LONDON -- For offshore Internet betting companies it wasn't what U.K. Chancellor

Gordon Brown

said during his budget speech this week that was important, it was what he didn't say.

Offshore Internet betting operators had feared the chancellor would announce measures to stem the flow of betting activity out of the U.K., which is threatening the almost 500 million pounds ($785 million) the Treasury receives annually from betting duty. What the chancellor decides is of paramount importance to such gaming companies. Offshore Internet betting is a unique Net sector because apart from

Youbet.com

(UBET)

, there are no other major U.S. players -- the big players are either subsidiaries of British bookmakers or operate out of British territories.

Among the mooted measures was a cut in the duty paid by U.K.-based operators from 6.75% to somewhere near the 3% charge that offshore operators add onto each bet. Even worse for some of the Internet operations would be a decision by the Treasury to close the tax loophole by extending existing legislation that covers subsidiaries of British companies based in tax havens such as Gibraltar. It would require these units to pay tax equal to the amount of revenue avoided.

For independent Internet betting companies operating out of British territories, such as

Sportingbet.com

on the Channel Island of Alderney, there is concern the U.K. advertising ban on the offshore companies will be expanded. The advertising ban may prevent Internet service providers and portals from striking up partnerships with independent Internet offshore betting firms. Currently, an icon on

British Sky Broadcasting's

(BSY)

Sky Sports

site takes the user straight to Sportingbet.com's Web site.

Government Hedges Its Bets

As it happened, Brown said nothing on the issue, but

Inland Revenue

, the tax authority, stated it would investigate the matter further. Inland Revenue also said it would focus on two preferred options -- either to require companies to pay duty on every bet placed by a British punter, or else force the bookmaker, including its offshore arm, to pay tax on its gross profits.

"This was a pragmatic approach by the chancellor, putting it in a holding pattern until all the parties can be consulted," said one gaming analyst, who declined to be named.

Shares of Sportingbet.com, which are traded on

OFEX

, closed Wednesday down 2.3% at 127.5 pence, and the shares of

Sports Internet Group

, a U.K. onshore concern, closed on London's

Alternative Investment Market

unchanged at 722.5 pence.

Yet the U.K. government realizes it does need to do something if it is to prevent the majority of betting moving offshore.

Since

Victor Chandler

set up a subsidiary in Gibraltar last year and began taking bets over the telephone and now the Internet, all three of the other major bookmakers,

William Hill

,

Ladbrokes

and

Coral's

, have followed suit. Together with the independents such as Sportingbet.com and potential newcomers

E*Sport

and

Zetters

, betting over the Internet is expected to grow exponentially over the next few years. According to

Datamonitor

, gambling online in Western Europe alone is expected to grow from around $1 billion this year to $5.5 billion in 2004.

Who Will Be the Also-Rans?

The Internet is perfectly suited for betting, and it is expected to get a further shot in the arm with the advent of third-generation mobile phones and interactive television. This has inevitably led to gaming companies jostling to strike up partnerships with phone and TV operators. Ladbrokes has announced it is developing a product in conjunction with

Ericsson

(ERICY)

, and

TSC

has learned that Sportingbet.com will soon announce an interactive TV venture with bookseller

WH Smith

, retailer

Littlewoods

,

Deutsche Telekom

(DT) - Get Report

and a large, but unnamed, British bank.

With the industry in its very earliest of stages, it is hard to say who will come out on top. Some believe that it is those with the largest brands, such as William Hill, that look in the best position.

However, Mark Blandford, managing director of Sportingbet.com, argues that the William Hills of this world are primarily U.K. operators, and their brands not well known in Asia or the Americas. Rather, Sportingbet.com is building its brand by forming partnerships with local operators, such as its venture with

J-Craft

in Japan.

Ironically, the reason for a lack of major U.S. players in this part of the Internet may also help explain why the online gambling market won't be as large as some hope. In the first half of this year, a bill will go before the

U.S. Congress

that will seek to ban Internet gambling in the U.S., including preventing U.S. citizens from placing a bet with an offshore site.

Heavy handed, perhaps. But no doubt Chancellor Brown will be watching closely.