Digital Journal — Scott Laurie is addicted to online poker and he’s not afraid to admit it. He logs on to PartyPoker.com three times a week, for five hours a session, usually starting at 2 a.m. “I like that adrenaline running through me,” says the 23-year-old Toronto resident. “And my computer is always close, unlike a casino 45 minutes away.”
Laurie is among the 80,000 players logging on to PartyPoker.com at any one time trying to make easy money. As more of these players are going all-in online, poker sites are betting on their enormously lucrative business to keep surging.
Their achievements are the envy of dot-com observers: Online poker revenues have grown from $82.7 million in 2001 to $2.4 billion (all numbers US) in 2005; last year, more than $60 billion was gambled on poker sites; and every day, 1.8 million players toss their ante into the virtual pots of the Internet.
The online poker industry is a global force sweeping across the Internet landscape, but its muscle is also being felt in the high-stakes world of investing. Poker sites are going public at values unheard of for e-commerce ventures. Investors are quietly gobbling up shares, trying to avoid being associated with a quasi-illegal industry. The investors aren’t stupid — they realize the benefits outweigh the risks as these companies are forecasted to rake in $24 billion by 2010.
The online poker craze is growing to a size no one expected, hot for a card game invented 200 years ago. Poker may be old news, but its reinvention is nothing less than extraordinary. Anyone hungry to capitalize on the next big Internet trend better join the table and play to win.
From TV to PC
To understand how online poker prospered across the world, you need to learn about the game’s godfather, Steve Lipscomb. In 2002, the TV producer secured funding to air a revitalized version of televised poker, which sports networks previously attacked for being as fun as watching ice cubes melt. But Lipscomb tweaked his show in one crucial way: He added tiny cameras to the poker table so the audience could see a player’s hand in Texas Hold ‘Em, a popular poker variant where each player is dealt two personal cards, and is able to share five community cards.
Not only did this peep show entice the TV watchers, but the massive prizes — $2 million for first place, $1 million for second — inspired wannabe poker stars worldwide.
“The secret to World Poker Tour is that it’s the first televised sport where armchair quarterbacks can literally play on TV next week,” Lipscomb tells Digital Journal.
Televised poker has now become the third-most watched sport in the U.S. behind football and car racing. And like many TV shows, World Poker Tour began using celebrities to increase ratings.
It worked but the show’s producers never predicted how hooked the celebrities would be to Hold ‘Em. “They’re here to play a game,” Lipscomb says. “Ben Affleck can’t suddenly compete in an NBA game. But he can play in a WPT event and have a legit shot at winning.”
That egalitarian mentality sparked online entrepreneurs to ante up and bet big. Poker sites employed scantily-clad women to attract its mostly male client base. Public awareness exploded, though, when PartyPoker.com paid a bargain $7,000 per 20-second spot to advertise on World Poker Tour. The show’s five million weekly viewers were hungry to be poker millionaires themselves, and took to the Web to hone their skills on PartyPoker.com.
Today, PartyPoker.com rakes in around $575 million, while the other 300 poker sites collect the other $1.5 billion. The site averages 2,455 new player sign-ups per day. In its past five years, the online poker leader was luring amateurs with simple platforms, attractive graphics and strong marketing power. But PartyPoker.com also wanted to shake up the world outside the land of big blinds and river cards. The site’s parent company, PartyGaming, astounded the business community on June 30, 2005, when it went public in Britain. Its market value was estimated at $12 billion.
“This industry only has a short history,” says PartyGaming CEO Richard Segal. “But I believe there is still plenty to play for.”
But why list on London’s Stock Exchange (LSE) when three-quarters of its customers live in the U.S.? The reason is one that has plagued the online poker industry since inception — Internet gambling is illegal in the U.S. While not illegal for the players (no federal law forbids it), some states have ancient laws that make it a crime to bet online. Only one person has ever been convicted of the offence. It’s like jaywalking — it might be technically illegal, but everyone does it and you won’t get caught doing it.
Rather, the real danger lies with companies whose operations and servers reside on North American soil (it’s also illegal in Canada under the Criminal Code). In the U.S., the same law that forbids betting over the phone applies to Internet gambling. No prosecution has landed any operators in prison, but the scare tactic is working well.
Online poker companies are evading legal action by offshoring in low-tax jurisdictions such as Gibraltar or the Caribbean islands. Even more inviting are the 64 countries that already license online casinos — and they’re not just a bunch of banana republics.
What’s illegal in North America is legal in the United Kingdom. The UK is trailblazing the online poker revolution by legalizing Internet gambling and becoming the centre for the iPoker entrepreneurs. “The UK is far ahead of us by changing laws so the poker sites could take bets anywhere in the world,” says gaming lawyer Michael Lipton.
Until North America follows suit, aggressive companies will duck the law through tricky tactics, such as stationing their servers in an area of Canada that law enforcement is hesitant to investigate. On the Kahnawake Mohawk Reserve, it’s as if a force field protects online poker companies.
Reservations are Recommended
On the south shore of the St. Lawrence River near Montreal is a 48-square-kilometre swath of land home to Canadian aboriginals who claim the property as an independent political jurisdiction. The Kahnawake Mohawk claim goes back 16 years to the Oka Crisis, when they demanded the province of Quebec stop plans to build a golf course on ancient burial grounds.
After a dramatic clash between Mohawk protesters and soldiers that resulted in three deaths, the Mohawk tribe forced the province to cancel the golf-course expansion, while also convincing the Quebec government to lay off the land.
This retreat soon meant the Kahnawake Mohawk Reserve was sitting with pocket aces. In 1996, the Reserve set up a gaming commission offering gambling licenses to Internet casinos. Now its server farm is home to hundreds (if not thousands) of gambling sites who exploit the legally exempt status loophole. Section 35 of the Constitution of Canada orders the federal government to honour ancient Native Canadian rites integral to its culture.
The Kahnawake Gaming Commission has repeatedly sworn that regulated gaming was part of the Mohawk culture before the European settlers arrived, raising a worrisome question for authorities:
Does Section 35 of the Constitution trump the Criminal Code?
Quebec isn’t approaching the reserve with any objections, but the province is still promising to take action…sometime. Internet casinos like PokerRoom.com, with servers operating on the Kahnawake Mohawk Reserve, don’t view legal action as an immediate threat. Some believe many provinces want to protect their local lotteries by blocking online gambling. “In our point of view, it would be better if the government regulated the market,” says Patrick Selin, CEO of Ongame, PokerRoom.com‘s parent company. “We’d be prepared to pay the tax the government put on us.”
But in Canada, the government has a monopoly with its lotteries, notes lawyer Michael Lipton. “People will be able to run their own online casinos only when the public wants it from a tax revenue perspective,” he says.
Still, as Web poker explodes, the Feds in the U.S. and Canada aren’t planning to bust the party. “Law enforcement has priorities beyond who’s operating online poker where,” says Las Vegas attorney Tony Cabot. States and local governments can enforce anti-gambling rules but their resources are already stretched thin. Online poker may be a juggernaut too huge to take down.
If money talks in Washington, why would U.S. officials turn a blind eye to fortunes just waiting to reaped? Call it tunnel vision of the worst kind.
“We’re losing $7 billion annually by prohibiting Net gambling,” Cabot estimates. But not everyone is willing to forego the big bucks.
Bluffing their Way to Billions
Following PartyGaming’s coming-out party, competitors like Empire and Sportingbet joined in with their own IPOs, attracting the attention of Wall Street. After all, Americans can’t operate poker sites but they can profit from British public companies on the LSE. Investment houses like Goldman Sachs, Merrill Lynch and Fidelity hold millions of shares of online casinos that U.S. law considers shady operations. These investors support enterprises illegal in the U.S., which Congress could investigate if they truly cared. The potential penalties could land these white-collar pseudo-criminals in jail.
But the government would have trouble prosecuting investors, since they don’t control the offshore casinos or direct their activities. It’s a weak case that’s not even worth a subpoena.
Meanwhile, the investment houses are licking their chops.
Fidelity, for instance, owns $363 million worth of shares of Sportingbet, a company listed on the LSE. The venture is considered a smart gamble, since the risks are worth owning shares in a growing profitable business. A Morgan Stanley report found that Sportingbet was taking in $530,000 a day from its poker division alone. No one is mistaking the iPoker boom as a mere dot-com flash.
Even the bricks-and-mortar casinos are enjoying the wealth (despite being shut out of online poker themselves). Holly Thomsen of the American Gaming Association says online poker is increasing interest in “live” poker. “More people are learning and getting a feel for the game in an anonymous environment online,” she says, “and then coming to Las Vegas or other casinos to experience the real thing.” The Nevada Gaming Control Board says poker revenue in three months of 2005 increased by $10 million compared to the year before.
The Future is Flush with Innovation
Looking forward, the online poker market is expanding its reach outside the PC. More companies are thinking of bringing their game to cellphones or interactive TV, although concepts are still nascent.
“We are not overly excited about mobile phones, but its development is still in the early stages,” says PartyGaming’s Segal.
Already available through some carriers, cellphone poker is nowhere near perfect. After all, poker needs colour screens, and for sharks who love playing for hours on end, a phone’s tired battery could suddenly ruin a straight flush.
But Segal is optimistic that a more opportune platform could shift online poker to a new level. “Digital television is proving a promising distribution channel on which players might interact in the medium term,” he says.
Segal won’t divulge any more details for fear of competition nabbing his ideas, but it’s obvious this business is heading towards integrative interaction. Segal will admit, though, that poker won’t be the only game worth marketing.
About 40 percent of PartyPoker.com customers also play blackjack, fuelling speculation that “hit me” will be the new “all-in.” Perhaps it’s not inconceivable to also see craps or roulette emerge from the online casino shadows to explode like poker did.
Baby Sharks
It’s easy to forget how deep some trends run. Online poker sites advertise at football games, and we hear about tournaments where five regular guys became instant millionaires. Sometimes, we witness the future of a tech trend blooming right before our eyes.
“I don’t see online poker dying down anytime soon,” says Scott Laurie, the online poker addict. He’s got good evidence his favourite hobby will enjoy a long winning streak: When he finished his shift at a school recently, he peeked into a room to see what the kids were doing. He spotted a circle of 10-year-old boys holding cards, playing poker with multi-coloured chips.
If these youth are our future, then online poker won’t fold anytime soon.
For more information on celebrity poker:
HollywoodPoker.com is the online poker site hosted by celebrities James Woods and Vince Van Pattan. The site boasts prime poker entertainment with a large selection of poker games and your chance to participate in online exclusive celebrity tournaments. In fact, Woods and Van Pattan are regulars on the site. But beyond celebrity appeal, HollywoodPoker.com‘s mission is to keep all users entertained with exciting game rooms, community message boards and huge prize pools. Player support is also available 24 hours a day. After all this, if online gaming really isn’t your cup o’ tea, there are tons of Hollywood Poker beauties that will keep you occupied for hours on end.
This article is part of Digital Journal’s national magazine edition. Pick up your copy of Digital Journal in bookstores across Canada and the United States! Or subscribe to Digital Journal now, and receive 8 issues for $29.95 GST ($48.95 USD)!
