Is Facebook Still a Gamble?
DeWayne is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tuesday's announcement that Facebook (NASDAQ: FB) has become the world's largest virtual casino with over 900,000,000 potential players seemed to go largely unnoticed by investors as the share price continued its fall.
On Tuesday, Gamesys, an independent gaming company, launched a version of online Bingo for Facebook users in Britain who are at least 18, and which the company said will pay winners real money. Gamesys will also offer virtual slots gambling on Facebook.
Facebook confirmed the deal with the following statement - "Real money gaming is a popular and well-regulated activity in the UK and we are allowing a partner to offer their games to adult users on the Facebook platform in a safe and controlled manner."
Facebook did say there are no current plans to offer gambling in any other countries or with any other partners besides Gamesys. Also there was no disclosure of the revenue sharing agreement between Facebook and Gamesys. Facebook currently takes a 30 percent share of revenue for transactions on non-gambling games such as Zynga Inc's (NASDAQ: ZNGA) popular Farmville game.
Although immediate plans are limited in scope, this cash cow has the obvious potential to save Facebook's bacon in ways that Farmville could only dream of. Global gambling revenues passed $400 billion, according to the latest research undertaken by Global Betting and Gaming Consultants for its Global Gambling Report – Betting on Regulation.
The DOJ in the Clinton, Bush and Obama administrations has expressed the view that the U.S. Wire Act of 1961 applies to all forms of Internet gambling, and therefore all Internet gambling is illegal under existing law. Several courts have agreed with DOJ on this question.
However, the U.S. Court of Appeals for the Fifth Circuit interpreted the Wire Act differently. In Thompson v. MasterCard International et al., the appeals court in 2002 affirmed a lower court ruling that, under federal statutes, sports betting conducted over the Internet is illegal, but casino games are legal.
Approximately 85 countries have chosen to legalize Internet gambling. As of June 30, 2010, one survey found 2,679 Internet gambling sites worldwide owned by 665 companies. These sites offer various wagering options, including poker, sports betting, casino games, lotteries and bingo. According to H2 Gambling Capital, global online gambling revenue in 2010 was nearly $30 billion, and less than 15 percent of that came from the U.S.
During the 111th Congress (2009-2010), several bills pertaining to Internet gambling were introduced:
- The Internet Gambling Regulation Consumer Protection and Enforcement Act (H.R. 2267) – Introduced by Rep. Barney Frank (D-Mass.) in May 2009, this bill would establish a federal regulatory and enforcement framework under which Internet gambling operators could obtain licenses authorizing them to accept bets and wagers from individuals in the United States. On July 28, 2010, this bill was reported out of the House Financial Services Committee by a vote of 41-22, but it was never voted on by the whole House.
- Reasonable Prudence in Regulation Act (H.R. 2266) –A second piece of legislation introduced by Rep. Frank in May 2009, it called for a one-year delay in the date for compliance with regulations enforcing UIGEA..
- Internet Gambling Regulation and Tax Enforcement Act of 2009 (H.R. 2268) –Introduced by Rep. Jim McDermott (D-Wash.), it was the companion to Rep. Frank’s licensing and regulation bill and would have required any establishment licensed under Rep. Frank’s legislation would be required to pay a two percent fee (i.e. federal tax) on all deposits. In addition, the bill would increase the protection against tax cheating.
- Internet Poker and Games of Skill Regulation, Consumer Protection, Enforcement Act of 2009 (S. 1597) –Introduced by Sen. Robert Menendez (D-N.J.) in August 2009, it would legalize and regulate games of skill on the Internet. The legislation would create a federally-managed licensing program for Internet poker operators, with state and tribal regulators able to qualify to perform regulation, and states and tribal jurisdictions able to "opt out" of allowing legalized Internet poker.
- The Bipartisan Tax Fairness and Simplification Act of 2010 (S. 3018) –Sens. Ron Wyden (D-Ore.) and Judd Gregg (R-N.H.) introduced the bill which, among its many provisions, would use taxes and licensing fees on Internet gambling as a revenue generator to offset reductions in federal tax revenues.
During the “lame duck” portion of the 111th Congress, Sen. Harry Reid (D-Nev.) considered proposing legislation to legalize online poker. The legislation would have protected states’ rights to choose whether to legalize online poker, giving them the authority, tools and resources necessary for the proper policing. The legislation would have eliminated ambiguity within current law and provided substantial new tools for the enforcement of the Unlawful Internet Gambling Enforcement Act (UIGEA), while also strengthening law enforcement oversight for Internet gambling operators and increasing penalties for illegal Internet gambling. The bill also would have created strong regulatory controls to protect consumers and vulnerable groups, including underage and problem gamblers. While the legislation was not introduced, the AGA supported the legislation and Sen. Reid's efforts.
Legalized gambling in America is really not the issue as US citizens only represent 4.47% of world population and as any die-hard Olympic fan knows, a proxy server or VPN is always just around the corner on the info super highway.
One of the most interesting slides in Facebook's quarterly earnings release was this one:
Just two years ago, the United States and Canada made up 30 percent of Facebook’s users. Fast-forward to today, and the percentage is a little bit different: under 20.
Not only has the percentage changed, but the growth rate is almost negligible: only about 35 percent user growth over 24 months for the world’s social utility. That compares to 170 percent growth in Facebook’s “rest-of-the-world” category, which includes Africa, and 165 percent growth in Asia.
Even stodgy old Europe has 63 percent growth.
We have argued that Facebook shareholders would be best served if Mr. Zuckerberg attacked the world of online payments via a Pay Pal business model. Facebook is well positioned for such a move as it is trusted by users, knows who you are, where you work, where your Aunt Ethel lives and even has pictures of what you did last summer. Serve this up with the hand dealt today and it appears Facebook could potentially live up to its lofty valuations at some point... Or can it?
While turning the world's largest social network into an online casino and possibly becoming payment processor to the world is indeed a heady elixir, there are still some sobering facts that must be addressed. Over the next 4 months Facebook's float is going to increase by some 2 billion shares.
Facebook currently has a "float" (tradable shares) of about 420 million, which were sold at the IPO. This represents 15% of the company's outstanding shares.
Here are the Facebook lock-up releases that are coming over the next year, as compiled by analyst Ken Sena of Evercore:
FACEBOOK LOCK-UP RELEASES:
- August 15th, 2012 (next Thursday): 268 million shares, 10% of shares outstanding.
- October 14th: 249 million shares, 9% of shares outstanding.
- November 13th: 1.332 billion shares, 49% of shares outstanding.
- December 13th: 124 million shares, 5% of shares outstanding.
- May 17th, 2013: 47 million shares, 2% of shares outstanding.
Over the next 4 months, 2 billion Facebook shares will become eligible for sale—about 70% of Facebook's total shares outstanding.
Facebook also faces a massive tax bill related to its employee stock compensation program.
Facebook will likely have to write a check for $2.5–$4 billion to the U.S. government in a few months to pay the "withholding" tax on many of its Restricted Stock Units (RSUs), which will vest in the coming months.
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