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Monday, October 09, 2006

Implications Of Ban On Poker & How To Profit From It

By Yaser Anwas, CSC of Equity Investment Ideas

If you live in the US, you won’t be able to play online poker anymore. Poker is one of my favorite games, and I enjoy playing online. It’s lucrative, too. I’ve won several thousand dollars over the past few years playing online poker.

This week, Congress passed legislation that will prevent me from playing any more online poker. The law could take effect in less than two weeks’ time. I’m angry about this. I think it’s a massive violation of my freedom.

On the other hand, if I’m reading the situation correctly, we can use this turn of events to our financial advantage through a simple investment in the stock market. Lawmakers tacked the legislation onto a bill about port security.

The legislation prevents credit card companies and payment processors from doing business with Internet gaming companies. It’s a done deal. George Bush’s signature is all that’s needed to make it official. One report said he’d sign it in two weeks.

Even if a payment processor could get around the legislation, it wouldn't matter. The gaming companies have said they won't do business with US residents anyway.

This news resulted in a $7 billion investment vaporization. In a matter of seconds, a $12 billion industry lost 60% of its market capitalization.

At first sight, this appears to be a Puritan thing. Politicians are using moral grounds to justify this legislation. Sen. John Kyl (R-Ariz.) likened online poker to cocaine use and said it “may” lead to “possible addiction and, in turn, to bankruptcy, crime, and suicide.”

Congressman Jim Leach (R-Iowa) is “concerned with the unity of the American family.” I think these are thinly veiled lies. I think the real issue is money.

Here’s why: The Internet poker industry grew from zero to $15 billion in annual revenue in seven years. The speed caught regulators with their pants down. Result: Uncle Sam missed out on a tax bonanza, and the casino industry missed out on a profit bonanza.

Meanwhile, a ragtag crew of foreign-based software designers and phone-line hucksters show up in Forbes’ list of billionaires. I’m guessing the big casinos lobbied Congress for this ban. They probably figure all those online players will be forced to come to the casinos now. Plus, getting even with the offshore gambling moguls makes them feel good.

Do you think it’s a coincidence that on the same day the newswire reported the online poker ban, a group of private investors announced a $15 billion buyout of Harrah’s? I don’t. I bet these private investors think casino profits will rocket now that online gambling is out of the market.

What I can’t figure out at this point is: Are they really this stupid? Have they have failed to realize that Internet gambling is the primary source of growth for brick and mortar casinos?

For 150 years, the poker business went nowhere. Then the Internet comes along, and suddenly the whole country went crazy about poker. It is no coincidence. Internet poker paid for televised poker with advertising dollars. Next thing you know, everyone wants to play poker at home, online, and in the casinos.

Or look at it this way: The recent World Series of Poker had 8,567 entrants, each paying $10,000. More than half of them qualified through online poker tournaments.

If they’re stupid, the casinos just killed the goose that lays golden eggs. By pushing for a ban of online poker, I think Las Vegas casinos just wiped out three years of revenue growth. Maybe more.

There is another possibility. Once again, I can’t prove any of this. This is my theory only. But this hypothesis makes much more sense.

The casinos are following a long-term strategic plan to dominate the online poker business. First they get Congress to clear the marketplace. Then they wait a few years for the dust to settle. Finally they push congress to rescind the ban and regulate the industry.

Only this time, the Vegas casinos have the market all to themselves. And the senators get their hands on the tax revenue.

Here’s how I’m going to play it: First, I’m going to wait for the casino stocks to trend lower. Without online poker, the casinos will earn less money, and this week’s events will turn out to be a massive sell signal for casino stocks.

The stocks could halve in value, at which point I’ll buy them. And then, I wait. If I’m right about all of this, senators will call for regulation sooner or later. Then news will leak that Harrah’s has developed an online gambling platform... and the gambling boom will reignite.

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