However, in March the Massachusetts Gambling Commission met internet gambling operators and vendors in an open forum, with legalisation back on the agenda. Then in April, California’s Assembly Governmental Organization Committee followed suit.
Three states, including New Jersey, have moved to legalise online gambling in recent years, despite the existence of strong opposition, led by Las Vegas Sands, a large US casino operator, and a direct competitor to the online gaming sector, fearful of losing market share. Beneficiaries of regulation in the US, in addition to consumers and gambling companies, include the gaming developers, such as 888 and BwinParty.
Software developers and customer relationship management specialists like Playtech, and payment systems companies such as Optimal Payments, are also likely to benefit.
Since online gambling was legalised, revenues from the industry reported in Delaware, Nevada and New Jersey have been lower than expected.
This subdued performance has resulted from inefficiencies in the ability of customers to make payments, either due to problems locating customers (as regulation requires companies to identify the location of its customers) or because of the reluctance of banks to engage in payment processing.
This presents an opportunity for payments processing specialist Optimal Payments, who own Neteller, the secure e-wallet provider of choice for online gaming companies.
Its systems enable efficient transfer of cash from customer accounts, with greater flexibility than traditional bank accounts.
Performance of stock vs indices over 1yr
Source: FE Analytics
Of the gaming developers, 888 looks most attractive to us. 888 has profitable operations in Europe, of which 45 per cent is in the UK, generating 7 per cent growth in revenues in 2013 despite large costs associated with setting up in the US.
The cash flow from the European business alone makes it an attractive investment. Should other US states open up, the opportunity for the group becomes significantly greater.
The likeliest is California, which constitutes the 9th largest economy in the world, and revenues there would likely dwarf the $270m currently generated in New Jersey.
There are a number of groups that have lodged objections against online gambling, and concerns raised by these groups must be addressed if any progress is to be made on positive regulation in the US.
Performance of stock vs indices over 1yr
Source: FE Analytics
The concerns primarily relate to the possibility of money laundering, the competitive threat to the livelihood of horse racing tracks, (particularly in California), and the ethics of gambling.
In truth, regulation, like that implemented in the UK in 2003, would ensure robust controls were put in place, reducing the risk of ‘grey’ market operators and governing issues of money laundering, gambling addiction and exploitation of vulnerable players.
In the words of one of the representatives at the California panel, Pechanga chairman Mark Macarro, it is better to “design the bus rather than get run over by it.”
Attitudes to gambling have altered significantly in recent years. Tessa Jowell, Culture Secretary for UK when the British Gambling laws were enacted in 2003, called it ‘a diverse, vibrant and innovative industry’ and concluded ‘the law needs to reflect that.’
With only three US states having legalised online gambling, perhaps the same is now true there.
As a leisure activity, it is popular amongst today’s generation of mobile internet users. It is therefore a lucrative source of tax revenue.
Estimates suggest the market in the US could be $6bn, and by regulating the industry and dedicating a portion of tax revenue to promote ethical practice and alleviate gambling addiction, it is no surprise that the move is thought to be imminent.
Leigh Himsworth manages the City Financial UK Opportunities fund. The views expressed here are his own.