Small tech firms seek Internet jackpot

David Strow

Thursday, June 7, 2001 | 11:22 a.m.

With the passage of Nevada's Internet gaming law, it's clear that the biggest winners could be the state's casino operators, who may soon have the ability to offer their well-known gambling products online.

But there's another group that stands to benefit handsomely as well. They are the technology providers -- the small companies scattered around the world that provide the online games and software systems that make Internet casinos run.

"This could be a very huge opportunity for us," said Darold Parken, president and chief executive of Calgary-based Chartwell Technology Inc. "I'm not sure all of the operators in Vegas will want to participate, but I imagine there will be a number that will, and we certainly want to be there to provide them with the tools if that happens. It potentially opens up America to online gaming, and adds that legitimacy to the (online gaming) industry that's missing right now in a lot of cases."

There are dozens of such companies scattered across the globe, and most are miniscule in size compared to Nevada's casino companies and slot manufacturers. Virtually all of them are "penny stocks," trading over-the-counter or on international exchanges. Nevada's action Monday night caused buying frenzies in many of these thinly traded issues Tuesday.

But Marc Falcone, gaming analyst with Bear Stearns, advised caution.

"They're all really small right now, and they all need capital," Falcone said. "It's going to be difficult for a lot of these smaller companies, because they might work with bigger companies, but in the end, all of the business will migrate to existing (casino) operators and equipment manufacturers. A lot of these landbased operators are working to do it on their own."

One operator doing just that is Station Casinos Inc. On Wednesday, the Las Vegas company announced the launch of GameCast Live LLC, a subsidiary that will market a software package used to facilitate interactive gaming. The patented system "streams" audio and video from a real slot machine to a player through interactive television, computers or a wireless remote device.

Since Internet gambling currently isn't legal in Nevada, the software is now being marketed only for use by guests staying in a property's hotel rooms. Pending regulatory approvals, Station will begin licensing the system to tribal casinos and cruise ships next year. The company also plans to eventually begin licensing the system to other Nevada operators, and will roll out the system in its Las Vegas-area casinos as well.

But Glenn Christenson, chief financial officer for Station, isn't ruling out the possibility that the system could be used one day by online casinos.

"It certainly has the potential for that," Christenson said. "It addresses one issue that's very real for Internet and intranet gaming, which is the credibility of the games. These are games the regulators have seen before. It's the exact same game players saw downstairs. You'll be able to view them and play them in the exact same manner (as you would in person). If Nevada approves it, it can overcome a lot of concerns by consumers."

Station also remains keenly interested in operating its own Internet casino, Christenson said.

"There's a lot of (time) before you get into a position where you'll have Internet gaming in Nevada," Christenson said. "The question now is the regulatory aspects, the legal aspects relative to the federal government. Certainly to the extent that it becomes legal, we want to be a participant."

Another group of existing gaming companies that could see a huge benefit, Falcone said, are slot manufacturers.

"All of these well-known slot games they have could serve as a huge attraction on the Internet," Falcone said. "Someone like WMS Gaming, International Game Technology, Alliance Gaming, or Anchor stands to benefit by licensing this content."

In the business of actually creating the online casinos, a leading company is CryptoLogic, one of the only Internet gaming companies to trade on the Nasdaq exchange.

CryptoLogic is the creator of Internet casinos operated by such names as William Hill, one of the UK's largest sports books, and Jupiter Ltd., Australia's largest casino operator. The company markets a "turnkey" solution to online casino operators, providing the games, the support software, web development services and customer support. All the customer does is turn it on and market it.

CryptoLogic is now gearing up to take its product to Las Vegas and apply for a Nevada license.

"As the market matures, it's the big-name operators that will be successful and profitable," said Nancy Chan-Palmateer, director of communications for CryptoLogic. "We are in discussion with a few folks in the U.S., certainly some in Vegas, others in other parts of the U.S."

That means big casino operators, but it also means companies that aren't even in the Nevada gaming industry at all -- provided that Nevada at one point allows companies that don't operate casinos in the state to operate casinos on the web. The state's recently passed law would restrict it to current operators of large casinos.

"There's some great brand names out there who could be equally strong (as Nevada casinos), like a Virgin in the UK, or Philip Morris, or a Coke, even," Chan-Palmateer said. "It would be play for fun at first, because the legal environment is not there yet. It will be interesting to see how it emerges."

Those independent Internet casino software companies that stand the best chance of partnering with Nevada casinos, Falcone said, are those companies that currently have ties to Nevada companies -- specifically, companies like WagerWorks Inc., Chartwell and Virtgame.

Privately held WagerWorks has developed the "for-fun" Internet casino site operated by MGM MIRAGE, and the Las Vegas casino giant owns a minority stake in that company. Chartwell has worked on a similar venture with Harrah's Entertainment Inc. of Las Vegas, while Virtgame operates a Nevada-only online sports book for Coast Resorts Inc.

Chartwell, which trades on the Vancouver exchange, supplies a variety of online casino products, including quick-loading Java-based casino games, casino administration software and e-commerce management software.

Although large casino companies could simply build their own Internet casinos, "most people are smart enough to realize they have an expertise, and it's gaming, not software development," Parken said.

Although it has supplied software to for-cash online casinos through a subsidiary in Belize, it doesn't participate in actually operating the computer systems that host the online casinos. Those functions are referred to other companies.

And Parken said that could be a key advantage for his company over its competitors as it seeks a Nevada gaming license.

"We've ensured that we comply with Canadian and U.S. laws as a corporate policy from the outset," Parken said. "They (Nevada regulators) will apply pretty rigorous standards to anyone wanting to get into this business. We've tried to do everything in compliance with the law as possible, and hopefully that will be helpful to us when it comes to getting licensed by Nevada."

Virtgame already holds a license from the state, thanks to its partnership with Coast Resorts of Las Vegas.

The system Virtgame built for Coast Resorts is an "intranet" system, and cannot be accessed through the regular Internet. Only registered Nevada residents can participate, and only by directly dialing into the system on a computer modem.

But Bruce Merati, chief operating officer and chief financial officer of Virtgame, says that Virtgame possesses software that could allow an Internet casino to screen out anyone trying to enter the casino from a jurisdiction where Internet gambling is illegal. That is one of the key guarantees Nevada gaming regulators are demanding before they will authorize Internet gambling in this state.

Virtgame's method screens users by their Internet protocol (IP) numbers. IP numbers are assigned in blocks to certain Internet service providers in certain locations. If the IP number of a user indicates an ISP located in an off-limits jurisdiction, the user is rejected.

Merati said Virtgame is now using the system to screen out U.S. users from an online lottery being operated by Argentina's national lottery. It could allow the company to serve as a "checkpoint" for all online casino operators in the state, Merati said.

"If the regulations were in place, Coast in theory could offer blackjack and slots to the state of Nevada right now," Merati said. "If Nevada, for example, allows casinos to take wagers from the U.K., they could also do that on a selective basis."

And that technology has the company banking on Nevada, with plans to open a Las Vegas office.

"I would say 90 percent of our business is going to come out of Nevada," Merati said. "Nevada is going to be our prime customer base."

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