While it looks easier for a thoroughbred to squeeze through the eye of a needle than for Internet gaming to win political approval, that just might be what Youbet.com (UBET) is trying to do.
Youbet.com is the online betting outfit that beautifully illustrated the magic of being a .com stock when it changed its name Jan. 20. from
You Bet International
. Its share price subsequently rose as high as 22 1/4, about triple its 1998 high of 7 3/8.
The company took some lumps in the financial press for its .com transition, but in this case it actually makes sense. This is not some fish-oil or ball-bearing company trying to cash in on the Internet craze, but a company that conducts all of its business online. If there's cause for criticism, it should be for not having done it sooner.
"But," you must be wondering, "isn't online gaming close to political dog meat?"
Yes, but that's where the eye of the needle comes in. In the last session of
Internet Gambling Prohibition Bill
, which proposed to make gambling on the Internet a federal crime, passed the
90-10. The bill, from
Sen. Jon Kyl
(R., Ariz.), died only because the
version was incomplete before the end of the session.
So on March 23, Kyl introduced
, a kinder, gentler version that was careful to exempt certain methods of betting on the ponies and thus increases its odds of passage. Kyl's spokesman, Vince Sollitto, explained that the bill specifically allows "closed-loop, subscriber-based services which operate in accordance with state laws and which provide for protections against underaged gambling."
Not coincidentally, Youbet.com is available only to those who use their proprietary software and subscribe using credit cards. The open architecture of Web-based gaming sites disqualifies them from Kyl's exemptions.
On Youbet.com, the punter must open a wagering account, and access to the account is not possible through an ordinary Web browser -- two things Kyl likes because it keeps people from, in his words, "clicking the mouse and betting the house." But for $5.95 per month, subscribers can get the equine version of the slo-mo live video. They also get the ability to place bets through the Pennsylvania subsidiary of British megabookie
. Youbet.com stresses that it does not actually accept wagers, but passes them along to Ladbroke's. Turf fiends pay their usual Ladbroke's fee, and Youbet.com collects 50%.
In addition, Youbet.com has nonexclusive broadcast deals with 24 racetracks across the U.S., including the well-known Santa Anita in California and Pimlico in Maryland. The monthly subscription fee also includes handicapping and other data, live track odds and official track programs.
Sounds like a sweet deal for the couch-potato handicapper and a good market for Youbet.com. According to the company, some 77% of horse-track betting comes from off-track bets.
But if it were this easy, everybody would do it. Which brings us back to the eye of that needle: gambling-specific issues and other issues common to early-stage .com companies.
First, in order to be legal, approval must be granted both in the bettor's state and in the state where the bet is accepted, according to Kyl's spokesman. This is not a problem, Youbet.com says in its
Securities and Exchange Commission
filings, because Ladbroke's does not accept wagering accounts from people who live in states that outlaw it, including Colorado, Georgia, Hawaii, Mississippi, Nevada, North Carolina, South Carolina and Utah.
Moreover, in state-licensed off-track-betting parlors, the state gets a cut of the bet. But with Youbet.com, the states get nothing. While there are no organized state efforts to block Youbet.com, the issue is a real one. In order to broadcast races at Santa Anita, just a few miles south of Youbet.com's corporate headquarters in Los Angeles, Youbet.com had to agree not to accept wagers from Californians for races there. While not a deal-killer, it could limit the market for Youbet.com or any other competitors (none online so far).
Robert M. Fell, Youbet.com chairman and CEO, said his company is prepared to work with states to "resolve the concern by establishing a 'hub' operation within that state or working out some other economic arrangement."
Assuming enough state politicians are willing to work with that, Youbet.com still faces some tough turf on its way to the pole.
Its technology is suspect.
horse-racing columnist Andy Beyer panned YouBet's technology in an April 3 column, "When Cyberspace Wagering Did Not Compute," complaining of confusing instructions, software crashes and missed bets. And postings on Youbet.com's message board -- which Youbet.com, to its credit, has not censored -- contains rants from unhappy users.
audio/visual is really bad!!!!!!!!!!" reads one typical posting. "The race starts, then everything stops and after watching the screen you get part of a broken call and the results if the damn thing hasn't stopped altogether."
Youbet.com President David Marshall told Beyer, "It's not perfect, but our idea was: Let's get it out there. What you see today is the worst you're ever going to see."
The company's finances could also pose a hurdle. Like other Net stocks, Youbet.com is losing money. For last year, the company lost almost $14 million and has accumulated losses of $37.5 million since its inception in 1995.
These losses have not stopped it from raising a bundle of cash. On April 6, it announced the completion of $36.7 million in 11% five-year convertible notes; three days later it filed an S-3 to register almost 3.9 million shares. Fell says he hopes the offering will allow the company to roll out its service worldwide and enable it to qualify for a listing on the
Nasdaq National Market
So is Youbet.com going to become Goodbet.com? Well, it's certainly come out of the gate first and fast, but every punter knows that no horse is a sure bet. If Youbet.com's secondary offering is a success, that should give it the war chest to keep improving its odds before the tote board closes.
Perdue helped launch three technology companies in roles ranging from marketing executive to chairman/CEO. He has written widely on technology for InfoWorld, PCWorld, Interactive Week, Forbes ASAP and many others. Perdue is also editor and publisher of
Wine Investment News. At time of publication, he held no positions in the stocks discussed in this column, although holdings can change at any time.