Canada's Gambling Laws May Pinch GigaMedia

The government may shut down online gambling in the country, where GigaMedia gets a substantial portion of revenue.
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The Canadian government is looking for new ways to crack down on Internet gambling sites based in the country, which could force


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to move its profitable online casino operations elsewhere, resulting in a near-term revenue hit.

Taiwan-based GigaMedia derives about 70% of its revenue from selling software to online casinos, with most of that business tied to Ultra Internet Media, owner of The online casino is based in the Kahnawake tribal reserve near Montreal that plays host to over 400 poker and sports-betting online casinos.

According to a recent story in the

National Post

, the Canadian government is now considering new measures to "stamp out" Internet casinos based on this reserve.

The government considers the casinos operating in the region to be illegal, but neither federal nor provincial governments have cracked down on the sites. Now, the paper reported, the government is considering enforcing the existing laws or taking new measures to restrict banks and credit card companies from conducting financial transactions with the casinos.

"The Minister of Justice asked his officials to determine whether criminal code provisions could be assisted by other measures," Chris Girouard, a representative for Canada's Department of Justice, tells

A representative for Rob Nicholson, Canada's Minister of Justice, could not be reached for comment whether the minister is specifically considering measures that would restrict banks and credit card companies from doing business with the online casinos.

GigaMedia could not be reached for further comment.

On GigaMedia's quarterly conference call March 11, a week after the

National Post

story ran, one Wall Street analyst asked management about the possibility of the Canadian government shutting down the jurisdiction.

"First of all, we see no possibility of that happening in the near term," CEO Arthur Wang said. "It's a rumor that's been circulated around that we just see no basis for. Second of all, we are in the final phases of obtaining another gaming license in Malta, and so we will have both redundant licensing and redundant operating facilities."

Although GigaMedia does not have an equity stake in Ultra Internet Media, it does consolidate the business and its operating results. Any immediate freeze of the online casino by the Canadian government would result in a significant near-term hit to GigaMedia's profits.

Such measures would be similar to those made by the U.S. in 2006, when Congress passed the Unlawful Internet Gambling Enforcement Act that forced many online gambling companies abroad. The implementation of such a bill in Canada would also presumably cut down on online gambling spending in that country.

However, the U.S. law has been considered notoriously difficult to enforce, and U.S. Congressman Barney Frank introduced a bill in 2007 to create an exemption for properly-licensed casinos, which would allow Americans to legally gamble online.

GigaMedia shares, at around $14, have already fallen over 40% from their 52-week high set in November as investors fret about future growth opportunities. Fears of a weaker global consumer spending have been hammering away at the stock prices of traditional land-based casino operators such as

Las Vegas Sands

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MGM Mirage

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in recent months.