Virtual casinos bet big

Estimates for the online gambling business reach into the billions, but laws and real-world casinos may stand in the way of any virtual boom.

Jeff Pelline Staff Writer, CNET News.com
Jeff Pelline is editor of CNET News.com. Jeff promises to buy a Toyota Prius once hybrid cars are allowed in the carpool lane with solo drivers.
Jeff Pelline
7 min read
Not far from a sun-drenched beach on the Caribbean island of Antigua sits a new five-story office building that some locals find obtrusive in the postcard-tropical setting.

Inside is an air-conditioned room packed with state-of-the-art computer equipment that operates around the clock to entertain some 40,000 people worldwide: It is the "plumbing" of an Internet gambling operation, relaunched just eight months ago by World Wide Tele-Sports. The network, combined with a service dubbed InterCasino, lets Netizens play video poker, craps, roulette, black jack, and slot machines, as well as bet on sports games and horse racing, on their home PCs from anywhere in the world.

"It looks completely out of place in Antigua," said company vice president Jessica Davis, who moved to the eastern Caribbean island three years ago from snowy North Dakota. "But our growth has been amazing. We have customers in 125 different countries, and this is just the beginning."

The company's reason for choosing the unlikely setting are more than one of aesthetics: Online gambling is legal in Antigua, but not necessarily in the United States. And while building an offshore operaration might seem like a lot of trouble, the investment is well worth it to companies like World Wide Tele-Sports and a recent wave of other virtual casinos to have set up shop on the Internet.

CNET TV: July 13, 1997
The Web: In-studio debate on online gambling. Click here for airtimes.

CNET Central: A look at impact of proposed law.
Click here for airtimes

These online operations are trying to grab a piece of a market that may offer one of the greatest moneymaking opportunities in electronic commerce. But nobody knows for sure how big the market is--or whether these relatively small upstarts will make it at all, in the long run.

"It's tough to put a dollar figure on the market, but I'd say guess-timates would have to put it at $300 million to $500 million [in annual revenues] worldwide," said Scott Smith, director of the digital commerce group at Jupiter Communications.

An Internet directory search turns up more than 200 gambling sites on the Net, some for money. Bets range from nothing at all, in games that use play money, to hundreds of real dollars, a survey of some of the sites shows. Jackpots can top $100,000 and the odds are as good as or better than Vegas, the sites contend, although many consumers are skeptical. Some carry glamorous names such as Casinos of the South Pacific. There's even a magazine dedicated to the issue, called Rolling Good Times Online.

Throughout the Caribbean, companies are assembling "offshore" online gambling operations on remote islands--not unlike the offshore banks that have gained fame in previous decades. Whereas offshore banks can only amount to post office boxes, Davis said, "a lot of these people operate out of their house or a villa," where they have assembled the computer equipment.

This results from the regulatory gridlock elsewhere, which is the single largest roadblock to the fledgling industry's growth. (See related story)

Jay Cohen of
World Sports Exchange on Net gambling benefits
Here's an example of the growth potential. Interactive Gaming, an online gambling startup on the Caribbean island of Grenada, says that $58.4 million was waged on its phone and Net gambling site last year. The company accepted its first online wager in May 1995. After just eight weeks of live Net wagering the sports betting system had reached 20 percent of the company's total handle, and since then has grown to 40 percent.

"The Net is set for exponential growth," said Jeffrey Erb, a spokesman for the company. "Over the span of the week, there are 3,000 to 5,000 people placing online wagers."

The small islands that have legalized online gambling also benefit economically. Some of them charge upwards of $100,000 for a gambling license, a handsome take.

Here's how the system typically works. Users log onto the Net and go to a Web site that offers online gambling. They may have to download software as well. Once they reach a "home page," they apply to gamble by offering a credit card number. Sometimes a social-security number is required. The credit information is verified, and they are allowed to begin gambling--typically in smaller denominations. The money often is credited into "e-cash," which is used to gamble just like real money. At World Wide Tele-Sports, for example, a Netizen can bet on a sports game for as little as $10. Winnings are credited back to the user's account, or they can request payment by check.

Some other examples of online gambling companies include:

U.S. Lottery, where users play lottery games online for real money and prizes. The computers are based on an Indian reservation in Cour d'Alene, Idaho, where tribal courts have upheld the practice, said Michael Yacinda, president of UniStar, which manages the gaming operation for the Indian tribe.

The Red Cross has lent its name to an online lottery in Liechtenstein, the European country with a population of less than 30,000. Dubbed Plus Lotto, entrants open an account at the lottery's Web site using a credit card and buy tickets for less than $10 each. Jackpots can range in the tens of thousands of dollars and some proceeds go to the Red Cross, as well as the players.

Some of the gambling is make believe. One example is Virtual Vegas, where gamblers play traditional casino games such as poker, blackjack and roulette. The company specializes in "virtual communities," which make the gambling sites lifelike, said president David Herschman. It has struck a deal with @Home, the high-speed Net access provider, to provide a souped-up entertainment site.

As with other businesses, such as selling airline tickets, flowers, and books, the Net offers a low-cost commerce system. "Telephone wagering is based on 800 numbers, so the Net wagers also save a lot of money for us," Erb said.

But like any Net business, this one faces numerous hurdles: regulatory, technological and shaky consumer confidence.

The other day, CNET's NEWS.COM did some street interviews in San Francisco's multimedia gulch to gauge public interest.

"I don't want my credit card flying around in cyberspace," said George Connell of Atlanta.

Added Marlene Easton of San Francisco: "I'd be weary of the odds. [In] Vegas and Reno you know the odds are always set for the house. I go to the track for the fun of the track rather than for the gambling."

"We see some real problems with it," said David Robertson, chairman of the National Coalition Against Legalized Gambling. "Whenever you expand gambling availability to people, you increase the amount of people who are addicted to it."

Even supporters worry about such things as online outages that could affect the results. But the regulatory issue looms largest.

In the United States, for example, online gambling is regulated on a state-by-state basis. "The availability of gambling on the Internet threatens to disrupt each state's careful balance of public welfare and fiscal concerns," according to a study by the National Association of Attorneys General, which has endorsed a federal bill to ban Net gambling.

As a result of this uncertainty, many big-name online services and "brick and mortar" gambling companies are waiting on the sidelines. "We have heard from a number of organizations, some big names in the online space, who would like to launch some effort but are afraid of the repercussions from the government," Smith said.

Harrah's, one of leaders in Nevada and riverboat gambling, is one example. "We don't have a comfort level that there's an adequate regulatory environment surrounding it," said Ralph Berry, vice president of communications. "There's no adequate way to protect against underaged gamblers," he said, citing one common concern.

The online gambling companies think any concerns are exaggerated--or not a problem at all. Some online gambling executives think that the casino operators are just trying to protect their own turf. "They have huge brick-and-morter investments to protect," Herscheman argued.

The companies also said that security concerns are overstated. Crypto Logic said it has the technology in place for "quick and secure" online transactions. The company has developed a system for micropayments that will be offered to other industries this year, Rivkin said.

Unistar's Yacenda said the company displays a page prominently on its Web site that is meant to identify potential gambling addicts. It asks 20 questions to help would-be customers determine if they are "compulsive gamblers," as Yacenda puts it, and lists the numbers of counselors.

Many online gaming companies also limit the amount that can be wagered. At U.S. Lottery, customers can only wager up to $500 a month. The credit-card payments and verification systems typically help weed out those who are underaged, he added.

If the barriers can be broken, online gambling is poised to take off. "If you can remove that legal barrier, online gambling could be a major application probably larger than online video games," because it has more mass appeal, Smith said.

Reporter Tiare Rath contributed to this report.