The Party Poker Puzzle

The U.S. Congress recently passed a law cracking down on internet gambling. I have no doubt that time will demonstrate how incredibly stupid this law is. Tens of millions of Americans gamble recreationally. Past experience tells us that attempts to ban activities that most people consider harmless always fail. By missing the opportunity to legalize internet gambling and allow American-owned companies to get in on the action (and allow the government to tax it), the Congress showed a disturbing lack of common sense. How ridiculous is it to try to ban online poker in an era when you can hardly turn on the TV without seeing poker being played?

But railing against idiotic laws is not the real reason for this post.

The successful online poker sites practically mint money. Party Poker often has 80,000 people playing online at once. The poker site takes a small cut of each pot (known as the rake). Party Poker nets almost $2 million a day in profit. Because players want to be where the other players are (it makes it easier to find a table you want to play at and allows for bigger tournaments with million dollar payoffs), the large poker sites have a huge advantage over smaller ones. Thus, like other internet activities with network effects (think eBay), these large profits can survive even in the face of competition. The people in charge of Party Poker (including the unfortunately named founder Anurag Dikshit), are now on the Forbes 400 list of the richest people in the world.

In response to the passage of the recent U.S. internet gambling law, Party Poker announced that it would no longer let Americans play on its site. The fact that it is a publicly traded company probably made it much more difficult for Party Poker to continue taking American money than it would be for private, Latin America-based sites. After the announcement, its share price on the London Stock Exchange plunged by 60% and has gone down more since then. Three-fourths of its players were American. And, with all the Americans gone, I’m sure many of the non-Americans will no longer find the site an attractive place to play.

I’ve got a friend who is both a professional poker player and an economist. Just minutes after Party Poker said it would close its doors to Americans, he made a good point: why didn’t they just sell the company to a group of private investors who were willing to absorb the risks associated with dealing with Americans? Is there no one out there with $5 billion who could buy the site and keep it operating? That person wouldn’t be able to come into the U.S. without getting arrested, but otherwise is unlikely to face serious legal repercussions.

Apparently the folks at Sportingbet, another firm that trades on the London Stock Exchange, are smarter than the ones running Party Poker. Last week I got an email from Sportsbook.com, a subsidiary of Sportingbet. It read as follows:

“With the recent passing of law effecting financial institutions’ transactions with online gaming companies, Sportsbook.com’s parent company, Sportingbet PLC, has decided to stop taking wagers from customers in the US effective immediately.

Sportingbet PLC has sold Sportsbook.com to the existing management team and a group of investors who are continuing to run Sportsbook.com just as always-or perhaps even better than before.”

Economics at work.