A Once and Future King?

12 July 2008

CryptoLogic Ltd. has seen poker liquidity erode significantly since 2005, when its network boasted more than 9,000 players and explosive revenue-generative potential. While a number of unfavorable political and economic developments have conspired to diminish the Dublin developer's player volumes, Brian H. Hadfield, the company's recently installed chief executive, told IGamingNews he is dedicated to righting the ship.

"It's quite easy for things to be sort of binary," said Mr. Hadfield, in response to a question regarding whether media coverage of CryptoLogic's liquidity tends to take precedence over its commercial developments and steady Internet casino business. "And because a lot people are talking about liquidity, not just us, there tends to be a focus on that."

Indeed, the battle over liquidity since October 2006 has intensified dramatically. It was then the United States enacted policy which made illegal the processing of online gambling money transactions.

While this policy, the Unlawful Internet Gambling Enforcement Act, serves as a means to enforce existing law -- and does not, in effect, ban online gambling, as is often thought -- it was still enough to compel developers like CryptoLogic and Playtech Ltd. to discontinue serving United States poker players through their licensees.

Poker titans like PartyGaming of Gibraltar, which at one time was thought to control the lion's share of the global online poker market, also left the United States.

The impact was severe: stocks fell, companies sold or discontinued their American operations and staffs were restructured. Equilibrium -- if such a thing ever existed in this young industry, where technology is policy's nettlesome bedfellow -- has yet to return.

As the dust continues to settle, companies have turned toward regulated European markets to populate poker networks. The battle now pits the holdouts like PokerStars, which continue to serve United States players and increase liquidity thereby, against the emigrants, which grapple for business in a ferociously competitive market beyond the bounds of the Stars and Stripes.

CryptoLogic, once a poker titan in its own right, powered a network that ranked among the top five in licensee revenue as recently as the 2005 fiscal year, when it reported liquidity of 9,000 and a 126 percent rise in annual poker licensee revenue to $27 million. At that time, 75 percent of the global Internet poker market was controlled by the five largest networks.

Across the 2006 fiscal year, however, Internet poker's incendiary growth slowed, and the company's licensee revenue grew a more modest 22 percent to $33 million.

October 2006, though, arguably represented the tipping point for CryptoLogic's poker business. Betfair, a licensee that accounted for between 5 percent and 10 percent of Crypto's poker revenue, left the company's network to launch its own.

Between the third quarter of 2006, when poker revenue totaled $8.3 million, and the first quarter of 2008, when revenue totaled $4.2 million, the business has dropped a precipitous 49.4 percent. Moreover, at yearend 2007, liquidity stood at 6,000 -- it now stands at 1,141, according to PokerScout.com.

Mr. Hadfield, CryptoLogic's third C.E.O. since April 2007, has before him the considerable challenge of resuscitating the company's formerly dominant poker operation, one he's begun to undertake with the aggressive acquisition of licensees.

With the May additions of Maharajah Club, a former licensee of Boss Media, and OPoker.com, a Scandinavia-facing poker site, the company upped its licensee total to 15. Both licensees, Mr. Hadfield told IGN in May, are expected to begin contributing materially to revenue from the first quarter of 2009.

That total rose to 16 with the June addition of Betjacks, an international online gambling startup scheduled to launch this fall. Additionally, Mr. Hadfield has revised his yearend licensee projection -- from between 18 and 20 to between 22 and 24.

"We're going to have some that will be launching this month, more that will be launching at the beginning of next month, and you'll see more licensees come after that," he said.

CryptoLogic also has a war chest of $80 million in cash for acquisitions, an undisclosed portion of which Mr. Hadfield said the company is not averse to using.

"There are opportunities out there, so we're taking that seriously," he said. "We will continue to look at some other opportunities, a couple of which we have in our sights at the moment. But we believe that there are still opportunities to do things in Europe, and I guess I'd like to leave it at that."

Mr. Hadfield said that previous struggles with the poker platform, namely, the rapidity with which licensees could be integrated, are being overcome.

"It was built awhile ago," he said of the platform, "and over the last few years we've spent $17 million rewriting elements of it so that we can bring new licensees on quicker, so that we can adapt currencies and languages much quicker than we could in the past.

"So there was a period that, even if we wanted to, it was difficult to bring licensees on," he added.

With competition intensifying for players and market position, the company is looking toward Asia to supplement its traditional casino and poker businesses. Mr. Hadfield said the company's investments in the region are performing in line with expectations, and are expected to contribute 13 percent of total revenue by 2009 yearend.

Asked whether his projection that the company will, by the end of 2009, return to revenue levels last seen before its United States exit, he said: "I'm anticipating that we will."

Time will tell what contribution the company's once mighty poker software arm will have.

Chris Krafcik is the editor of IGamingNews. He lives in St. Louis, Mo.