Breakout

Caesars and Zynga Get Dealt a Winning Hand With the Intrade Shutdown

Jeff Macke
Breakout

Dublin wagering website Intrade.com announced on Sunday that it was completely shutting down. The move comes months after the company was sued by the Commodity Futures Trading Commission (CFTC) for operating an improper, off-site options exchange.

Intrade shot to popularity during the 2008 presidential election when it correctly predicted a win for President Obama. The site also allowed users to place wagers on commodity prices, Oscar races and whether or not the economy would slip into an official recession. The "big idea" was that the predictive power of a market's collective intelligence was greater than that of any individual. The reality was that Intrade was a routine gambling market operating without U.S. oversight.

None of which matters much to the masses in the U.S., who are hardly wanting for ways to place wagers. What brings the story home is the drive to legalize online wagering sponsored by more traditional casinos.

New Jersey has the most at stake as the U.S. tries to redefine what constitutes "legal wagering." On February 26, New Jersey Governor Chris Christie signed into law a bill allowing online wagering in his revenue-starved state. As a give-back for the increased business, casinos agreed to a 10% to 15% tax hike on online revenues.

Christie's budget projects contributions to the state's Casino Revenue Fund will be anywhere from $235 million this year to $436 million next year, which is largely based on allowing online gamers to legally play any game found in a casino.

It remains to be seen what made U.S. regulators target Intrade, but it's impossible to rule out fraud given the accusations of fraud surrounding other gambling sites like AbsolutePoker.com, Full-tilt Poker, Online Poker Stars and Absolute Poker just in the last six years.

The most likely scenario is that the U.S. government will take pains to run the criminals out of business to maximize its own take. Such selective prosecution is exactly what was done with the lottery — which was once a black market numbers racket.

Legitimizing online gambling in the states would be a boon for companies like Caesar's (CZR) and Zynga (ZNGA), which are both counting on getting a piece of the online gambling action. Cracking down on the black market offshore sites gets rid of competition on the taxpayers' dime.

Since the end of January CZR and ZNGA are up 76% and 36%, respectively. Odds are the Intrade shutdown is an incremental positive for both, but it's a binary wager. Neither company has much going for it if they can't facilitate gaming.

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