Market euphoria surrounding this week's successful flotation of online poker group Partygaming recalls the heady days of the tech boom, writes Barry O'Halloran
Online poker company Partygaming this week completed the biggest initial public offering (IPO) on the London Stock Exchange for five years, but not everybody bought into the euphoria.
Despite it having a higher value than many blue chips and that it has entered the FTSE 100, the elite list of London's top 100 stocks, some asset managers will not be having a bet.
High-profile European firms like F&C Asset Management and Morley Fund Management have ethical investment funds, sometimes called "stewardship" funds, that will not buy the stock. Their socially-responsible investment policies mean that gambling, along with tobacco and firearms, is one of the things they avoid.
They're not the only people with reservations about Partygaming. The company's own prospectus, the document that sets out its stall for potential investors, warned that the US justice department has threatened to imprison or fine directors of companies involved in this business, because online gambling is illegal there.
None of this dampened enthusiasm for the stock, which raised £1 billion (€1.48 billion) for its four founding shareholders on flotation and then wound up with a total valuation of £5 billion on its first day's trading. Demand for the shares was triple the level of supply.
It followed a more low-key, but equally successful float a fortnight earlier: Empire Poker, which launched with capital of £514 million, finished up 5 per cent by the close of trade.
Both flotations recall the heady days of the technology boom, when investors fell over themselves to buy internet-related businesses.
However, there is a key difference between this type of internet business and those that cost investors billions five years ago. Gambling is one of the few pure internet plays that makes money. One of the others is pornography, which is equally unlikely to excite stewardship funds.
In the case of Partygaming, there's a connection between the two. One of its founders, Ruth Parasol, ran what are coyly called "adult" websites and phone lines until she and her husband, Russ de Leon, realised in 1997 that poker paid. They got involved with the other founders, Indian entrepreneurs Anurag Dikshit and Vikrant Bhargava.
Their initial payoff was £1 billion, but it looks like there's a bigger one on the way. According to Christiansen Capital, a US firm that provides advice and management services to the gambling and entertainment industries, online poker was worth $1 billion last year and will generate $6.4 billion by 2009. That's an annual compound growth rate of 44 per cent.
The combined global gambling market, including the emerging online players, traditional casinos and bookmakers, will grow by 3 per cent a year over the same period. Of that, the total internet market is expected to swell at the rate of 20 per cent a year.
This means that poker is the fastest growing sub-division of an industry that is showing a healthy level of expansion. Partygaming has 50 per cent of the current global market, and says that it can have up to 70,000 players online at peak times.
A lot of the expansion is being driven from the US, which accounts for around 80 per cent of Partygaming's business - despite the protestations of its department of justice.
A spokesman for the company (which is actually registered in Gibraltar) told The Irish Times that there are around 100 million regular poker players in the US.
They range from players going around to each other's homes at the weekend to high rollers, and all points in between.
Televised tournaments in the US often attract bigger audiences than basketball, which normally has the same pull on American viewers as the football and hurling championships here. The pots at stake in these large competitions rival the $40 million fund for the US Professional Golfers' Association (PGA) tour.
Thanks in part to the same tournaments and the availability of gambling on the web, the craze is spreading. In recent years it has become hugely popular in the UK, Europe and Australia, and is growing fast in the Far East.
This country is no exception. In fact, the general popularity of cards and betting here lead many to believe that the still immature online poker market is about to boom. Virtually every night, tournaments where players face each other across tables rather than via PCs are played for sizeable pots in centres around the country.
According to Blanaid Morris, marketing manager with bookmaker Boylesports, which has just launched an online poker product on its website, interest in conventional poker here is massive. She believes it is probably greater than in the UK, where the poker craze has attracted a lot of media attention. "It's just a question of transferring that interest to the internet model," she says.
Her company is not the only one to have begun swimming with the card sharks. Its publicly-quoted rival, Paddy Power plc, recently added poker to its website. Betfair, the betting exchange originally aimed at those interested in racing and sports betting, has a poker option, as does practically any gambling-related site.
The beauty of poker for its providers is that they are not taking any of the risk. That is for the players. Instead, they take a percentage of each winning hand, known as a "rake", in return for providing the online playing facilities. As there is always a winning hand, there is always a rake.
There are various methods of taking it. Partygaming takes up to a maximum of $5 on winning hands of $170 and over. The company also generates revenue by selling its software to other providers, and taking a percentage of their rakes.
Operators like Boylesports and Paddy Power use partnerships like this for their poker options. This means that when someone logs on to their site, they are playing on a platform provided by the bookmakers' partners. In the case of Boylesports, it is Prima Poker, one of Partygaming's closer rivals, with around 10 per cent of the global market.
The Irish bookmakers use partners because volume is key to a poker site's success. Players will go where the action is, and the best action is on the sites with the largest number of players.
Anyone seeking a foothold in the market either needs to spend vast sums on marketing to pull in the numbers, or tie in with somebody who has them, and share the pay off.
As volume is key and new arrivals rely on existing operators to get in, this gives those with an established presence a valuable head start. It also confers a significant advantage on Partygaming, which has the highest volumes of all, leaving it invulnerable to competition for the moment.
The only risk that fund managers single out is that 80 per cent of online gambling customers - those in the US - are possibly breaking the law when they use online services. One Barclays investment manager this week described it as a black cloud hanging over the company.
Partygaming's spokesman is quick to point out that it has staff in the US nearly all the time and none of them has ended up behind bars.
"We have had lots of people over at trade shows," he says. "The biggest trade shows in the online gaming market are all in the States - there's one in Vegas next week and we'll be there." He adds that directors and staff of other European companies in the same field also spend time in the US, and even own property there, with no repercussions.
The spokesman says that the group's advice is that under US law, online gaming is not illegal. It listed this as a possible risk in its prospectus to err on the side of prudence. The document had 27 pages detailing the various pitfalls facing anyone who bought shares in the company.
But as the spokesman points out, the offer was still three times oversubscribed, with most of the big institutions weighing in. So it appears that most investors were more than happy to go to the poker party. In fact, pretty much all of them were, except those whose ethics precluded them from accepting the invitation.
