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The Online Gambling Opportunity

By Jeff Hwang – Updated Apr 6, 2017 at 4:18AM

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Notes from the recent G2E conference in Las Vegas.

Last week, in "The State of Online Gambling," we looked at the prospects for the legalization, regulation, and taxation of online gaming in the U.S., based on the latest scuttlebutt from the Global Gaming Expo (G2E) in Las Vegas. Today, I want to turn to the prospects for some of the potential players in this space, which include existing brick-and-mortar (B&M) casino operators such as MGM Resorts International (NYSE: MGM) and Harrah's Entertainment, and suppliers International Game Technology (NYSE: IGT) and WMS Industries (NYSE: WMS).

The list of potential players also includes video game companies such as Electronic Arts (Nasdaq: ERTS), payment processors such as American Express (NYSE: AXP) and eBay's (Nasdaq: EBAY) PayPal, and even Web heavyweights Google and Yahoo!, any of which could enter the online gaming space if and when federal online gaming regulation passes, whether it be three years, five years, or 10 years from now.

Online potential for B&M casino operators
Just a few years ago, some casino operators might have argued that legalized online gambling in the U.S. would cannibalize existing B&M businesses. But in four days of conferences at G2E, I don't recall hearing that argument even once. In fact, Harrah's Entertainment is one of the companies now leading the push.

In September 2009, Harrah's signed an agreement with Dragonfish, the B2B division of U.K.-based online casino operator 888 Holdings, to procure online poker and casino software for the now up-and-running World Series of Poker and Caesars Casino online sites. These sites are U.K.-facing -- if you find either site's URLs from the U.S., you will be redirected to the regular sites for Caesars casino and the World Series of Poker.

That said, B&M casino operators -- most notably Harrah's and MGM -- will have a number of competitive advantages in the online gaming space:

  1. Brand. According to the "Gaming White Paper" revealing the results of a 1,200-person survey conducted by The Innovation Group, brand is the single most important factor when a customer considers gambling online. The paper lists Harrah's, Caesars (a Harrah's brand), and MGM as the three most appealing B&M casino brands.
  2. Trust and convenience. If you make a wager online, the first thing you want to do is make sure you get paid if you win. That said, having a bricks-and-mortar casino location lends itself to both trust and convenience. Gamblers could wager online, then cash out at the local casino owned by the same operator.
  3. Cross-marketing capabilities. We've talked a bit over the years about Harrah's Total Rewards program and its cross-marketing capabilities, which have allowed the company to consistently produce above-average results with a portfolio of largely average properties. Harrah's Total Rewards program now has 40 million-plus members who earn points in places like St. Louis or Chicago, and redeem points at Harrah's properties in Las Vegas.

If you're reading this, I'm guessing you probably have a Total Rewards card, and you probably get emails on a daily basis with special offers to visit a Harrah's casino property.

You're probably thinking that those emails aren't all that effective, because most of the time you just delete them from your inbox. But they probably don't have to work all that often for Harrah's to generate a return on investment. Meanwhile, when it comes to online gaming, the effects will be much more powerful: It will be much easier for Harrah's to direct you to Caesars Casino online than it is to get you to book a trip to stay at the Flamingo in Las Vegas.

Software suppliers and games makers
Because B&M casino operators don't typically have a core competence in software or game design, software platform suppliers and game makers will also be important players in the online gaming space. On the platform side, we'll see a lot more deals like the Harrah's/Dragonfish one, where casino operators purchase or lease software platforms rather than build their own.

On the content side, IGT already offers online games and software platforms through its WagerWorks subsidiary. Meanwhile, WMS Industries announced earlier this year its intention to launch a U.K.-facing online gaming site, with plans to enter France, Spain, and Italy as regulations allow.

But at the same time, we'll likely see traditional video game software companies like Electronic Arts and Activision enter this space. Electronic Arts already offers online gaming -- albeit without the gambling component -- on its site.

If the prospect of these companies entering this space might seem unlikely, consider that Sega Sammy -- the company behind Sonic the Hedgehog and other video games -- is also one of the leading manufacturers of the pachinko and pachislot machines that supply the $255 billion Japanese pachinko/pachislot gaming market. Sega Sammy already supplies content for some of IGT's slot machine games, including Virtua Golf and House of the Dead.

Media players and payment processors
According to "Gaming White Paper," the top five non-gaming brands that would influence visitation from online or predominantly online gamblers are:

  1. Visa/MasterCard
  2. Google
  3. Yahoo!
  4. Amazon
  5. American Express

Credit card companies like MasterCard and American Express, and payment processors like eBay's PayPal, were shut out of the existing online gaming market by the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). These companies will almost certainly be back in the game when the online gaming is legalized, and would certainly get a nice boost.

Meanwhile, there are more than a few smart people who strongly believe that we could see at least one of the large online media companies -- like Google or Yahoo! -- enter the online gaming space.

American Express and Google are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers selection., eBay, and Electronic Arts are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Google, and International Game Technology.

Fool contributor Jeff Hwang is the all-time best-selling author of Omaha poker books on the planet. Jeff owns shares of International Game Technology, WMS Industries, American Express, and eBay. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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