Devangshu Datta: The great gamble

TECHNO BEAT

Last week, the global media made much of an unlikely alliance between a former porn queen from California, her husband, and two IIT whizkids.

PartyGaming, a company founded by Ruth Parasol, her husband Russ De Leon, Anurag Dikshit and Vikrant Bhargava is about to launch an initial public offering (IPO) on the London Stock Exchange. The offering could yield $ 3 billion in subscriptions and create a valuation of $ 10 billion plus for the business.

Parasol and De Leon made a fortune purveying porn and running sex-chat services. In 1998, they sold off the porn empire and established an online gambling business. The tech part of that was handled by Dikshit, an IIT Delhi graduate, who controls about 40 per cent of PartyGaming. Dikshit's batchmate Bhargava is the marketing head and owns about 15 per cent.

PartyGaming owns Partypoker.com (PP), an online poker-playing site. PP has a simple revenue model. It provides a stable platform for people to play poker online for real money. PP charges a commission (known as a "rake" in casino parlance) of around 1 per cent of the money bet on each hand.

At any given instant, PP has about 70,000 people sitting at its virtual tables; it controls a huge chunk of the online poker market. It's seen fabulous growth along with excellent profitability and high margins.

In 2002, PartyGaming declared gross pre-tax profits of $5.8 million. In 2003, gross profits were $ 89.2 million, rising to $ 372 million in 2004. In the first quarter of 2005, it earned $125 million "" about $ 1,000 a minute.

The online poker market grew at a fantastic 460 per cent in 2004 to reach an estimated $ 770 million. Credible estimates suggest that the online gambling sector is worth over $ 8 billion.

PartyGaming is headquartered in the tax-haven of Gibraltar, with its servers hosted on a Mohawk reservation in Canada. The marketing office is in London. Most of its 1,100 staff work out of a Hyderabad call-centre and software development site. If the IPO works, the staff, including the call-centre employees, will collectively benefit to the tune of approximately $ 550 million in free stock options.

The IPO could run into legal problems. The Brits are pretty relaxed about gambling in any or all formats. Americans are not. Neither are Indians.

Online gambling is explicitly banned in the US under the Interstate Wire Act. PartyGaming admits a substantial chunk of its revenues comes from US customers, who are presumably breaking laws to indulge in a favourite pastime. US-based FIs, may shy away from the issue. The Red Herring prospectus is due this weekend and the reaction to that will be critical.

The official Indian response to online gambling is more confused. There is no explicit bar in the IT Act, 2000. But the Public Gaming Act of 1867 (PGA) clearly states that it is illegal to run a public gambling establishment that charges commissions or otherwise earns an income from gambling and so on.

The PGA's provisions might extend into cyberspace. This would not affect Dikshit or Bhargav, who are NRIs. But it could, if interpreted strictly, put the entire Hyderabad-based employee contingent behind bars.

It is easy to argue that PP is a public gaming establishment and that the 1,000-odd call-centre employees have been collectively guilty of running this. Their income clearly comes from commissions paid by gamblers. Hundreds of Indians are arrested every Diwali for wagering far smaller sums.

If one accepts this logic, the "illegal" earnings of the Hyderabad-based employees have been condoned by the income-tax department, which has accepted their tax-returns. The RBI has also been culpable by allowing an influx of dollars openly earned by charging commissions from gambling.

One could split hairs and suggest that poker is a game of skill "" indeed, this argument has been made with varying degrees of success in various countries. Or, one could argue about the definition of a public gaming establishment. But it might be better to simply chuck out the PGA. That would give resident Indians legal access to the fastest-growth, tech-enabled business in the world.