Online Gaming a Gamble Or a Sure Bet?

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INFORMATION, COMMUNICATIONS & ENTERTAINMENT Online Gaming A Gamble or a Sure Bet?

KPMG INTERNATIONAL © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Foreword For thousands of years, people have been playing games of chance or wagering on the outcomes of various games and events. Today, that activity often takes place at casinos, game parlors, bookmakers and—increasingly—online.

The online gaming market represents one of the fastest growing segments of the gambling industry. H2 Gambling Capital, a leading supplier of data and market intelligence on the global gambling industry, puts the size of the global online gaming market at about US$21 billion, hitting US$30 billion by 2012. But that may be just a drop in the ocean, considering that some of the biggest potential markets—such as the U.S., China, Japan, and South Korea—still prohibit many forms of gambling over the Internet.

Market prospects could abound in the coming years. While it is difficult to predict political and legislative action, many markets that now ban online gaming could easily change their laws as a means of authorizing what is now an underground economy and increasing tax revenues—something that the current recession may be making more urgent.

Another key opportunity may lie in the regions where online gaming is now legal. For example, KPMG firms are now starting to see a shift in online gaming regulations in Europe; state monopolies may now be giving way to privately owned websites, as we see beginning to occur in France, Italy, and Denmark.

Other important trends include: • Industry consolidation: As is the case in many maturing markets, some KPMG firms are seeing an increase in M&A activity related to online gaming. • Business-to-business expansion: Established gaming sites are looking to license their software and services platforms to establish new revenue streams and gain market presence. • Entrance of land-based casino operators: Looking for incremental revenue, companies like U.K.-based Rank have already moved into the online space to complement their traditional casino and bingo services, while casino giant Harrah’s and gaming technology leader IGT are also taking steps in this direction. • Emerging platforms: Gaming is moving to the same mobile and social platforms that are exploding for casual games. We are pleased to present this overview of the state of the global online gaming sector and some of its major players. This is a dynamic and rapidly changing business, facing unquestionable consumer demand. Many operators, media, software and technology companies, payment solution providers, regulators, attorneys, and investors alike are all keenly watching how this industry will develop.

Sincerely,

Gary Matuszak Global Chair Information, Communications and Entertainment

A Gamble or a Sure Bet? The online gaming business is progressively moving into markets around the world, changing the model of the gambling industry as many consumers turn to the Internet to bet on sports, gamble on slots or play cards. Despite potential political and legislative restrictions, the market, which already produces more than US$20 billion in worldwide revenue,1 may be ready to grow further as new geographic regions open up and many governments become more receptive to Internet-based gaming.

One attraction of the online gaming market is its very high rate of growth. H2 Gambling Capital, one of the most widely quoted sources of online gaming statistics, says the market for global interactive gaming will grow about 42 percent to US$30 billion in 2012 from US$21.2 billion in 2008. This is significantly faster than the 15 percent growth that H2 forecasts for the gambling industry as a whole over the same period.2

The online gaming market is composed of a number of different types of games, each with its own business models and technology. They include:

• Sports betting: Betting on sporting events such as games, horse races, dog races, etc. • Online poker: Like land-based (or traditional) poker, the provider often takes a commission from wagers, and may be less risky than other casino games. • Casino games: Games of chance such as slot machines or roulette that operate the same as in a traditional casino. • Online bingo: A web-based version of the ages-old game. • Online lottery: Online versions of frequently government-sponsored lotteries.

The market for global interactive gaming will grow about

42% to US$30 billion in 2012 from US$21.2 billion “ in 2008.

1 eGaming Report,” H2 Gambling Capital, July 2009 2 Ibid.

Key Trends

Potential of the U.S. market Online gaming growth continues worldwide as the potentially richest marketplace remains largely unrealized.

Many companies abandoned the American market in 2006 with the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) that year. But the issue of Internet gambling hasn’t ended there. Bills to end the online gaming restrictions have since been introduced3, although few expect any bill to sail through the legislative process.4 Separately, the U.S. Treasury Department and Federal Reserve Board announced in November 2009 that they were delaying enforcement of the UIGEA for six months.5

Taken together, these activities suggest a public policy debate that could still evolve and in so doing regulate and tax online gaming. U.S. land-based casinos and global online gaming enterprises are actively preparing6 for and betting on that very outcome.

Deregulation of other markets While the U.S. may be an alluring gambling market, other geographic regions may hold more short-term, and even long-term, promise for the online gaming industry. Many European countries, for instance, have been shifting their online gaming regulations to open up markets to non-native competitors. In France, legislators have been discussing a bill that would end the state monopoly on online gaming, allowing privately owned websites to offer wagers on horse racing, soccer and poker. Italy, one of Europe’s largest gaming markets,7 has also been reforming its gambling laws.

Perhaps even more attractive are Asian countries where online gaming is still outlawed, but where traditional gambling is often thought to be part of the culture. China is an exploding market for Internet games; however it does limit land-based casino gambling activities to Macau, and prohibits online gaming altogether. Korea, an enormous market for online multiplayer games such as World of Warcraft, may have online gamblers, however gambling online remains illegal in Korea as well.

3 “Frank Introduces Internet Gambling Regulation and Enforcement Act of 2007”, Press Release, April 26, 2007. Retrieved from http://www.house.gov/apps/list/press/financialsvcs_dem/press042607.shtml, http://www.forbes.com/2009/05/06/ gambling-barney-frank-markets-equities-online.html 4 “Online Gambling Moves Need Traditional Backing,” Financial Times, November 8, 2009 5 Retrieved from http://www.federalreserve.gov/generalinfo/Foia/Reg%20GG-UIGEA-Comments.pdf, http://www.pokernewsdaily.com/uigea-regulations-officially-delayed-six-\“;months-6701/ 6 “Harrah’s Hire Ex-Party Boss for Online Push”, GamblingCompliance Ltd., April 14, 2009. Retrieved from http://www.gamblingcompliance.com/node/36950. 7 “Market Data Focus: Italy,” eGaming Review, October 2009

Entrance of traditional “land-based” casinos Many major casino players—including Harrah’s, Rank, MGM Mirage and Las Vegas Sands—have been looking into online gaming as a way to increase their market share and reach consumers who might not be willing to come to their The online gambler is physical casinos. In early 2009, for example, Harrah’s (which owns the World Series of Poker) brought in the former CEO of online poker site PartyGaming often a loner. to head Harrah’s Interactive Entertainment, a new company that will handle its — Joseph M. Kelly online operations. Then in August, Harrah’s Interactive Entertainment entered into a long-term deal with Dragonfish, the business-to-business technology arm of gaming site 888 Holdings, to power the Harrah’s site.8

Moreover, much of this effort is likely to be for incremental revenue, coming from people who don’t ordinarily go to casinos. “The online gambler is often a loner,” says Joseph M. Kelly, a business law professor at the State College of “ New York (SUNY) in Buffalo and co-editor of the Gaming Law Review. “He is not the kind of person who would go to Las Vegas and play blackjack or craps.”9

Industry consolidation Online gaming growth rates have also helped to drive market consolidation, as larger players in the gaming sector have looked to fill out their capabilities or reach into new markets. For example, IGT, the leading maker of gaming machines, in 2008 purchased Million-2-1, a developer of mobile/cell phone gaming technology. Million-2-1 also has a consumer-facing Internet games portal called Kerching that offers online casino, poker, bingo, SMS games and cell phone java slots games in legal territories.10 In September 2009, bwin purchased one of Italy’s largest online poker sites, Gioco Digitale.11

We predict new rounds of merger and acquisition activity, both among traditional gaming companies reaching into virtual markets and existing virtual leaders taking over smaller niche competitors.

8 “Harrah’s Interactive Signs Development Deal with 888 Holdings,” Poker News Daily, September 12, 2009 9 Interview with Forbes Insights, November 2009 10 IGT website, https://www.igt.com/content/base.asp?pid=58 11 “ bwin to Buy Italian Gamer for Up to 115 Mln Eur,” Reuters, September 14, 2009

In France, legislators have been discussing a bill that would end the state monopoly on online gaming, allowing privately owned websites to offer wagers on horse racing, soccer “and poker.

Bingo: online gaming with a social twist Social gaming—games hosted on social networks such as Facebook that are meant to be enjoyed and played with friends—has taken off in the past year, and online gaming companies are closely watching this growth for even more social games such as bingo. In a recent special report on Internet bingo in eGaming Review, Peter Trinz, senior vice president for Internet bingo software developer Parlay Entertainment, was quoted as saying: “The social networking phenomenon has run parallel to the development of the bingo product. Bingo is a social game and people now feel very comfortable interacting on the Internet.”12

According to a study by media analyst Screen Digest, with growing broadband penetration, increased promotional activity, a trend towards regulatory relaxation and the current economic downturn driving demand for in-home entertainment, online bingo has become the fastest growing sector of the online gaming market and offers huge potential for further growth.13

The Screen Digest study notes that the U.K. market, estimated to generate over £220m of revenue in 2008 (by gross win), is the largest, most mature and most competitive online bingo market globally. Other markets ripe for expansion are likely to include Spain and select markets in Eastern Europe, Asia and Latin America.14

Growth of mobile gaming With consumers increasingly comfortable using their mobile phones for products and services such as mobile banking, wireless Internet via 3G networks, and picture and video messaging, mobile gaming is likely not too far behind. While sports books have long taken advantage of sports-related subscription services to provide updates and scores, the mobile gaming market may still be fairly untapped, and its potential size may be huge. For example, mobile gaming will enable bettors (or punters) to place bets at an event or at a bar or pub while watching a game. Live streaming of sporting events via faster 3G connections has the potential to further enhance this market.

Emerging markets While online gaming has taken off in Europe and holds potential for the U.S. should legal issues be resolved, other global markets also hold tremendous promise. A solid infrastructure of broadband Internet connectivity, easy access to mobile applications, and safe and secure payments through a native banking system are three of the key factors that could support this growth. Emerging regions such as India and Latin America are likely to be the next major markets to come into view for the industry.

12 “A New Dimension,” eGaming Review Bingo Report ‘09 13 Bingo in the Digital Age: Global Market Assessment and Forecasts’, Screen Digest, March 2009 14 Bingo in the Digital Age: Global Market Assessment and Forecasts, Screen Digest, March 2009

Risks It would be remiss to discuss the online gaming industry without taking a look at a few of the possible risks—or challenges—that could have an impact on companies that are targeting this marketplace.

Legislation While much global legislative action focuses on liberalizing online gaming regulations, in many cases these efforts move slowly, and it may take many years for markets to actually open up to licensed competitors even after laws pass.

In addition, there is still potential for legislation that is intended to reduce or eliminate online gambling. A movement in this area could suddenly decimate some players. For example, when the U.S. passed the UIGEA in 2006, many online gaming companies that had been hoping for the best were quickly crippled or forced out of business.

Payment crackdowns Also in the U.S. market, credit card companies have recently tightened restrictions on the use of credit cards for e-gaming transactions. Both Visa and Mastercard have toughened their stance on allowing e-gaming transactions to be coded as other kinds of online commerce, keeping U.S. customers from using their cards to gamble online.15 These restrictions were put in place in anticipation of UIGEA law going into effect in June, 2010.

Reputation and privacy concerns Prospective online gaming customers remain sensitive to any perception that a provider cannot in some way be trusted, while existing customers may be fickle and easily switch to a provider which they perceive as more trustworthy. The constituents of trust are broad and range from the potential for fraud or players using software to beat the system, to security issues that cause players to be concerned for their online information.

The management of personal data gathered by an online gaming provider is subject to regulation by various EU privacy laws that are growing considerably in importance. These laws provide customers with rights, and online gaming providers with obligations, to honor. Compliance with such regulations is also a relevant constituent of trust between the provider and their acquired and retained customer base.”

15 “Visa declining U.S. egaming payments too,” eGaming Review, Feburary 5, 2010 8 ONLINE GAMING: A GAMBLE OR A SURE BET?

User experience In addition to reputation and security concerns, online gamers must be assured that they have a fair chance to win, and that operators are conducting themselves properly. Unlike “land-based” casinos, where players can physically see the way the games operate or cards are dealt, online and digital forms of these games require greater faith.

Aware of these concerns, groups such e-Commerce Online Gambling Regulation and Assurance (eCOGRA), an independent standards authority for the online gaming industry, have emerged. eCOGRA oversees fair gaming, player protection and responsible operator conduct, acting essentially as a player advocate where online gaming is lawful.

Geographic Sectors

Europe According to a recent study by Arthur D. Little, the online gaming market is opening throughout Europe, with annual revenue forecast to reach 8 billion euro by 2012.16 Following the examples of the U.K. and Italy, and under pressure from the European Commission, many other countries are currently preparing for a control-led opening of their markets.

One of the biggest challenges in Europe may be the allowance of cross-border online gaming. Currently, many countries have focused gaming reform activity within their own borders,17 which may have the consequence of creating a “balkanized” environment of multiple regulations.

With an online gaming market estimated at GB£1.48 billion, the U.K. has one of the most established online gaming industries, including sports betting, poker, bingo, lottery and online casinos. The online gaming sector has also seen a steadily increasing share of the total U.K. gambling market, growing from 3.7 percent in 2004 to an estimated 12.1 percent in 2009.18

One area of concern that leading international gaming consultants GBGC (Global Betting & Gaming Consultants) has for the Internet gaming sector is that of credit cards. The charge-off rate on bad debts by credit card firms jumped significantly in Q3 2009. The firms have been raising fees and interest rates in response to bad debts from customers in the recent recession. The credit card is the oxygen of Internet gambling—if customers cannot transfer funds, the business model can fall down. If access to personal credit cards becomes more difficult in the U.K. in 2010, there could still be pain ahead for its online sector.19

16 “Online Gambling: All In?” Arthur D. Little, 2009 17 “Market Barriers: A European Online Gambling Study,” Gambling Compliance, 2009 18 GBGC Interactive Gambling Report, September, 2009. 19 GBGC Analysis report prepared for KPMG, February, 2010

Italy represents a huge gaming market, and the country’s industry is expected to generate just under €18.7 billion in 2009. Still, its online gaming market is relatively small; online gaming losses are expected to make up just 5 percent of total gaming losses in Italy this year, compared to a rate of around 18 to 20 percent in the U.K., and 25 percent in countries such as Sweden.20 Italy has been liberalizing its onshore Internet poker and gaming regulations, allowing more providers to be licensed, although there is an onshore requirement. PokerStars recently established an onshore presence in Italy, and bwin Interactive Entertainment’s acquisition of a leading Italian poker site, Gioco Digitale, demonstrates the draw that the regulated market has.

The gaming markets in France and Spain, meanwhile, are expected to open up in 2010.21 In France (which like Italy has an onshore requirement), PartyGaming is reported to be entering the market in 2010 through a business-to-business The U.S. market for partnership,22 and Paddy Power signed a five-year deal with French operator online casinos and Pari Mutuel Urbain (PMU), one of the country’s two state-backed gaming and poker could be worth 23 betting providers. as much as North America The United States may have the most potential as a lucrative market for online US$12 gaming, but it is also the market with some of the greatest challenges. Currently, billion. online gaming is outlawed in the U.S. under the UIGEA, which prohibits U.S. banks and credit card companies from processing charges to and from online “ casinos. But should online gaming be legalized, the U.S. market for online casinos and poker could be worth as much as US$12 billion, according to Goldman Sachs.24

The consequence of the gaming ban in the U.S. has been to create a 21st Century equivalent of Prohibition. Legalization’s proponents say today’s similar dynamic— lots of enthusiastic bettors, no home-grown legal financial infrastructure—opens the way to money-laundering and brings disreputable money handlers into the mix. Should winnings actually flow through a U.S. financial institution, the consequences could be unpleasant for all concerned. In June, 2009, for instance, U.S. federal authorities froze bank accounts worth US$34 million representing 27,000 online poker players. The accounts were managed by two service companies, Allied Systems Inc. and Account Services, and were held at Wells Fargo, Citibank and other U.S. banks.25

20 “Market Data Focus: Italy,” eGaming Review, October 2009 21 “Online Gambling: All In?” Arthur D. Little, 2009 22 “PartyGaming to Enter French Market with B2B Deal,” eGaming Review, August 28, 2009 23 “New Paddy Power B2B Arm Signs Landmark Deal with France’s PMU,” eGaming Review, November 12, 2009 24 “Goldman Sachs: PartyGaming, 888, Playtech, bwin to Surve on Legal U.S. eGaming,” eGaming Review, June 30, 2009 25 “U.S. Deals Blow to Online Poker Players,” The Wall Street Journal, June 10, 2009

There have been proposals in Congress to legalize forms of online gaming. One bill, introduced by Financial Services Committee Chairman Barney Frank, has 66 co-sponsors as of March 2010 and would license and regulate all Internet gaming, except for sports betting. A Senate bill from Senator Robert Menendez would license only non-banking interactive poker and other skill games, as well Legislators in Florida as legalize interactive horse racing.26 Neither bill progressed in 2009 or in early were presented with a 2010, however. study from a lobbying Some individual states also have been considering legislation separately; others group showing that have been presented with studies suggesting how online gaming could boost legalizing online poker tax revenue. California, for example, was considering a bill enabling intrastate could raise online poker, although the bill has since run into delays.27 Legislators in Florida were presented with a study from a lobbying group showing that legalizing online poker could raise US$90 million annually in taxes.28 “US$90 million Canada, with an online gaming market estimated at CDN$1 billion29, has been annually in taxes. looking to liberalize its own online gaming laws. All gaming in Canada must be ’conducted and managed’ by a provincial government or agency. In early 2010, Loto-Quebec received cabinet approval to enter the online gaming business. Loto-Quebec will work with B.C. Lottery Corp. and Atlantic Lottery Corp.—both of which already offer limited online gaming—to develop a common electronic platform across their jurisdictions, as well as to achieve the volume of players that will be required to make online poker viable. These provincial agencies are expected to offer online gaming by the end of the year30, while other provinces such as Ontario, are expected to follow suit.31

26 “Internet Gaming Comeback?” Global Gaming Business, November 12, 2009 27 “California Legal Online Poker Bill to Be Delayed, Senator Warns,” eGaming Review, August 21, 2009 28 “Legal Online Poker Could Raise $90M a Year, Florida Told,” eGaming Review, November 16 2009 29 Canadian Gaming Business magazine, October, 2009, p. 6. 30 “Loto-Quebec to Get Into Online Gambling Business,” CTV.ca, February 3, 2010 31 “Ontario may follow other provinces and allow online gambling: McGuinty”, The Canadian Press, February 23, 2010

Asia Pacific and India The two largest prospective markets in Asia—China and South Korea, both remain closed to online gaming.

In China, the history of gambling can be traced back several thousand years. Today, legal lotteries are available in most Chinese cities, as well as in Hong Kong and Macau. But casino gaming is limited to Macau—which has now overtaken Las Vegas as the biggest gaming city in the world today.32 However while Macau’s laws cover land-based casinos, they do not currently grant concessions for online gaming.

South Korea, meanwhile, has been cracking down significantly on online gaming, which is still illegal in the country. Unauthorized gaming sites are available—a The two largest popular one is Hangame—but winners have had to cash out by using illegal prospective markets in money dealers, according to a report in Korea Times.33 To combat this, the country’s Ministry of Culture, Sports and Tourism, proposed a bill that charges people trading “excessive” amounts of cyber money with gambling.34 Asia—China and Japan currently bans most forms of gambling, with the exception of lotteries South Korea, both and bets on racing. Certain gaming machines, such as Sega Sammy’s pachinko remain closed to online and pachislot, are very popular in Japan’s leisure industry,35 although land- gaming. based casinos and online gaming are not permitted. Yet there has been some movement to lift this prohibition, opening up this high GDP market of 128 million “ people. The ruling Liberal Democratic Party in Japan has been reported to be communicating with some of the largest online gaming operators to discuss casinos in that country.36

32 “Unlocking the World of Chinese Gambling,” Global Gaming Business, September 2009 33 “Online Gambling Sites Mushrooming,” Korea Times, June 9, 2008 34 “Habitual Online Item Buyers Face Sanctions,” Korea Times, June 25, 2008 35 White Paper on Leisure Industry 2009, Japan Productivity Center 36 “Japan, a Potential Gold Mine for Online Gambling,” eCommerce Journal, February 13, 2009

In late 2009, foreign operators were submitting bids for the first online gaming licenses in India; it is estimated that country’s betting market is worth about US$60 billion. Bidders were said to include William Hill, Betfair and bwin, as well as local Indian operators, with at least three licenses to be granted in the Himalayan state of Sikkim. Reports said the goal was to have the betting services running in time for the football (soccer) World Cup in April 2010.37

Online gaming may soon take place in Australia as well. In October 2009, the government’s independent advisory body on gaming policy recommended lifting the 2001 Interactive Gambling Act, which currently bans online gaming. The Productivity Commission endorsed the idea of allowing operators to offer online poker and casino products to Australian residents, subject to a strict regime of consumer protection.38 Australians spent an estimated AU$790 million on offshore gambling sites in 2008.39

In late 2009, foreign operators were submitting bids for the first online gaming licenses in India; it is estimated that country’s betting market is worth “about US$60 billion.

37 “Betfair and William Hill Target India,” The Independent, October 27, 2009 38 “Lifting of Oz eGaming Ban Set to Spur Further Growth,” eGaming Review, October 26, 2009 39 “Lifting of Oz eGaming Ban Set to Spur Further Growth,” eGaming Review, October 26, 2009

Latin America Brazil, with 192 million people, is the most highly populated country in Latin America, and may have one of the strongest foundations for online gaming: a solid base of regular Internet users and a cultural history of gambling. Brazil currently operates different types of lotteries, all controlled by the federal government. Bingo games are also popular, as is sports betting, especially on football (soccer).40

Brazil has the potential on the surface to become a huge online gaming market, however it is currently prohibited and no online betting legislation exists.

Argentina, meanwhile, may be the sleeping giant for online gaming of Latin America. In Argentina, gambling and betting licenses are provincial, not national. bwin, for example, operates through a license from the Provincia de Misiones, while 888 has a partnership with Tower Torneos. Companies are currently trying to push the envelope in terms of gaining a national presence through advertising and sponsorships. bwin recently started advertising with a large national publisher, and has a shirt-sponsorship deal with Buenos Aires-based football team Boca Juniors.41

Another potentially lucrative market is Mexico. Mexico’s 1947 Federal Gaming and Raffles Law regulated gambling, and 2004 legislation allowed online gaming, with about 200 permits awarded in 2006, most of them to Apuestas Internacionales, a subsidiary of the TV giant Televisa.42

It is estimated that the Mexican gaming market may be worth some US$4.6 billion.43 Until now the gaming business has been dominated by the government-run National Lottery. Online gaming is expected to become one of the most lucrative niches of the business. Through Mexican sites (ending in .mx) of the online casinos, it is possible to access international sites of companies such as bwin, Intercontinental Global and others.

40 “Brazil’s Gambling Potential,” eGaming Review, October 2008 41 “Sleeping Giant,” eGaming Review, February 4, 2008 42 “Online Gambling in Mexico: A Safe Bet,” www.yogonet.com, September 2007 43 “Online Gambling in Mexico: A Safe Bet,” www.yogonet.com, September 2007

Some of the Key Industry Players44

Annual Name Headquarters revenues (year) Notes 188Bet Isle of Man Privately held • Online sportsbook provider owned by Cube Ltd. • Recently launched a mobile gaming product with Swedish mobile developer Mobenga • Strength is said to be in Asia • Has sponsorship deals with five teams in the English Premier League, including Liverpool F.C. and Chelsea F.C. 888 Holdings Gibraltar US$256 million • Online gaming site that also operates Casino-on-Net and Pacific Poker (2008) • Its B2B division, Dragonfish, provides technology, ePayment services and managed services through partnership deals with other gaming sites • Dragonfish has a deal with Harrah’s Interactive Entertainment to provide its online gaming services. Betfair London, U.K. €303 million • Internet betting exchange that also operates a poker product and game arcade (2009) • Claimed its 2 millionth customer in April, 2009. bwin Vienna, Austria €403 million • Largest online gaming company focused primarily on sports betting, as well as Internet casino and poker (2008) • Holds sports betting and casino licenses in Austria, Gibraltar, Italy and Argentina and an e-money license for the UK • Claimed 2.1 million active customers in 2008. Cryptologic Dublin, Ireland US$61.5 million • Licenses gaming software, support services and payment processing (2008) • Revised strategy in 2009 to focus on Internet casino, games development and licensing to top gaming/ entertainment brands • Companies using Cryptologic solutions include 888, Betfair, BSkyB, GigaMedia and PartyGaming. Gala-Coral Essex, U.K. Privately held • Operates in multiple formats, including casinos, bingo halls, retail betting shops (in the U.K. and Italy), and online gaming. • Recently agreed to a £175m capital as part of a debt restructuring45. GigaMedia Taipei, Taiwan US$183.6M (2008) • Provider of gaming software and services to the online gaming industry, primarily in continental Europe • Also offers platform of casual (non-gambling) games in Asian markets, including China, Taiwan, Hong Kong, and Macau. GTECH Providence, RI, €2,058 million • Leading operator of lottery systems, now a subsidiary of Italy’s Lottomatica (Lottomatica) USA (2008) • GTECH G2, its online gaming arm, is comprised of four subsidiaries—Boss Media, St. Miniver, Finsoft and Dynamite Idea—focused on providing software and services in the Internet and sports betting market. International Reno, NV, USA US$935M (2009) • Global gaming company specializing in the design, manufacture, and marketing of electronic gaming Game Technology equipment and network systems (IGT) • Operates two online gaming subsidiaries: WagerWorks, a casino software solution, and Million-2-1, which does mobile/cell phone gaming. Ladbrokes Middlesex, U.K. £1,172 million • Largest betting company in the U.K. (2008) • Operates 2,700 retail betting shops in the U.K., Ireland, Spain and Belgium • Operates online casino sites offering sportbooks, poker, casino games, bingo and backgammon • Sites use the OpenBet system from Orbis Technology. Microgaming Isle of Man N/A (privately • Software developer for online gaming industry held) • Online casino operators using its software include Ladbrokes, 32Red, Fortune Lounge Group, and others. Paddy Power Dublin, Ireland €283 million • Ireland’s largest bookmaker, now expanding in the U.K. and Europe (2008) • Non-retail (online) activities now generate 70 percent of its operating profit • Acquired a controlling stake in Sportbet, an Australian sports betting company. PartyGaming Gibraltar US$472 million • Online gaming company best known for its PartyPoker online poker room (2008) • Has made a number of recent acquisitions, including World Poker Tour and Cashcade (online bingo) • B2B division uses its software to create and operate bingo and casino eGaming services targeting the UK market. Playtech Isle of Man €111 million • Provides software and managed services for the online gaming industry (2008) • In joint venture with William Hill for William Hill Online • Other companies using Playtech software include PartyGaming, GoldenPalace.com and Bet365.

44 Source: All information from company websites and annual reports, unless otherwise noted 45 Gala Coral Lenders Said to Eye Cash Infusion, New York Times, February 16, 2010

Annual Name Headquarters revenues (year) Notes PokerStars Isle of Man Privately held • Said to be the world’s largest online poker room • Sponsors a wide range of online and offline poker tournaments, including the World Championship of Online Poker • Some 20,000 players are said be playing real money “ring games” daily. Rank Group Maidenhead, £522.2 million • Operates bingo services and casinos in the U.K., with complementary online gaming services U.K. (2009) • Has direct operations in U.K., Spain and Belgium. SBOBet Philippines Privately held • Online sportsbook and casino operator Isle of Man • Has operations in Asia (licensed by First Cagayan Leisure & Resort Corp. in the Philippines) and Europe (licensed by the Isla of Man) • Uses video streaming technology to offer “live dealer” games online. Sega Sammy Tokyo, Japan ¥429,195 million • Manufacturer of pachinko and pachislot machines (2009) • Amusement machines, including network-enabled trading card games • Amusement centre operations and arcade machines • Home video game software business, including content for mobile phones, PCs and toys. Sportingbet London, U.K. £163 million • Betting site that operates in the U.K, Spain, Germany, Greece, Turkey, and Australia (2009) • Operates Paradise Poker brand online poker site • 64 percent of revenues come from sports, 24 percent from casino and games, and 12 percent from poker. William Hill London, U.K. £963 million • Major chain of betting shops that operates primarily in the U.K. and Ireland (2008) • Online efforts—William Hill Online—are through venture with software developer Playtech.

Conclusion As the popularity of both gambling and online entertainment continues to grow, the online gaming market is without a doubt an attractive area of expansion for software developers, casinos and other land-based gambling operators, related suppliers, and industry newcomers and investors alike.

Even despite the unpredictable political and legislative hurdles and roadblocks in many countries, online gaming seems to have taken a strong enough foothold in some markets such as Europe that investment into this sector may have less risk than it appears. Coupled with the enormous potential of the industry—in the event that major markets such as the U.S. or Asia-Pacific allow online gambling and supporting activities—it is not surprising to see that the online segment of the gambling industry is by far one of its fastest growing divisions and piquing the interest of the industry’s largest players.

KPMG An experienced team, a global network.

KPMG’s global network of Information, Communications & Entertainment (ICE) professionals work with our firms’ clients in the online gaming and related sectors throughout the Americas, Europe, Middle East, Africa and Asia-Pacific.

Companies and investors in this industry face many financial, information and security risks and issues. In addition to helping our firms’ clients with these concerns, KPMG professionals can also advise on reducing costs, improving controls, protecting intellectual property, and meeting the myriad of challenges of the digital economy.

Contacts

Global Contacts European region Americas region Gary Matuszak Mark Summerfield Wade Loo Partner, Global Chair KPMG in the U.K. KPMG in the U.S. Information, Communications, +44 20 7311 3055 +1 650 404 5240 and Entertainment [email protected] [email protected] KPMG in the U.S. Neil Duggan Silvia Montefiore +1 650 404 4858 KPMG in Gibraltar KPMG in Canada [email protected] +350 200 48600 +1 416 228 7211 Maureen Migliazzo [email protected] [email protected] Global Executive Russell Kelly Information, Communications, Asia Pacific region KPMG in Isle of Man and Entertainment +44 1624 681013 Kieran Lane KPMG in the U.S. [email protected] KPMG in Australia +1 650 404 4425 +61 (2) 9335 7514 [email protected] [email protected]

Edwin Fung KPMG in China +86 10 8508 7032 [email protected]

© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. About the Authors Mark Summerfield is Global Head of KPMG’s Gaming practice based in London, U.K. Mark has worked with gaming companies for 14 years. More recently his team has delivered assurance, acquisition and advisory services to online gaming companies ranging in size from private enterprises to companies listed on the U.K. stock exchange.

Wade Loo is a technology audit partner based in the U.S. firm’s Silicon Valley office. He has a wealth of experience as lead partner for various global technology corporations and a global business perspective having worked in KPMG firms in Japan, China and Singapore for eight years.

Contributors We would like to acknowledge the contribution of Archie Watt, Elaine Pratt, Forbes Insights (www.forbes.com/forbesinsights) and Global Betting & Gaming Consultants (www.gbgc.com) who assisted in the development of this report.

The information contained herein is of a general nature and is not intended to address the circumstances of any © 2010 KPMG International Cooperative (“KPMG Interna- particular individual or entity. Although we endeavor to provide accurate and timely information, there can be tional”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate International provides no client services. No member firm has in the future. No one should act on such information without appropriate professional advice after a thorough any authority to obligate or bind KPMG International or any other examination of the particular situation. member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Designed by Evalueserve. Publication name: Online Gaming Publication number: 1001505 Publication date: March 2010 Printed on recycled material