Morgan Stanley Research December monthly form guide

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Morgan StanleyOnline Gambling: Monthly Form Guide
Dec 10

The focus this month has been on the possibility of an internet poker bill being passed in the US during Congress’ post-election lame duck session. A bill has been drafted, and there has been speculation that it will be attached to other ‘must pass’ legislation. A letter from Republican opponents of gambling, arguing that to do so would be undemocratic, suggests that they are taking the possibility increasingly seriously. At the State level, Senate in New Jersey passed legislation that would allow intra-state and international online gambling in the state, and Poker Voters of America said that they would shortly announce a sponsor for their draft bill to allow intra-state online gambling in California. In Europe the challenge to Italian rules that allow online cash poker and casino games was rejected meaning that these products should be available soon, and in Germany two court decisions further undermined the current Inter-State Treaty which bans online gambling. We also attach Stanleybet’s newsletter which reports European legal and regulatory developments over the last few months for both land-based and online gambling.

Poker Traffic update:
November was generally stable sequentially for most operators, and Pacific Poker seems to be holding on to the market share gains it has made since the introduction of its new software. In a demonstration of the importance of regulated markets, PokerScout reported that while PartyPoker’ liquidity was down 24% year on year in the week ending 29 November, its liquidity including France and Italy was actually up 2% year on year.

Source: H2 Gambling Capital, Morgan Stanley Research. Average seated players between 1800 and 2400 BST

Source: H2 Gambling Capital, Morgan Stanley Research. Average seated players between 1800 and 2400 BST

Ready to Roll:
We highlight some of the key forthcoming dates and events.


Biggest Pot
Phil Ivey won the biggest pot of the month, worth $199,063, from Ziigmund, although this was worth less than half the pot Ziigmund won last month.

US Regulation and Prohibition

Speculation that a federal internet gambling bill will pass in the lame duck session increased…
It has been suggested that Senate majority leader Harry Reid could attach legislation to another bill.
… although Sen Reid has given mixed signals on the topic in the past.
Republican gambling opponents wrote to the heads of both US Houses opposing attempts to attach a poker bill to other legislation. They wrote that online gambling supporters “might be pushing the Senate to attach such a bill to a ‘must pass’ measure”.
The New Jersey Senate passed a bill that would allow internet betting in the state. The legislation would allow both state residents and foreigners to bet on online gambling sites regulated by the state. The bill now needs to be approved by the Assembly and the Governor.
Because the legislation would allow foreigners to play on New Jersey sites, it could restart the dispute between the US and the WTO on online gambling. For this reason it might increase focus on a federal solution.
California looks set to introduce legislation to allow intra state online poker in 2011. Melanie Brenner, executive director of Poker Voters of America, said that a sponsor for the legislation would be announced in the next few weeks.
According to ComScore online gambling traffic in the US was up 114% month on month in October. The strong growth was attributed to the World Series of Poker.
Payment processor eWalletXpress was served with a warrant from the US government. The site is now unavailable to US players.
FullTilt has joined PokerStars in pulling out of Washington state. Poker players have described leaving the state in order to continue playing.
PartyGaming filed a motion to dismiss the complaint against it in Kentucky. Amongst other grounds, PartyGaming noted that the plaintiffs had failed to identify anyone who had suffered a quantifiable loss from online gaming.

European Developments

Online cash poker and casino could be available in Italy from early 2011 after an Italian court rejected a challenge to the new rules. The Administrative Court of Lazio rejected a challenge by Microgame.

The Federal Supreme Court in Germany found in favour of bwin after a six year legal case in which a monopoly operator applied for an injunction to prevent bwin offering gambling services. Bwin called for Germany to develop modern regulations for online gaming.

Germany’s Federal Administrative Court in Leipzig ruled that the sports betting monopoly in the country is only consistent with European law if it is unambiguously designed to fight gambling addiction. The judgement casts further doubt on the Inter State Treaty on gambling.

The Spanish government is negotiating with the industry and the regions and hopes to draft a bill regulating online gambling by the end of the year. It also intends to sell 30% of Loterias y Apuestas del Estado, the national lottery operator.

The chairman of licensed French gambling site BetClic described the country’s online gambling rules as the worst in Europe. He said that the tax levels are absurd and the laws encourage fraud.

The Danish Gambling Board confirmed that the opening of the country’s online gambling market is unlikely to happen before summer 2011. The delay has been caused by a complaint about the proposed tax rates.

The managing director of Winamax explained how it is possible to operate successfully under the French regulatory system.

Cyprus has submitted a bill to the European Commission that would ban all online gambling except for sports betting. It is expecting a response in December.

News from around the world

The Federal Court in Australia ruled against Betfair’s attempt to overturn the turnover-based race field fee in New South Wales. However, Betfair is reported to be considering an appeal.

The Canadian province of Saskatchewan is considering introducing internet gambling. The Saskatchewan Indian Gaming Authority is investigating the issue.

US Online Gambling – “The long and (still) winding road of US internet gaming”

Investment conclusion: The potential for a federal Internet-poker bill is increasing, but passage is still too difficult to predict, in our view. Should a bill ultimately pass, the established land-based casino operators in the US with recognizable poker brands should be positioned relatively well but investors may be over-estimating the EBITDA impacts. We believe the opportunity is much more limited for the single-property LV operators (LVS and WYNN) and smaller regional operators (PENN and BYD) unless they collaborate and pool players. The US equipment suppliers currently have very little to offer in the online poker / gaming space, in our view.

We believe it will be necessary for the US companies to partner with existing foreign online-gaming companies. The European companies have the technological expertise, poker-centric databases, and brand awareness that existing US operators currently lack. Of the existing Internet operators, we see PartyGaming / bwin and 888 (O/W-rated by MS UK Leisure analyst Vaughan Lewis) as best positioned to benefit.

What’s new: A bill is currently being drafted in the Senate that would legalize and federally regulate Internet poker in the US, according to press reports. The bill would allow internet, poker-only casinos. We highlight the bill’s key provisions:

(1)Eligibility. Only the larger US casino operators, slot suppliers, and Indian tribes will be eligible for a license for the first two years of the law.

(2)State “Opt In / Out” Rights. Even if federal legislation passes, the timing of the rollout of online sites and the ultimate market size depends on the states. States have the right to opt in/out of the legislation and could create significant delays in the implementation of federally approved legislation.

(3)Taxes. Taxes are currently set at 20% of revenues, though 30-35% appears more likely.


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