PartyGaming, the World’s Largest Internet Poker Site, Soared to a Market Capitalization of £5.9 Billion On Its First Official Day As a Public Company –10% More Than Veritable Reuters That Makes 90% of Its Money Selling News and Information Globally To Those “Gambling” on Shares and Foreign Exchange.

Philip Stone July 4, 2005

And while it has always been said in Reuters that information is power, and from that flows profit, the real truth is that hosting the world to your poker table where you get a cut of the pot would appear to be a whole lot more profitable.

Now while investors don’t like to be thought of as gamblers, the fact is they place their bets, eh investments, on the price of shares going up or down, or currencies moving one way or another. And Reuters provides them with the news and information that hopefully allows the gamblers, eh investors, to make the right decision.

PartyGaming basically cuts out all the middle people and runs the world’s largest Internet poker palace where gamblers admit they are gamblers and they can play for very large stakes, just like the stock market.

So it is kind of fitting to compare Reuters, founded in 1861, and PartyGaming, founded in 1997, both listed in London, to see who has the business model right.

In 2004 PartyGaming generated a pre-tax profit of $371 million (£211 million), all from the Internet. In 2004 Reuters generated a global pre-tax profit of  £437 million – about 90% from banks and the rest from media.  In addition to its wholesale business Reuters is trying to generate some “real” money via the advertising model on its reuters.com site.

PartyGaming has about 1100 employees spread between three centers – the UK, Gibraltar, and India. Reuters has approximately 14,500 staff in 91 countries.

PartyGaming says its sales in the first quarter of 2005 almost doubled from a year earlier. Reuters says its Q1 sales were down 6.2% from the same quarter, 2004. PartyGaming says it 2004 net margin was 57.9%. At Reuters it was 14%.

Analysts expect that PartyGaming will enjoy 20% annual growth. It is currently making a profit of about $60,000 an hour on revenues of around $100,000 an hour.  Analysts would be very happy if Reuters could generate low single digit growth.

Ah, you might say, but investing in a poker company has a much higher risk factor than investing in a great British news and information institution like Reuters. The poker company surely is much more of the gamble. Maybe, maybe not.

Almost 90% of PartyGaming’s business comes from the US, and that is a big risk in itself since the US Justice Department says online betting is prohibited by existing legislation covering cross-border gambling. Not so, says PartyGaming – it claims the legislation is directed at sports betting, not poker.

The problem for the Feds is that PartyGaming has no presence in the US so who do you arrest? The players? Doubtful? It has threatened to arrest the company’s directors should they visit the US but so far no one has been hauled away in chains.

If the US business was to fall apart because of legalities then the PartyGaming shares could head south very dramatically, and that type of share movement just couldn’t happen with an institution like Reuters, could it?  Well, as a matter of fact it already did.

During the dot.com boom days, on March 6, 2000, Reuters’ shares closed at their all-time high of £16.20. Yet just three years and one week later, on March 12, 2003, the shares closed at just above 95 pence, the company’s business model in tatters and with real questions about its survival being asked.  Today its share price languishes around the £4 mark. So it doesn’t really matter whether you are a poker/gambling site, or a veritable “old money” institution, if you get it wrong the stock market treats you the same with no mercy.

As for strategy, PartyGaming recognizes its US vulnerability and says it wants to spread the risk by developing its business in other parts of the world. At Reuters, management says it has a strategy going forward (for the past three years the strategy was to cut costs) but we have to wait until the half-yearly results later this month to learn what the new strategy is. Management should be able to summarize it in just three words: sell, sell, sell.

Keeping in mind the PartyGaming launch was oversubscribed three times by leading banking and investment institutions, it would appear the financial community, perhaps reading their Reuters wires, have determined the threats from the US, while certainly a risk, do not mean it is a risk not worth taking. Because of the risk the shares were launched on the low side, but by the end of the first official day of trading on the London exchange the shares had closed 28% higher. The institutions were in the game in a big way!

PartyGaming is not the first Internet IPO to show the real power and financial strength of the Internet. Look at Google. It floated in August, 2004, and within a year it is now the largest capitalized media company in the US, with its launch share price nearly quadrupled. RBC Capital Markets forecasts that Google will earn about $1 billion this year -- about $5.18 per share -- and that will jump to $2.5 billion in 2007. It posted a profit of $396 million in its most recent quarter, well above expectations. The general Wall Street consensus is that Google will increase its earnings annually by some 32% in each of the next five years.

So, back to the original question: is the better business model to own the trading floor and get a cut of the action as PartyGaming does, or is it better to charge a premium for your news and information that helps those with that information to make better decisions on the trading floors owned by others?

The financial institutions, armed with their sophisticated risk analysis software – perhaps some of that also from Reuters – are showing their true colors. They are taking the gamble that for now the US authorities will leave PartyGaming alone. And if they’re right, they’re out to make a killing.

And we haven’t been able to say that about Reuters for a very long time!