The Texas Hold'em Fad & Online Gambling

I don't understand this country's recent obsession with Texas Hold'em poker, and more generally, gambling. I hadn't even heard the phrase "Texas Hold'em" until a year and a half ago. Now, you see World Poker Tour (WPTE) poker tournaments all over ESPN, and every other show on the Travel Channel is about Las Vegas.

Part of this fad, of course, is online gambling. Online gambling is a great business, with low overhead, recurring cash flows, and easy scalability. I've owned stock in the two main publicly-traded online poker plays myself: Cryptologic (CRYP) and World Gaming (WGMGY.OB). I bought CRYP @ ~$21.00 and WGMGY.OB at $0.66 in late December. I sold both recently, after serious run-ups occurred in February. (I may repurchase CRYP in the future and I will probably not own WGMGY.OB ever again.)

I am still bullish about the overall long-term potential of most aspects of the online gambling business, but I have nagging doubts about these two gambling software companies, which don't actually run the online gambling sites themselves.

First, what does their pricing power look like in the long run? I suppose it depends on the extent to which customers are loyal to the website than to the software, but let's face, it isn't difficult to write gambling software and license it out. I would feel much more comfortable buying stock in a company that runs online gaming sites than one that provides software to them. (FYI, CasinoCity.com maintains a list of the largest suppliers of online gambling software here.)

Second, online poker (not online gambling -- just online poker) has one possibly fatal flaw: its anonymity. What if I and nine of my friends were to join a texas hold'em game and communicate by phone or instant messaging while the game is occurring? Knowing the cards held by the other nine would make the group almost unbeatable. You would have a money machine. Even if only two people were in on the scam, you would greatly improve your odds. (Online poker comprised 20% of CRYP's 2004 revenue.)