Investing: How the U.S. Is Getting Beat in Online Gambling

Gambling lore is filled with tales of the lucky novice who walks into a casino and breaks the bank. This year it really happened. The fortunate neophyte is Vikrant Bhargava, who is from Rajasthan, India, and admits that he had never set foot in a casino until recently and still isn't all that fond of gambling. But in a single day in June, he and two colleagues walked away with the poker purse of all time: more than $1 billion in cash.

What distinguishes reality from myth is that Bhargava, 32, wasn't playing poker. He is the marketing director of PartyGaming, a company based in Gibraltar that operates the world's largest online poker site, PartyPoker.com Bhargava joined the firm in 2000 when it was an Internet start-up based in the Dominican Republic that was trying to establish a niche in the then novel world of online gaming. Today PartyPoker boasts that more than a million people have played for money on its site this year, the vast majority of them Americans, who are technically circumventing the law, according to the Department of Justice (DOJ).

Flush with success--and with profit margins of 60%--the firm went public on the London Stock Exchange this summer. The June 27 IPO, which valued PartyPoker at $10 billion, was Britain's biggest this year. Bhargava shared the pot with two other reclusive co-owners: a Net pornographer named Ruth Parasol, who switched from carnality to cards in the late 1990s, and Anurag Dikshit, an Indian software whiz whom Bhargava met when both were students at the Indian Institute of Technology in Delhi. They are not three of a kind, but they did cash out about one-fifth of the company. "Poker became a monster," says Bhargava, who sold stock worth $210 million and still retains almost 9% of the firm's equity.

Gaming is going global, and to stock markets, with a force that's making fortunes for a cluster of little-known industry outsiders and giving monstrous headaches to regulators, legislators and traditional casino companies. Poker is growing most rapidly; this year an estimated $2.7 billion will be spent on Internet poker games, almost double last year's take and 10 times that of 2002. That breakneck growth can't continue--one reason PartyGaming's stock drifted below its IPO price--but other casino games like blackjack, as well as lotteries and sports betting, are finding new homes online. According to Warwick Bartlett, who runs the British firm Global Betting & Gaming Consultants, almost $12 billion will be wagered over the Internet this year, or close to 5% of the world's total gross gambling yield. Over the next five years, the consultancy estimates, the total take will soar to about $22 billion, or about 7.5% of the industry total. "You've got at least 10 years of strong growth in the sector," Bartlett predicts.