Jason Kim was on a roll. One night last month, the 33-year-old policy analyst for the U.S. Department of Commerce won $60 in just 15 minutes of virtual, low-stakes Texas hold 'em on the popular online gambling site PartyPoker.com. Playing from his home PC against a half dozen strangers from around the world, Kim won three hands with a pocket pair of aces, a two pair of kings and nines and, finally, by turning a full house from what poker pros disdainfully call "the hammer"--a seven and two of different suits. But when he's not sitting at his computer these days, Kim has a different moneymaking scheme on his mind: betting on the poker sites, instead of at them. Earlier this year he invested in the stock of Internet bank Neteller, which allows players to gamble online with real dollars, and recently he began studying the stock of PartyGaming, the parent company of PartyPoker. "Everyone is going to be playing online in a couple of years," he says. "I want to get in before the gold rush really starts."
He may already be too late. Thanks to the never-ending broadcasts of celebrity and professional poker tournaments, poker is now the third most-watched televised sport on cable TV--behind only car racing and football. Business in the roughly 300 major virtual poker halls of the Net is booming, and in late June, five-year-old PartyGaming, based on the tiny European peninsula of Gibraltar, was among the first to take a crucial step for any ambitious dot-com: it went public on the London Stock Exchange, where its stock has since shot up 40 percent. Other poker dot-coms are now lining up to follow suit and big American investment funds are throwing in their chips and investing. Only the U.S. casino giants are left on the sidelines, banned from the action because of one remarkable fact: despite its success, online poker is technically illegal in America, according to the U.S. Department of Justice. Still, as Web poker booms, the Feds aren't doing much to stifle the party. "Everybody is comfortable that the U.S. government is not going to take any enforcement action," says Las Vegas lawyer Anthony Cabot.
The poker Web sites evade Uncle Sam with a fashionable modern-business strategy--offshoring. They set up their homes in such places as Gibraltar or the U.K. protectorate the Isle of Man, where they are regulated, lightly taxed and free to ride the seemingly unstoppable wave of poker popularity. Every day, 1.8 million players--more than 70 percent from the United States--throw their chips into the virtual pots of the Internet, according to tracking firm PokerPulse.com. Research firm Christiansen Capital Advisors says online-poker revenues have grown from $82.7 million in 2001 to $2.4 billion today--and projects the amount to double once again by 2005. The PartyGaming IPO in June offered a peek into the fortunes being amassed by the online poker start-ups. Its prospectus revealed that the company's profits more than tripled to $349 million in the last year, and it had virtually no debt. While concern over legal issues initially drove the IPO price down, the offering was three times oversubscribed, despite being off-limits to U.S. investors. "This isn't like the dot-com opportunities of the past," says Nigel Parson, a research analyst at Williams de Broe in London. "This spews out cash like you've never seen."
The popularity and success of online poker hasn't changed any minds in Washington. The federal government argues that Internet gambling violates three federal antigambling laws, including the 1961 Wire Act. A Justice Department official, who was able to speak frankly with NEWSWEEK on the condition his name not be used, noted that while Internet gambling is against U.S. law, prosecutors have greater priorities, such as combating terrorism and drugs. "We give what resources we can to it, but it's hard to keep up with," he says.
That makes playing or hosting poker games on the Web a little like going a few miles over the highway speed limit. It's technically illegal, but everyone does it and you probably won't get in trouble. Last month at the World Series of Poker in Las Vegas, nearly two thirds of the 5,619 players qualified in online competitions. Executives of the offshore poker sites, many of whom were in town for the tournament, seemed untroubled by any potential penalties for their illicit vocation. Banners for their Web sites covered the walls and halls of Harrah's Rio casino, where the competition was held. Similarly, online poker ads have returned to magazines, TV and the Internet, even though the Justice Department asked media companies in 2003 to stop taking them. The poker dot-coms have devised a simple workaround: they advertise their "educational" dot-net sites (such as PartyPoker.net), where players use imaginary money, then leave it to their customers to find the real wagering. This year, two offshore poker sites, Full Tilt Poker and UltimateBet, have even used their dot-net affiliates to sponsor entire shows on Fox Sports.
Even Wall Street can't stand being left out of this high-stakes game. Goldman Sachs and Morgan Stanley are reportedly working on the forthcoming IPO in England of Betfair, which helps gamblers place wagers against each other on everything from sports to politics (Betfair does not currently take wagers from U.S. citizens). Big investment funds are also snapping up shares of the Web gambling companies. Fidelity, Goldman Sachs and Blue Ridge Capital--all American firms--are three of the top five institutional investors in the U.K.-based sports-wagering site Sportingbet.com, which trades on the London exchange.
The only players left without a seat at the green velvet table are American companies like the big casinos, and they're frustrated by missing out on the fat stakes. Two years ago, MGM launched a poker site from the Isle of Man that catered only to non-U.S. players. It gave up after two months because customers didn't care to go through the arduous process to prove they didn't live in the United States. Steve Lipscomb of the World Poker Tour, who kick-started the poker craze with a TV show on the Travel Channel, is now trying to make that same everywhere-but-America strategy work with his new poker site. "It's the most inequitable circumstance you can imagine," he says. "Only companies that pay any attention to the regulatory authorities in the U.S. cannot participate in this business."
Everyone else plans to keep pursuing the tempting pot. The online casinos talk about expanding their service onto mobile phones and interactive television. Many experts also predict consolidation in the industry, as firms like PartyPoker, flush with IPO cash, look to gobble up rivals. Meanwhile, Arizona Sen. Jon Kyl plans to reintroduce legislation this fall to explicitly ban online gambling--though versions of his bill have failed to make it through Congress for the last eight years. (His representative declined to give details of the bill, but confirmed it was forthcoming.)
For gamblers like Jason Kim, it hardly matters. Regardless of U.S. policy, there are 80,000 players on PartyPoker.com every night and, he notes with glee, "there are lots of bad players willing to lose their money to good players." As long as that's true--and as long as the primal and sometimes destructive passion for gambling beats strong in the human heart--it would be unwise to place a bet against online poker.