Online Gambling Waits for Its Break

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It appears the sharp drop in airline travel is taking a hefty cut out of casino operators’ profits. About two-thirds of Las Vegas’ casino patrons arrive by air, according to a Barron’s article, and that realization has helped send the prices of many gaming stocks to 52-week lows. Some operators are looking to the Internet for a boost, though it probably will be quite a while before they see significant revenue from online casinos.

Once bitterly opposed to online gaming, many big operators are now embracing the concept. Last week, MGM Mirage (NYSE: MGG) and Sun International Hotels (NYSE: SIH) — which operates the Atlantis Resort and Casino in the Bahamas, among other properties — were granted licenses to run online gambling operations from the Isle of Man (off the coast of Britain), where such activity is legal. MGM research conservatively estimates online wagering revenues at around $1.5 billion worldwide. That figure does not include the U.S. or other countries where it has not been legalized.

Many believe the U.S. is moving toward legalization, and the state of Nevada is already preparing for that eventuality. MGM spokesman Alan Feldman says it will be “at least two or three years” before the issue comes to a head, however. One of the biggest obstacles is setting up a system that makes it difficult for minors to access. But when everything is in place, the payoff could be huge: Some analysts believe the industry could see up to $10 billion in online-related revenue by 2005.

Investors should be wary of analyst estimates, but it’s not hard to imagine Internet casinos raking in big money. Being able to play blackjack, poker, or craps from the comfort of home is an enticing concept for many. (There may be some rogue overseas operations out there now that will accept wagering from the U.S., but it’s a dicey proposition, and not legal.) On the other hand, virtual casinos may take revenues from other gaming industries such as horse racing and state lotteries, unless these industries are able to set up viable online operations themselves.

If and when it becomes legal in the U.S., expect a strong brand to make a strong difference. MGM Mirage, Harrah’s (NYSE: HET), Park Place (NYSE: PPE), and other giants of the industry will likely grab the lion’s share of the market. “Once you get the MGMs, the Harrah’s, the Trumps going online,” said former New Jersey gambling regulator Frank Catania in an MSNBC story, “you’re going to find that they’re attracting most of the players.”

When money changes hands, it only makes sense that customers will trust such well-known names over newer startups. eLOT, a company that wanted to sell lottery tickets online but now languishes in penny-stock land, is one example of how the wait for legalization has hurt some less-established firms.

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