Friday, July 3rd, 2009 | Written by Adam Ulick

U.S. investment bank Goldman Sachs said this week that it believes that online gambling will eventually be legalized in the United States and several European gaming companies could benefit.

In a report to investors, Goldman Sachs used PartyGaming, operator of Party Poker, as a basis for determining the U.S. market’s size, saying, “Based on a simple ‘grossing up’ of PartyGaming’s rake relative to its 9% market share, the US poker market alone was worth $1.5bn in 2008.”

If the U.S. were to legalize and regulate online gambling, the investment firm estimated that the poker market could actually be $3 billion, given that 30 percent of brick and mortar players start playing online and $300 in gross gaming revenue (GGR) is made per player. Increase those numbers to 45 percent and $400, and the U.S. market for poker alone could be as large as $6 billion.

Goldman Sachs estimates that the online casino market, which includes games such as online blackjack, slots, and roulette, would be of similar size, making the potential U.S. online gambling market as great as $12 billion.

The process will not be a fast one, warned Sachs, as is evidenced by the fact that the hearings for Representative Barney Frank’s latest legislation to regulate online gambling have been pushed back to September. The lure of tax revenue, though, should eventually push the federal government to allow gambling on the internet.

Goldman Sachs named four companies – PartyGaming, 888, Playtech, and bwin – as ones that should significantly benefit from a re-opening of the United States online gambling market. All of them, said the bank, “have sufficient scale and own proprietary poker and/or casino software.” Essentially, they are all large enough and established enough to be in good position to grab a piece of the U.S. pie, when given the opportunity.

Of the four, bwin and Playtech are the two that Goldman Sachs believes have the highest ceiling. Why? Because they would not only have the business-to-consumer (B2C) opportunities (new player acquisition), but also the business-to-business (B2B) opportunities. Both firms operate poker networks (bwin owns the Ongame network and Playtech owns iPoker) and are thus in the position to license out their software packages to companies who wish to enter the U.S. market. Playtech, in particular, is also very strong in the online casino arena and has many licensees.

Goldman Sachs said that a major reason that neither PartyGaming nor 888 would see their share prices rise as much as bwin and Playtech should they all get the opportunity to enter the U.S. market is that this opportunity has already been factored into the companies’ values. Of the two, PartyGaming could have the best chance for growth, with 117 percent accretion in the B2C realm and 40 percent accretion in B2B. If B2B provides the strongest opportunities, then Playtech will be in the best position to take advantage.

Interestingly, and this may play into the two companies’ potential strength in U.S. customer acquisition, Party Poker and 888 come up the most in U.S. Google searches for “online poker”, even though both exited the U.S. market about two and a half years ago. Search engine marketing company Greenlight did a study to see which sites appeared on the first page of results when various searches for poker related terms such as “poker”, “online poker”, and “poker chips” were made on Google. Party Poker led all online poker sites, appearing on the first page 45 percent of the time. 888 was close behind at 44 percent. PokerStars was third place at 37 percent. Wikipedia was actually the site that came up on the front page the most, 57 percent of the time.