The best way to profit from Asia's online gambling boom

published 10 September 2007

Nowadays, all the buzz around the internet surrounds social networking websites such as Facebook and Myspace, and other so-called Web 2.0' applications. Yet some of the most profitable opportunities online remain with those firms involved in distinctly old-fashioned pursuits, such as gambling. One of the first industries to find a way to make money from the internet (along with fellow vice sector, pornography), the gambling industry has reached an ever-widening audience by taking full advantage of every new technological development the web has to offer from safe credit-card payment technologies to streaming live footage of dealers. Currently, $12bn a year in gambling money changes hands over the internet; industry analyst CCA predicts the market will almost double to an estimated $22.4bn by 2010.

Until last year, the main markets have been in the US and Europe. But that was before the US Congress took a hard line on internet gambling, banning credit-card companies from taking payments from such sites. A series of high-profile arrests in the United States saw gaming firms rapidly pull out of the country, hammering share prices across the sector. It should come as no surprise, given that Chinese gamblers have now helped Macao overtake Las Vegas as the world's top gambling destination, that the survivors are turning to Asia. In China, online betting remains a regulatory grey area, says Ian Sayson on Bloomberg; laws banning gambling were passed before the internet existed and so online casinos are not expressly forbidden. Hsu Hwa-min, chairman of online casino iFaFa, tells the International Herald Tribune. "But the expectation is that they'll opt to regulate the industry instead of losing the business to other countries." Investors will, of course, remember many pundits saying the same about the US but the outlook in the Far East is more positive.

For one thing, according to the China Economic Review, China will allow online gambling in Macao, where it already takes 40% of house winnings from conventional casinos. And there are plenty of competitor countries willing to host online gaming if China won't. The government in the Philippines is already offering licenses for online casinos in Manila and a special economic zone in Cagayan. In fact, the real obstacle to online gambling in China has been the lack of reliable telecommunications. This has made it hard to move money in and out of the country especially when few people own credit cards. But those gambling firms that have been bedded into Asian markets for some time have got round this by relying on local brokers to accept bets and handle the money, pulling bets together and then relaying payments to online gambling companies through a third-party offshore.

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But it's not just about China. The potential rewards from other Asian markets are staggering. The traditional Japanese gambling game Pachinko, for example, is a $250bn industry larger than all the casinos in the world added together. Companies are now producing online versions of the game (see below). And once the internet finds its way into more homes Asia has a 10.5% internet penetration rate versus 69.6% in the US, reckons Internetworldstats.com a lot more money will be brought to the table. We have a look at one company that is especially well placed to benefit from an Asian boom in gambling in the box below.

US-based online gambling companies have struggled badly since US Congress cracked down on the business, but for those companies focusing on Europe and Asia, prospects are looking very bright. This is certainly the case for Taiwan-based Gigamedia (NASDAQ:GIGM), which Tim Plaehn on Seeking Alpha reckons is "poised for outstanding growth". The company specialises in producing software for online gambling, offering games in 15 languages. It has 64 million subscribers worldwide with the potential to tap into hundreds of millions more as they expand their Asian operations, says Anders Bylund on Motley Fool. The company already has a strong presence in the Chinese market, running the country's largest Mahjong site, Funtown, with 50% of users spending more than 100 hours on the site a week. The company's European poker site, EverestPoker, has practically doubled in size every year, helping the group to achieve an 88% rise in year-on-year revenue growth.

Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.