

However, not everyone believes it's going to be a cakewalk.

Falcone points out that among traditional gaming companies, only Caesars' website ranks among the top 10,000 websites, implying operators have a long way to go in generating traffic for their sites.

And the Internet casino field is growing more crowded each day.

"Although opportunity exists for these companies to come online, there will be some marketing necessity," Falcone said. "They won't just be able to put up a site and do gangbusters without marketing."

But the critical question remains: Would these marketing efforts create new gamblers and more business, or would they simply redirect gambling dollars and gambling customers away from Nevada and onto the Internet?

Sinclair doesn't think so. He points toward the emergence of the VCR as an example.

When VCRs first appeared -- and video stores began popping up across America -- some in the movie-theater industry feared they would be wiped out. And though the home-movie business now grosses far more, movie-theater business remains as strong as ever and continues to grow.

"If you're talking convenience gambling, such as lotteries or slot machines in Laundromats, then it does have an impact," Sinclair said. "For a Las Vegas casino, it's more about the experience."

And there are means for tying together the online and offline worlds, Sinclair said, through the use of comps that can be redeemed only at a Las Vegas casino.

"The Internet is just a killer application for cross-marketing," Sinclair said. "You get people on your site, you comp them for play on your site, and the whole time, you're just branding yourself over and over again.

"Let's say you're MGM, and you've only got 70 percent occupancy this weekend. You can hit your online gamblers with promotions and see how many of them you can get over."

MGM MIRAGE is already heading in that direction. Through a company called WagerWorks -- of which MGM MIRAGE owns a minority stake -- it is operating nongambling Internet-based versions of six of its real-life casinos.

Since the legality of Internet gambling isn't clear, players won't be able to wager with real money, and they won't even receive rewards based on the outcome of the online games. But they will receive comps from MGM MIRAGE casinos based on how long they play at the sites. Perhaps more importantly, with a flick of the switch, MGM MIRAGE could convert the site to a real Internet casino.

And though there are predictions, no one can say for certain what would happen next if Nevada pulls the trigger.

"It remains to be seen what the crossover is going to be," Alan Feldman, MGM MIRAGE spokesman, said. "I think it remains to be seen to what extent we'll be able to convert a customer of ours on the Internet into a customer of our casino-hotels. We may find these are two completely different customers."

In Monday's Sun:

Wireless and cell phone gambling are on the horizon.

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