Online Gaming: Hope Springs Eternal

Both poker and investment seem to be hanging their hats on hope this spring. Where the two worlds intersect is perhaps the epicenter of hope. Online gaming stocks have popped both on the news that PartyGaming settled with the U.S. government and the promise of Barney Frank’s new stand alone bill that would serve to legalize and regulate online gaming in the U.S.

Party’s settlement opens up the company’s ability to be acquired. Without the threat of U.S. retaliation for its pre-UIGEA activities, the company is free and clear to be picked up by a U.S. regulated casino operation.

In better times, Party would probably be flooded with offers. Both Harrah’s and MGM have expressed interest in acquiring an online gaming site. But both casino operators, like many in the casino space, have few pots to pee in right now. Harrah’s is mired in debt from its private takeover and MGM is tapped out, still looking for more money to complete CityCenter. But Harrah’s has at least taken the first step, hiring PartyGaming’s ex-CEO Mitch Garber for the vague assignment of running a newly created company that includes the WSOP and online operations.

Realistically, the U.S. never had a case against Party or any non-sports online gambling operator. But sometimes facts have little to do with it. In this legal grey zone game of tic-tac-toe, the U.S. has been playing the center square to block. To position themselves for a win, online gaming companies effectively have to buy the square. Other publicly traded companies like 888 Holdings are expected to follow suit.

Ironically, one of the driving forces behind the settlement is a bill that would officially legalize what the online companies are accused of violating. If online gaming is legalized and regulated in the U.S., no company can afford to be left out of this lucrative market. Publicly traded companies will do whatever it takes to clean their slates with the U.S. to gain regulatory approval.

Which leaves open the question…what do companies like PokerStars and FullTilt do? Unlike their publicly traded counterparts, they decided to ride out the U.S. Department of Justice’s bluff. Since the passage of the UIGEA, when publicly traded companies had to vacate the U.S., PS and FT have been cleaning up in the U.S.

“If” online gambling is legalized and regulated, will the last few years of operation in the U.S. hinder PS’ and FT’s ability to gain regulatory approval? You know companies like Party and WPTE will be lobbying hard and heavy to try to cut them out of the U.S. pie. Or will PS and FT get paid off by calling the bluff, cleaning up on all fronts – gaining market share in the U.S. during UIGEA and getting swift regulatory approval?

But all of this still hinges on hope. Maybe the same kind of hope that’s driven the stock market up for six weeks straight. The same kind of hope that’s seen bank stocks soar, even though no one has any idea how to interpret their soundness. And to some extent, that’s been the goal all along. The financial system runs on faith and hope – in “good” times and “bad.”

Does that sound jaded and disillusioned? Maybe. But the one thing I’ve learned as an investor is that there is less money to be made in an efficient market; hope and fear yield opportunities. And speaking of hype, I thought I’d share the promotion being used for my new investment newsletter. When it comes to promotional writing, copy writers make the rest of us look like punters.

Photo credit: Picture of Barney Frank taken by Joshua Roberts of REUTERS