Jeremy Warner's Outlook: Is PartyGaming for real? Why yes it is, if you discount the fact that it is illegal in the US

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The Independent Online

"Gets down to what it's all about, doesn't it. Making the wrong move at the right time." For fanatics of poker, Edward G Robinson's immortal line in The Cincinnati Kid as he stacks his winnings after an epic two day face off with the Kid (played by Steve McQueen) has come to define the bluff and double bluff of this extraordinarily addictive card game.

As PartyGaming, the market leader in online poker, announces plans for a stock market flotation later this month, the question has to be "who's outbluffing whom?" at the suggested valuation of about $10bn. One of the co-founders, the exotically named Ruth Parasol, has already made one online fortune - from internet porn and sex chat lines. Now she stands to make a second capitalising on the current craze for online poker. For her it is both the right time and the right move. Investors need to reflect long and hard on whether it is also the right thing for them. Despite the gloss of respectability given to the board by the appointment of the Sage boss Michael Jackson as chairman and Brian Larcombe, former chief executive of 3i, as senior non-executive director, PartyGaming won't be everyone's cup of tea.

The mooted $10bn valuation is more than twice the size needed to put the company, which is just eight years old with the great bulk of the growth taking place in the last three, straight into the FTSE 100. It also dwarfs the valuation put on more traditional gaming groups such as Stanley Leisure, or even Hilton Group, which operates hotels as well as betting shops and casinos. Can it possibly be worth so much, or is this just another online bubble?

Unlike the early dot.coms, these online betting companies make money - in the case of PartyGaming, huge amounts of it. Last year, the Gibraltar-based company made $350m in after tax profits. This year, earnings are expected to swell to more than $500m, which would make PartyGaming look cheap against traditional gaming companies even on the jaw dropping $10bn valuation the sponsors are expected to opt for.

Why so modest? One reason is the risk factors, which the way things are going will end up filling half the prospectus. The biggest of these is the US, from which PartyGaming derives most of its players and revenues. Online gaming also happens to be very probably illegal in the US, making the company highly vulnerable to legal action, or attempts to curtail its activities.

The other big risk factor is the sheer scale of the returns. At more than 50 per cent of sales and with barriers to entry low to non existent, these look completely indefensible. Any industry generating such an eye popping rate of return is bound to attract an army of copycats. As the gold rush gathers force, the returns are certain to be competed away. If it's really that easy to make money, how long before the Microsofts, Sonys and BSkyBs of this world get in on the act? On the face of it, PartyGaming's business model is highly vulnerable to someone else doing it bigger and better. But for the dubious legal standing of these businesses in the US, they almost certainly already would be.

That said, PartyGaming has plainly achieved some kind of first mover advantage in creating a brand which players feel they can trust both to run an honest game and deliver their winnings. There's a networking effect going on here, which means the more people that use the site, the more it will attract others.

PartyGaming makes nearly all its money from internet poker. Is this just a passing fad, that will disappear almost as quickly as it arrived? Richard Segal, the ex-Odeon cinemas boss brought in by the founders to run the show, naturally thinks not. According to Christiansen Capital Advisers, a specialist gaming consultancy employed by PartyGaming to support its flotation, online gaming is set to more than double its share of the total gaming market over the next five years, and within that poker is expected to take an ever greater proportion of the online segment.

Well, they would say that wouldn't they? A full house or a busted flush? Take your pick, but it is always as well to remember that what goes up like a rocket tends to come back to earth as a spent stick. Frankly, you might do better sticking to the poker, yet even those who reckon they can stomach the risk might ponder Edward G Robinson's sign-off line on beating the Kid's full house with a straight flush. "You're good, Kid, but as long as I'm around, you are second best. You might as well learn to live with it."

Nuclear threat over runway decision

On a junket with journalists to China this week, Martin Broughton, chairman of British Airways, has threatened the airports authority, BAA, with "the nuclear option" in the ongoing row about where to site a new runway for London and how to pay for it. The nuclear option so threatened seems to amount to BA throwing its lot in with Michael O'Leary of Ryanair in lobbying for a break-up of BAA. This would indeed be an unholy alliance of nuclear powers, for the two airlines' reasons for opposing BAA's plans are poles apart.

Just to recap, the Government is proposing that the new runway be sited at Standsted, north-east of London. Ryanair reckons it is already being overcharged by BAA for use of Stansted and refuses to be railroaded into helping to fund a second runway. It is already actively lobbying to have BAA broken up. Now even British Airways is threatening to get confrontational, but for entirely different reasons.

Last month BAA bit the bullet and admitted what had been obvious all along - that there was no chance of building the runway and associated facilities by the planned date of 2011, unless it is cross-subsidised by passengers at Heathrow and Gatwick. This might suit Mr O'Leary, but it is anathema to Heathrow-based airlines such as British Airways. Hence the threatened nuclear option.

It's all very well making threats, but in the end it will be the Government that decides all three of these matters - where the runway is sited, who pays for it, and whether BAA ought to be broken up. The commercial case for siting the new facility at Heathrow is still overwhelming, as this is where international travellers most want to arrive and depart from and where they are most likely to want to pay for the privilege.

The reasons for opting for Stansted are largely environmental and political. Heathrow and its environs already seem too crowded to take another runway, whereas Stansted is in the midst of purest green countryside. The fact that Stansted is also staunchly Tory country, whereas the flight path to Heathrow contains some key marginals, is by the by.

By seeking ways to meet the Government's preferred solution, BAA has put itself on a collision course with all its major customers. Mike Clasper, chief executive of BAA, finds himself caught between a rock and a hard place. The only thing guaranteed to release him would be a Government u-turn in favour of a third runway at Heathrow, in which case from Richmond to Henley, the angry mob would march on Westminster. Not everyone can win in this battle of the runways.

A soft landing in the housing market?

A warm glow of comfortableness emanates from the Nationwide building society. Not only has it raised its retirement age to 75, because old people make the customers feel better, but its chief economist has declared the hoped for soft landing in the housing market duly achieved. I hope she's right about this, for in truth it is still far too early to tell. The fact that house prices don't yet seem to be falling is largely accounted for by the refusal of vendors to accept lower prices. The upshot is that transaction levels have plummetted and the market is dead. I'm not sure that counts as a soft landing.