One of the most intriguing issues in Internet gambling now, we think, is the Justice Department settlements -- mostly because nobody (including us) knows what the heck's going on.
A little background for those unfamiliar with this issue: Some publicly traded Internet gambling operators are in settlement negotiations with the DOJ over their past, questionably legal activities in the United States. And the potential outcome of those negotiations, as C.E.O.s on earnings calls rightly repeat ad nauseam, is unclear.
One thing is clear, though: The market has its take on the settlement agreements, and the skeptics (which include an American lawyer or two and an occasionally bearish analyst) have theirs.
The market logic is relatively simple.
One part of the argument runs that because the Internet gambling sector is so competitive in Europe, consolidation there is sensible -- more to the point: inevitable. But in order for consolidation to occur, theory goes, prospective consolidators must first resolve what many call the American Legacy Issue, and that apparently involves forfeiting some cash to the DOJ for . . . well, for breaking the law?
The other part of the argument assumes that settlement agreements are a prerequisite for mergers and acquisitions. So, once prospective consolidators settle up with the DOJ and get down to a little M&A, wary investors, it's thought, will cozy up to the I-gaming investment case.
Sentiment engendered by market logic: Bullish.
Now, a reality check.
At the risk of deflating upbeat market news (apparently a faux pax among we the gaming industry media), the skeptic asks: Why settle with the DOJ?
That Internet gambling is illegal in the United States is far from settled, after all; although conversely, that Internet gambling is legal in the United States is also far from settled.
So what does a settlement agreement really protect the operator from anyway when even the DOJ can't figure out how to uniformly administer existing law? And what's to say these settlements are any guarantee of something desirable like a license . . . especially now, when no new regulation for channels like casino or poker even exists?
Sentiment engendered by skeptic logic (surprise!): Bearish.
Two problems arise with the market logic, the skeptic says. First, it assumes the DOJ settlement has value, and second, it views a DOJ settlement as a prerequisite for consolidation.
Because United States Internet gambling law -- state and federal -- comprises a complex network of unresolved messes, there are simply too many variables at play now to assume a DOJ settlement has any value relative to a company’s future operational prospects in America.
And with regard to consolidation, clearly it's happening now in spite of unresolved legacy issues.
Gtech Corporation acquired Boss Media A.B., which used to provide technology to United States-facing clients, and William Hill recently joined with Playtech Ltd., which also had clients that targeted America. And for those who balk at the Gtech and William Hill deals because they don't involve two operators, don't forget that Bwin Interactive Entertainment A.G. nearly acquired Sportingbet but concerns about Turkey -- not Sportingbet's transgressions in the United States -- were rumored to have derailed that deal.
But hold on a minute. One problem arises with the skeptic's logic, the market says.
To assume a settlement has no value is to assume you know the value of a settlement. And how can you know definitively that a settlement is worthless when, as you rightly suggest, there are so many legal variables at play in the United States that it would be nearly impossible to accurately predict anything?
(Reader: If your head is spinning, this means I've done my job well enough here.)
In sum, I think as industry observers we should acknowledge what we don’t know, for to assume anything, bullish or bearish, about the significance of a DOJ settlement constitutes little more than a gamble.
And who better than we to know when not to punt.