Kerzner drops Internet gambling operation

By Liz Benston (contact)

Thursday, Jan. 30, 2003 | 11:14 a.m.

Citing the uncertain profit potential of legalized Internet gambling, resort owner Kerzner International Ltd. said Wednesday it will exit the business by discontinuing Kerzner Interactive, its online gambling division.

Las Vegas casino operator Station Casinos Inc., which had a renewable option to buy a 50 percent stake in Kerzner Interactive, has agreed to terminate that agreement, both companies said.

The move follows an announcement last year by Station Casinos -- initially one of the most aggressive proponents of Internet gambling -- that it would also discontinue its online gambling ventures.

That was after Station converted its planned $5 million purchase of Kerzner into a $4.5 million option, saying it hadn't received a clear signal from Nevada regulators on how to proceed with Internet gambling. Station officials said today that the company expects to take a $4.5 million charge against its earnings in the first quarter of this year.

Kerzner, headed by Sol Kerzner, said in its fourth-quarter earnings announcement that it was unlikely that Internet gambling would be legalized in the United States and that it faced increasing competition and more restrictive play in places where gambling online is allowed.

Kerzner Interactive's web casino -- named "Atlantis" after its parent company's flagship resort in the Bahamas -- only targeted customers in areas where Internet gambling was permitted.

The vast majority of offshore Internet sites market to Americans, who account for at least 60 percent of the business, analysts say.

"Without the potential for expansion into other markets, including the United States, the outlook for new business has substantially decreased and achieving profitability is unlikely in the short-to-medium term," Kerzner told investors Wednesday.

That outlook isn't good for MGM MIRAGE, which launched its Internet gambling site last fall, one Wall Street analyst said.

"We believe that Kerzner's shutdown of its online gaming operation does not bode well for the profitability of Internet gaming operated from tightly regulated jurisdictions like the Isle of Man, and it could indicate that MGM MIRAGE's website may not be able to achieve profitability in the near to medium term," UBS Warburg analyst Robin Farley wrote in a research note to investors.

Like Kerzner, MGM MIRAGE only accepts bets from certain jurisdictions where online gambling is legal. The site is now taking wagers primarily from Western Europe and the United Kingdom and has a verification system that blocks U.S. bets.

It remains the only major Las Vegas casino company in the Internet gambling business.

MGM MIRAGE spokesman Alan Feldman today called Farley's analysis "short-term" and said the company's site differs from Kerzner's in many respects.

"This has always been a long-term strategic move for us," Feldman said. "We believe Internet gaming will continue to grow in the coming years, that it will be legalized and accepted more and more around the world."

The company has refused to disclose profit forecasts or other performance details for the site.

"That has not been the focus of what we're doing," Feldman said. "We're establishing an operational model that can be shown to regulators and legislators around the world."

Kerzner spent a greater percentage of the company's overall budget on starting the site than MGM MIRAGE, Feldman said. The MGM MIRAGE site also has the potential for greater brand recognition than the Atlantis brand and doesn't require players to download games or use CD-ROMs, as Kerzner did, he added.

Kerzner International representatives could not be reached by press time this morning.

The Bahamas-based company operates luxury resorts in exotic locales such as the Maldives, Mexico and Dubai. It also has a 50 percent stake in a company that receives 5 percent of the gross operating revenues of the Mohegan Sun tribal casino in Connecticut, one of the country's most profitable casinos.

During a conference call Tuesday to discuss fourth-quarter earnings, MGM MIRAGE said it has so far spent $4 million in "startup" costs on website. The company expects to begin advertising the site to players this year, Feldman said.

Park Place Entertainment Corp. last year applied for an Internet gambling license in the Isle of Man. And the owners of the Venetian casino resort in Las Vegas also have applied for an online gambling license in Alderney. Both are small islands near Europe with semi-independent governments.

Neither company has indicated whether they will launch their own web casinos.

Competitors including Mandalay Resort Group and Harrah's Entertainment Inc. have expressed disinterest in introducing online casinos because of their murky legal status.

A federal circuit court has disagreed with the U.S. Justice Department's contention that Internet gambling is illegal under federal law. And states such as Nevada are still considering whether to allow Web casinos available to people within their borders.