Sunday, March 19, 2006

In thousands of houses across the United States at this very moment thousands of people are wagering thousands of dollars on NCAA tournament basketball games without leaving their bedrooms.

Overseas, thousands of operators of thousands of Web sites are collecting a portion of each bet and adding it to the millions of dollars they have pulled in just since breakfast.

This is the phenomenon of Internet gambling, a $15 billion industry driven by the popularity of sports and the growing interest in poker. The industry is the subject of tense debate between companies looking to cash in on the American marketplace and lawmakers looking to ban online gambling.

Analysts predict online betting soon could make up as much as 10 percent of gambling worldwide.

In fact, the total value of some online-gambling companies operating overseas is comparable to that of the major traditional American casino companies — is worth about $2.4 billion more than Harrah’s — and revenues are expected to top $25 billion by the end of the decade, according to Christiansen Capital Advisors, which tracks gambling data.

Gamblers are expected to bet $4.7 billion on sports online this year. Revenue from online poker, less than $400 million worldwide in 2003, is expected to hit $4 billion. Other casino games, such as craps and roulette, are growing in popularity, as companies expand their offerings. Even bingo soon could become a $500 million game, Christiansen said.

The business of online gambling has made many people very rich. Calvin Ayre, the chief executive officer of Bodog Entertainment, an online gambling and music company based in Costa Rica, recently was featured on Forbes magazine’s list of billionaires.

“It’s been quite a ride,” Mr. Ayre, a Canadian citizen, said last week after the taping of a televised poker tournament at his $3.5 million estate in Santiago.

That ride largely has been funded by bettors in the United States: Nearly two-thirds of all online wagers are placed by people in this country, even though most forms of Internet gambling are illegal, according to the U.S. Department of Justice.

Conservative lawmakers, often at the urging of religious groups, have been trying to stop online gambling since it first surfaced in the mid-1990s. Their efforts largely have been focused on updating the Wire Act of 1961, the pre-Internet-era statute that currently serves as the law governing online-gambling issues.

Their arguments mostly are the same ones they cite in opposing gambling in general: Opponents point to studies that suggest gambling increases personal debt and is responsible for higher rates of divorce, drug use and depression. However, they also argue that the Internet creates additional dangers, allowing minors to place bets and criminals to use stolen credit cards.

“We feel this type of gambling is particularly pernicious,” said Rep. Robert W. Goodlatte, Virginia Republican, perhaps the most outspoken opponent of gambling on Capitol Hill.

However, advocates argue governments would reap big financial gains by making online gambling legal, regulating it and taxing it heavily.

“I could pump $1 billion into the U.S. economy right away,” said Peter Carruthers, chief executive officer of, which also operates out of Costa Rica and earns most of its revenue from U.S. bettors.

Furthermore, companies say, regulation would protect against many of the problems gambling opponents fear would occur if online betting is legalized in the United States.

In the United Kingdom, for instance, online gambling is legal and heavily regulated. Companies are required to use special age-verification software. All bets are recorded, and there are strict caps on the amount one person can bet at once. The operations of all Internet gambling companies are routinely audited for fraud or money laundering.

Similar regulations have been put in place in more than 80 other countries worldwide.

“[The U.S.] should regulate this, and enforce the use of software that works,” said Nigel Payne, chief executive officer of London-based Sportingbet PLC, which spends time in Washington lobbying for regulation. “Do we honestly think that Americans are not going to gamble? If they honestly think they can stop people, it’s an extraordinarily naive position.”

The legal landscape

The Department of Justice says that online gambling is illegal and has collected millions of dollars in settlements from online payment firms, including PayPal, that have helped process bets placed on the Internet.

But shutting down gambling operations or stopping people from betting has proven tricky. U.S. laws can’t stop operators working outside the country, and building a case against individual gamblers is time-consuming and not a priority.

As a result, much of the department’s efforts center on pressuring credit card companies to refuse online-gambling transactions.

Legal scholars, gambling advocates and even some lawmakers said that because current laws were crafted before the Internet age and most operators are based overseas, the law is only helpful to a point.

“You’ve got 2,000 offshore sites,” said Joseph Kelly, a professor of business law at the State University of New York in Buffalo and a specialist on gambling laws. “You have to be able to crack down on offshore operations. In my opinion, it’s an exercise in futility.”

Indeed, Mr. Ayre operates on the same principle: His company has no physical presence in the United States.

“We are running an Internet business, and we follow all the laws of the countries we operate in,” he said. “In all these jurisdictions, what we’re doing is legal. We feel we are a legal organization.”

The debate over Internet gambling and U.S. law centers largely on the 45-year-old Wire Act, which was designed to crack down on sports betting by organized crime and explicitly outlaws betting on “sports or other contests” using a phone line from state to state.

However, the law says nothing about the playing of poker, blackjack or other casino-type games and was written long before the Internet was conceived.

“We’re satisfied that what we’re doing in the U.S. is not illegal,” said John Sheperd, a spokesman for Gibraltar-based PartyGaming PLC, which pulled in $977 million in revenue last year from its and Web sites. “We recognize that the law was not written with the Internet in mind.”

Federal legislation introduced last month by Mr. Goodlatte seeks to clarify the law to ensure that online bets are banned and to include poker and other common gambling practices.

“There needs to be a clear statement by the Congress that this is what the law is and this is what should be enforced,” said Mr. Goodlatte, who claims to have more than 100 co-sponsors for his Internet Gambling Prohibition Act.

Some proposed laws target credit card companies and banks in the United States, but companies already say they can work around these measures by using foreign banks and direct-payment services, such as FirePay.

In addition, operators of online-gambling companies said Mr. Goodlatte and other lawmakers are sending mixed messages, because their legislation outlaws some activities but not others.

Mr. Goodlatte’s bill, for instance, allows for online betting on horse racing and fantasy sports, exemptions that baffle online-gambling companies.

“Mr. Average is being told this is bad, Mr. Average is being told you can’t do this, but Mr. Average is being told that if you bet on a horse race, it’s fine,” Mr. Payne said. “If you do it on a fantasy league, it’s fine. If you do it on a lotto, that’s fine. These are the exemptions the politician needs in order to push the bill through.”

Supporters of online gambling said the new efforts from Congress are a reaction to critics who say measures against Internet gambling were killed as a result of illegal lobbying efforts.

Mr. Goodlatte blamed Jack Abramoff, the lobbyist who recently pleaded guilty to fraud and conspiracy, for working to block his Internet anti-gambling legislation in 2000. Sen. Jon Kyl, Arizona Republican, nearly inserted a similar bill into lobbying-reform legislation earlier this month, and Mr. Goodlatte makes a point of referring to Mr. Abramoff when discussing his bill.

“Internet gambling has quadrupled since Jack Abramoff blocked the legislation back in 2000,” Mr. Goodlatte said. “As several members of Congress were misled by him, we felt it was a great time to bring [the legislation] back.”

The future

Online-gambling companies said they expect a 25 percent drop in revenues if the Goodlatte bill is passed. That figure, they said, represents the number of Americans who gamble online because they believe it is legal. The remaining gamblers will continue on, they said.

“You can’t ban something Americans like doing and don’t think is wrong,” Mr. Ayre said.

Nevertheless, companies are expanding their company offerings to include less controversial games, such as bingo, backgammon and checkers.

Either way, it appears companies have no plans to stop collecting from U.S. bettors, regardless of what happens.

“These guys boast publicly at conferences about online sports wagers coming from the United States,” Mr. Kelly, the business professor, said with a laugh. “And nobody bothers them.”

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