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

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The trio's timing was propitious. Internet poker was already available in the late 1990s, but the technology was clunky and the game less popular than sports betting and lotteries. Dikshit created a version that enabled multiple players to participate, and PartyGaming quickly went after the market leader at the time, Paradise Poker. "We weren't ready for the launch when we did launch" in August 2000, Bhargava recalls, shuddering at the site's initial reliability problems. The breakthrough came a year later, when the company hired a well-known poker player, Mike Sexton. He came up with a gimmick that got gamblers' attention: a $1 million first-place prize for an all-comers tournament.

When poker took off in the U.S. after the Travel Channel began televising tournaments in 2003, PartyPoker was holding aces in the hole. The contests, with peephole cameras under the table capturing the action and graphics showing each player's odds of winning, proved a smash hit for the cable channel. PartyGaming paid a bargain $7,000 per 20-sec. spot to advertise on the show. "We saw our market share go up from 20% to 50% in a fairly short period," Bhargava says. PartyGaming spent a whopping $52 million in the first half of this year to entice paying customers to the site--more than triple the amount it spent a year ago and up from just $10.6 million for all of 2003.

That hefty increase in acquisition costs is a plus, though, because it amounts to a formidable obstacle for new competitors. PartyPoker can afford the ante. In the first nine months of this year, the average daily "rake"--its cut of the amount bet--rose a third, to more than $2 million. Despite a summer stock swoon, market players are still betting that online poker isn't a short-term fad. One thing hasn't changed: you won't find Bhargava in a casino, online or real, anytime soon. "I can see myself playing poker off-line, but I can't find low-limit games," complains the centimillionaire. "Online is very different: that's entertainment." Besides, he's already won that game.