FP article!https://www.nationalpost.com/financialpost/story.html?id={8A6878B1-ED7E-4A54-93AF-530DECBB3FE7}
Cryptologic gambles on Atlantic crossing
U.K. Friendlier than U.S.
Sean Silcoff
Financial Post
Saturday, November 09, 2002
Lewis Rose has enemies in high places. He runs one of Canada's fastest growing, most profitable and financially sound software firms, in one of the Internet's few prosperous industries -- gambling.
Unfortunately for the new chief executive of Toronto-based Cryptologic Inc., several U.S. politicians have targeted the offshore and largely unregulated industry, and their five-year campaign to stifle the business is on a roll.
A federal bill that would prevent banks and individuals from accepting cheques, credit cards and electronic funds transfer to pay for Internet gambling has passed the U.S. House of Representatives and is now before Congress.
Even if the bill, like its predecessors, doesn't pass, Cryptologic and its customers -- virtual casinos based in such havens as Costa Rica and Antigua -- have another problem: Eliot Spitzer.
The New York State Attorney General -- notorious for shaking down Wall Street investment banks -- has threatened to slap injunctions on U.S. credit card issuers unless they stop accepting online bets. American Express, Citigroup, Discover and MBNA have complied, and online auction service eBay said in July its Paypal system will stop handling gaming transactions.
In August, the U.S. Department of Justice told Nevada's gaming control board, which had toyed with the idea of letting its casinos go online, not to push its luck.
The developments have devastated Cryptologic. The seven-year-old firm, which has created online versions of 29 casino games, including roulette and poker, has cut revenue estimates three times this year and scrambled to find alternative payment methods.
Its stock has fallen to a four-year low, plunging 7% yesterday when it said its revenue outlook for the fourth quarter was uncertain.
Several analysts who covered the company have left the building -- as has Jean Noelting, Mr. Rose's predecessor, who resigned abruptly in July -- 18 months after taking over from founders Andrew and Mark Rivkin.
At least two investment banks have approached the company, urging it to go private, since its stock barely trades over the value of Cryptologic's cash reserves, US$41.5-million as of Sept. 30.
"It's a highly profitable company that practically prints money -- but there is a lot of risk," says Sprott Securities analyst Brandon Osten, who dropped coverage this year.
None of this seems to bother the 43-year-old South African-born Mr. Rose, the former president of Alliance Atlantis Communications Inc., who was heading an obscure interactive television company when the Cryptologic board asked him to join.
In fact, during a 90-minute interview at Cryptologic's head office last week the staid, low-key career executive repeatedly diverted discussion away from the United States, where almost two-thirds of the world's online gaming players live. Instead, he kept repeating the same line: "We're absolutely focused on Europe."
It's a prudent move for anyone in the online gaming business these days. The increasingly hostile environment in the United States has trimmed the industry's explosive, double-digit growth prospects for the next few years, with Europe and Asia expected to provide most of the new business.
"I think the U.S. will get to regulation and licensing eventually, but it's going to be a trickle," said Dan Walsh, a Washington lobbyist who represents Cryptologic and other i-gaming companies.
Meanwhile, the situation couldn't be more promising across the Atlantic. In the United Kingdom, where opinions on legalized gambling aren't as divided, the on-line wagering industry is on the verge of a major step up to respectability.
"We believe that there will be a global trend toward regulated environments" in the business, starting with the British Isles, said Mr. Rose. "It brings the industry into the sunlight. We'd like transparency, we'd like regulation, we'd like players to feel secure and safe in an environment where they spend their money on this form of entertainment."
A couple of islands off the coast of England are leading the way. Last year, the politically and legislatively autonomous Isle of Man -- which has a reputation for stringent banking rules and low taxes -- said it would license and regulate online casinos, applying the same standards followed by actual casinos in England. Alderney, a self-governing British dependency in the Channel Islands, followed suit, and the rest of the United Kingdom is on course to deregulate its own gaming industry in the next two to four years, becoming the first major state to allow online operators to set up locally.
The newly regulated British islands -- unlike shadier jurisdictions in the Caribbean and elsewhere -- have attracted a new class of player: big-time bricks-and-mortar casinos. Last year, MGM Mirage and established British casino operators Littlewoods Leisure and Kerzner International were granted the Isle of Man's first three online licenses. In April, another established London casino, the Ritz Club, won one of three e-gaming licenses from Alderney. Las Vegas' Venetian Casino Resort has also applied for a licence. Both Littlewoods -- which received Isle of Man certification and went live in September -- and the Ritz (now awaiting Alderney approval) are Cryptologic customers.
"These organizations can now contemplate a legitimate environment in which to operate," said Kelly Moulton, chief executive of the Ritz Club London Online. "Before, they wouldn't touch it. If you want to get to the mass market, people aren't going to do it unless it's a brand they trust and there's a third party to go to if there's a complaint."
The TSX and Nasdaq-listed Cryptologic already puts its employees and licensees through a lengthy probity check -- under the watch of former RCMP commissioner Norman Inkster -- similar to regulated casinos. "We spent nine months evaluating software suppliers and it was very important to us to go with someone with clear financial audits who could survive probity checks," said Mr. Moulton.
"There aren't a lot of software suppliers like Cryptologic that can do that. We have to hold our suppliers to high standards."
The continental divide is causing Cryptologic to shift its focus in other ways. The company is pondering a move to the London Stock Exchange, in part because multiples for gaming stocks are higher there. Cryptologic's board is also looking for one or two directors in Europe, as well as a strong Canadian name to bolster what many feel is a weak board. "It's a concern of mine -- we need to strengthen the board," said chairman Dennis Wing, a former First Marathon Securities senior vice-president.
Meanwhile, Mr. Rose has his hands full trying to ensure the company's everyday operations run smoothly after a tumultuous year.
"Jean started the professional management culture, and my focus now is to continue focusing on customer responsiveness and professional, disciplined internal management," he says.
Cryptologic is smarting from an ill-fated investment early this year in a U.K. online sports content provider, which went out of business just three months later and is likely to drive the company to its first annual loss. He's spending a lot of time with customers, countering past criticisms the company wasn't doing enough to keep them happy.
He's also trying to avoid a problem as common to Cryptologic as any other developer: delays, including the late launch of its poker product last month. Meanwhile, the company has to make sure it doesn't fall behind its Swedish and South African competitors developing the business's next generation software.
Investors may have taken flight, and acceptance in the U.S. seems a longshot -- but if all goes well in Europe, perhaps Mr. Rose will find he's bet on the right horse.
"The whole concept of getting certified in a Tier I jurisdiction is to be ready when the U.S. is prepared to introduce legislation," says chief financial officer Jim Ryan.
"It's common sense and it's logical to us that they ultimately will regulate in this area. When they do, we'll be ready."