Canadian firms compete globally in online gaming despite domestic laws

With 11 years of experience in developing online gaming software, Toronto-based Cryptologic Inc. seems well-positioned to take advantage of what is now a surging, US$12 billion industry worldwide – even if they can’t sell their product in Canada. During the BMO Nesbitt Burns Canadian Gaming Conference held in Toronto on February 8, Lewis Rose, president and CEO of Cryptologic, broke down the astonishing growth in online gambling. In total, worldwide e-gaming revenues almost doubled between 2003 and 2005, and Internet poker revenues jumped from US$100 million in 2002 to US$2.9 billion in 2005. Clearly, poker’s growth – it now accounts for 20% of all e-gaming – has propelled the industry to its current size, but Rose believes it’s just the tip of the iceberg. "Industry expectations are that the $12 billion will grow to $24 billion by 2010," he said. "We’ve done tremendous research to understand what engages a player. How does a player enjoy the entertainment experience and ultimately spend more money at our sites?" In light of this incredible increase in popularity, it seems that just about anyone could enter the online gaming market right now – indeed, hundreds of new poker sites have been set up in the past few years. But the experienced gaming developers are not just capitalizing on the boom, and the Internet still only accounts for 5% of global gambling revenues. Cryptologic’s gaming software, which is used by used by nine online and land-based casinos, includes over 160 casino table and slot games, and multi-player poker and bingo in seven different languages and three different currencies. It has licensing agreements with companies, including Marvel Comics, to offer themed games. And it also runs an internal electronic cash processing system, which has processed $35 billion in wagers to date. Beyond that, Cryptologic puts itself through an extensive regulatory process to build confidence in its brands among gamers. "One of our competitive advantages and differentiating factors is that our casino offices, managers and directors, and our software have gone through extensive certification and probity checks to ensure that… every pull of the slot machine and every card that’s turned up is recordable and auditable," said Rose. "The most important thing for a player online is trust. He or she has to know the rules are fair, and that he or she will be paid if they win." Like its competitors, Cryptologic has benefited from the poker craze, and more than half of the company’s business now comes from poker. Cryptologic’s clients are assured their customers will also always be able to find a game, regardless of time, language, stakes or currency (U.S., British pound or Euro), with more than 9,000 players playing simultaneously at all times. Its software achieves this by directing all players, from all of its private-label customers, to a single common poker room. At present, these clients include UK casinos and sports books like William Hill, Ritz Club London, ukbetting.com and Littlewoods Casino. In Canada, laws prohibit setting up an online site for gambling and it is illegal to be found in a common betting house, a law that may also apply to online gambling. However, only individuals who have run gambling websites have been prosecuted in Canada so far, while players who chose to gamble on international sites have been virtually untouched. While it’s unknown whether online gambling will ever be legalized in Canada, it’s safe to say that interest in the phenomenon is growing here. Canadian sports networks increasingly televise poker tournaments, and websites like PartyPoker.com and PokerStars.com – which are both recreational sites – advertise in Canada as a way to sharpen poker skills, but not as a means to gamble. In what is referred to as the "clicks and bricks" scenario, casino operators recognize that online gaming can help them grow by not only by bringing in cash over the Internet, but also by attracting more people to their actual gaming tables in real-world locations. Matt Savage, a Las Vegas-based poker tournament organizer and commentator, also spoke of the increased appeal of online gaming in Canada during the conference. "Living in Las Vegas, there’s casinos and poker rooms every where you go, and I didn’t really figure…out until I stepped out of my hotel this morning," he said. "There’s other places in the world where you can’t just go out to a casino, so playing online has become a big part of the culture of gambling, especially of poker." However, if legalized online gambling fails to become more widespread and the interest in poker subsides, companies like Cryptologic will have to find a way to maintain revenues. Said Rose: "The three ways to grow your business are through new player acquisitions, existing player retention and lapsed player reactivation." To that effect, Cryptologic undertook a strategic investment of $12.5 million to improve its poker and casino games, and ensure its infrastructure could handle the industry growth. On the other hand, sustained interest in Internet gambling and an eventual legalization of it bring the risk that casinos could get into developing their software in-house. Rose, however, disagrees. "If you look at the casinos in Las Vegas for example, they pay to rent the slot machines," he says. "Does that mean they’ll get into slot machine manufacturing? No, I don’t think so." As for the future, Savage said that only the more established gaming providers such as Cryptologic are guaranteed to survive. However, Rose is confident that the industry will allow for more than survival. "The genie’s out of the bottle," he said. "Online gaming is here to stay, it’s not going anywhere."

Canadian firms compete globally in online gaming despite domestic laws

Broadcast | February 17, 2006

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