Casino giant exiting Internet gaming

By Liz Benston (contact)

Wednesday, June 4, 2003 | 11:09 a.m.

After investing millions of dollars to craft the first Internet gambling site operated by a major U.S. casino company, MGM MIRAGE will discontinue the site at the end of the month. It cited concerns that the legal and political climate for regulating online gambling remains uncertain.

MGM MIRAGE introduced its site, www.playmgmmirage.com, in September 2001 and said it has shown that Internet gambling could be conducted under the same regulatory structure that addresses security, money-laundering and other concerns at land-based casinos.

Just four months ago, Kerzner International Ltd., another major resort operator, said it would discontinue its Web casino, citing the uncertain profit potential of legalized Internet gambling. But MGM MIRAGE said it was committed to online gambling and said it would stay in the game.

The mood in Congress -- which is pursuing a bill to ban online gambling by outlawing the financial transactions used to place bets -- has "been one of prohibition rather than reason" in recent months, MGM MIRAGE spokesman Alan Feldman said.

"In our ongoing dialogue with members of Congress, we found those discussions to be extremely disappointing with regard to the fact that the technology (to regulate Internet gambling) is there and that millions of people are gambling online every day."

"It's been an interesting coalition of anti-gambling zealots and (lawmakers) who are either afraid of the technology or are unwilling to take the time to understand it," he said.

The company will take a $5 million writeoff in the second quarter to dissolve its MGM MIRAGE Online division. The company expects to reassign Bill Hornbuckle, president of the division, as well as the unit's handful of U.S.-based staff. Less than 20 people were employed in the unit abroad, Feldman said.

The site was based in the Isle of Man, a small island-nation off the cost of Britain that had created Internet gambling regulations to offset its declining tourism economy.

The site contained security verification technology that pinpointed where gamblers were located so as to block wagers from the United States, where Internet gambling is illegal. It only accepted bets from a few countries that allowed Internet gambling, primarily the United Kingdom.

The move won't have a significant effect on efforts to legalize Internet gambling in the United States, experts say.

"You're not going to see any U.S. companies taking advantage of (online gambling) if there's no clarity coming soon," said Sue Schneider, president of River City Group, a St. Louis area consultant for the Internet gambling industry.

The move follows a string of other closures by major Internet operators who have struggled to make a profit by operating under a more regulated framework than the hundreds of Web casinos that now accept bets from U.S. gamblers.

One of them, Crown Casinos of Australia, was hurt by the inability to take wagers from the U.S. or its home country, Schneider said.

The federal government issued an advisory last year to Nevada regulators saying that Internet gambling is illegal.

Nevada has since backed away from efforts to legalize Internet gambling both outside and within its borders. The nature of the Internet, in which data is transmitted across state lines and back again, could run afoul of federal laws, regulators say.

The site wasn't intended to be an instant money-maker, Feldman said. However, the lack of regulation in the United States -- where as much as 70 percent of Internet gamblers are located -- make it difficult to compete, he said.

"There may be a business outside of the U.S. but the cost of doing this when you're complying with U.S.-style regulations is significant," Feldman said. "To lock out 70 percent of the market while you're operating on a cost basis that's so high means it's not a viable business in the long term."

U.S. gamblers have already gravitated toward any number of the hundreds of Internet sites that will take their bets, said Sebastian Sinclair, an Internet gambling analyst with Christiansen Capital Advisors.

In the United Kingdom, the site's primary market, MGM MIRAGE was competing with other land-based casino operators with established Internet casinos such as William Hill and Ladbrokes, Sinclair said.

"Their brand doesn't really resonate where they're doing business," he said. "It's not the household gambling name that it is here."

Some established sites also are operating under looser rules that allow U.S. wagers, he said.

MGM MIRAGE could quickly jump back into Internet gambling in the future if it becomes legal in the United States, Feldman said.

The company also is big enough to acquire an Internet operator when the time is right, a cheaper alternative than growing its own site, Sinclair said.

The decision about whether to regulate Internet gambling in the United States will likely drive similar moves worldwide, he added.

"The question is when, not if" other countries will begin to regulate Internet gambling, he said. "But that 'when' could be some way off."