Los Angeles Business Journal: Online betting threatened by WTO decision on U.S. market

ONLINE horse race wagering has become a $1 billion industry in the U.S.--one reason why Woodland Hills-based Youbet.com Inc.'s stock has more than doubled in the past year, to just under $6 last week.

But a recent World Trade Organization ruling threatens to undo Youbet.com's fledgling success.

The WTO ruled that the U.S. violated fair trade treaties by allowing U.S.-based companies to take horseracing wagers online, while barring foreign companies from doing the same.

The April WTO ruling gave the U.S. up to 15 months to do something, although it's unclear what. "We cannot predict what actions, if any, the U.S. government may take in response to this report," Youbet.com Chief Executive Chuck Champion said in a recent conference call.

Meanwhile, the company has been focused on growth, looking to attract the 21- to 40-year-old market in expanding its base of 140,000 customers.

It acquired Dutch Antilles-based International Racing Group, which took in $210 million in wagers last year, and its Nevada subsidiary, It's All Good Buddy Inc. The deal will cost roughly $10 million over three years.

But the WTO ruling is enough of a thorn in the company's side that it dedicated a section in its annual report, and executives bring it up in quarterly conference calls. Complicating matters is that several proposals are floating around Congress that would be adverse for the company, including anti-online gambling provisions and allowing international companies to compete in the U.S.

"Various state legislatures, Congress and federal executive authorities have proposed laws and regulations directly applicable to online and Internet gaming, which could have a material adverse effect on our business," stated a company filing. YouBet.com executives declined comment last week.

Another company that would be affected is TVG, the Gemstar-TV Guide International Inc. subsidiary that broadcasts horseracing on television and offers online wagering. TVG executives referred questions to the National Thoroughbred Racing Association. Greg Avioli, executive vice president of the association, said there is confusion about what the WTO ruling means, "mostly because of the complex, almost Byzantine nature of the WTO itself."

Nelson Rose, an expert on gambling law and a professor at Whittier Law School, said the WTO is requiring "that the U.S. market be open to competing foreign off-track betting companies, or that the U.S. market be closed to everyone." That he said, "would put Youbet out of business."

Case outlook

Though YouBet.com shares have cooled in recent weeks, the onetime penny-stock has soared since Champion steered the company to profitability last year. Net income in 2004 was $4.6 million, compared with a net loss of $4 million a year earlier.

Revenues rose to $65.2 million in 2004 from $54.2 million in 2003. Of the billion dollars-worth of wagers placed online last year, YouBet.com took in about $315 million.

The WTO action arose from a claim filed by Antigua in 2003, contending that certain federal laws unfairly barred companies based in the island nation from operating in the U.S.

Under a 1978 exemption to federal laws that bar most other interstate gambling, the U.S. allows remote wagers to be placed on horse races. But the exemption doesn't include foreign companies.

Meantime, Antigua and other Caribbean islands have become havens for off-shore betting operations, and they are seeking a piece of the U.S. action. Horse-wagering totaled $15 billion in the U.S. last year, according to the NTRA.

The horse-racing industry, buttressed by 23 state attorneys general in a letter to the WTO in April, proposed that the U.S. withdraw from the gaming provision of the international treaty. The action would be complicated and costly, Avioli admits--and some legal experts doubt its viability.

"The WTO has made its decision, and the U.S. has to abide by it--not just because we're bound by treaty, but if we don't obey a WTO decision, we'll have lost all of our leverage to get countries like China to obey WTO decisions," Rose said.

Youbet.com Inc.

[GRAPHICS OMITTED]

YEAR (Dec. 31)                        2004      2003

Revenue (millions)                   $65.2     $54.1
Total Expenses (millions)             64.0      57.3
Operating Income (Loss) (millions)     1.2     (3.1)
Net Income (Loss) (millions)           4.6       (4)
Earnings (Loss) Per Share            $0.15   ($0.15)

SUMMARY

Business: Online horse wagering

Headquarters: Woodland Hills

CEO: Chuck Champion

Market Cap: $184 million Dividend Yield: None

Total Liabilities: $12.1 million P/E Ratio: 29.1

Long-Term Debt: $107,000