Wednesday, October 04, 2006

Gambling on gambling

I can't lie -- this hurts.

Parlay Entertainment, a small Canadian company that eked out a position as the dominant provider of on-line bingo software, has been swept up in the misery that the entire on-line gambling sector has been wallowing in since the U.S. Congress moved last week to effectively ban gambling on the Internet for U.S. citizens.

I bought shares in Parlay about 18 months ago after being impressed by their management calibre, and the fact that they were very quietly boosting revenues and market share in a fractious market.

The company made news last month when it announced it had agreed in principle to merge with a larger competitor, Chartwell Technologies. I was still mulling over the numbers, trying to decide what I was going to do with my Chartwell shares when this gambling ban news broke.

I can't say I was totally surprised by the move -- Congress has been sabre-rattling for years about shutting down gambling outfits, and a Republican caucus has been ramping up their feigned outrage to try to garner some family-values support going into midterm elections. So I'm not surprised that the move came.

But still: seeing 50% of the value of a company I liked a lot knocked off within the span of a week didn't exactly leave me with warm and fuzzy feelings. According to the company itself, about 60% of Parlay's revenues came from US-based customers. So it makes sense that the company has shed nearly 60% of its market cap since news it woudl lose 60% of its revenues broke.

So now I'm left wondering the $64,000 question -- now what? Do I sell my shares for whatever I can get for them and put the whole sorry chapter behind me? Or do I stick it out, secure in the knowledge that this is probably just an over-reaction?

Right now I'm leaning towards the latter option. A quote from the CEO of sector-heavyweight CryptoLogic on the matter is stuck in my craw:

“Internet gaming is here to stay. The genie is out of the bottle. There are millions of players around the world who play the games responsibility,” CEO Lewis Rose said. “We believe that regulation is the best way to bring on-line gaming into the sunshine. And sunshine is the best detergent.”

At the same time, it has decided to take a non-confrontational approach with the United States in the hope of one day being able to serve that market legitimately. Mr. Rose said he is still hopeful that Congress could eventually choose to tax and regulate Internet gambling, similar to an approach adopted by Britain.

“There are clearly going to be tremendous opportunities now. There's going to be an opportunity for consolidation of the industry. And we believe the cards are in our favour at the moment.”

This view really rings true to me. It's painfully obvious that there's a market for Internet gambling, so it's not going to go away. Prohibition of alcohol didn't work and neither will this over the long term. I suspect that for the next few years, the sector will grow revenues everywhere but the United States, before the U.S. Congress ultimately wakes up to the revenue potential and opens the floodgates to take their share through taxation.

I also think he's bang on in his assessment that consolidation is coming. In that scenario (and with more than $100-million in cash on hand) I suspect Crypto will be a buyer. And Parlay will remain a seller.

But I plan on remaining a shareholder.

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