Editorial: A View from the Epicenter

10 January 2008

With the recent settlements of the U.S. Attorney's Office in St. Louis with Microsoft, Google and Yahoo, it's clear that Internet gambling remains a high priority for the Department of Justice.

One gambling portal recently named U.S. Attorney Catherine Hanaway the "Person of the Year" to illustrate her impact on the industry. However, it seems that credit should go where it's due, and that's to Assistant U.S. Attorney Michael Fagan. A career prosecutor who joined the DOJ in 1977, Fagin apparently began his crusade against East Coast bookies who began migrating offshore in the early '90s to establish telephone betting operations. This was long before the Internet was a gleam in anyone's eye, much less before the first site began in 1995 -- the year we first began monitoring the industry. Undoubtedly, Fagan has worked for many U.S. attorneys during that time, and he remains a dogged, true believer on this issue.

The timing of the Internet giant settlements should comes as no surprise. For as long as I can remember, the NFL playoff season and March Madness have usually led to the most consistently-timed law enforcement news in this industry. No coincidence.

Likewise, the news on Microsoft, Google and Yahoo shouldn't be a surprise, as they've been discussed as targets on DOJ's joint battlefront of advertising outlets and payment processors for years. However, an objective look at the numbers is interesting. First of all, it would be interesting to know what sort of revenues those three giants took in from I-gaming operators during the timeframe in question and compare that to the fines.

More importantly, if you look at Microsoft's balance sheet (i.e. the subsequent revenues to the federal government), the actual pertinent number is 4.5 million. The remainder of the money will be showing up under advertising costs and charitable contributions. By comparison, look at Microsoft's ongoing legal battles in Europe over monopolistic practices. The fine in September 2007 in this case was $613 million, alone.

What does that bode for the large operators that have been rumored to be negotiating with the DOJ? Well, if any of those efforts are successful, be prepared to see some much bigger numbers. And some of these companies will be prepared to pay it for the right of their founders, directors and officers to be able to travel freely to the United States again.

In 2006, when the prosecutorial and legislative one-two punches were delivered to the I-gaming industry, my guess is that the U.S. government itself was shocked at the level of success it achieved. Frankly -- and in my humble opinion -- had these large operators still been in the hands of their entrepreneurial founders rather than run by folks from "the City," things would have turned out dramatically different. It would have been a "battle royale" that would not have seen billions of dollars lost in market cap virtually overnight.

Mrs. Schneider is the founder of IGamingNews and former chief executive of River City Group. She now consults for Clarion Gaming and contributes regularly to IGamingNews.