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After Pinnacle, It's All Downhill From Here

By Andrew Beyer
Wednesday, January 17, 2007

When Congress passed a bill to curb most online betting, gamblers protested that the measure was an infringement on their individual freedoms and that the legislative process had been a travesty.

However, they clung to the hope that the Unlawful Internet Gambling Enforcement Act might not have a significant effect because regulating the Internet is practically impossible. Such hopes have now been dashed. Shortly after the bill was passed, the best-known online poker site, PartyPoker.com, announced it was exiting the U.S. market. The worst blow came last week when Pinnacle Sports informed its U.S. customers that it would no longer accept their wagers on sports, horses or anything else.

Most non-gamblers will not recognize Pinnacle's name. Unlike PartyPoker.com (which advertised widely on television) and other sports betting sites whose operators court the media, Pinnacle assiduously maintains a low profile. Searches of databases reveal almost nothing about the company -- not even the names of the people who run it. Yet Pinnacle Sports is probably the biggest and best bookmaking operation in the world -- and maybe in the history of the world. It has customers in more than 100 countries, though the U.S. market accounted for roughly two-thirds of its business. "It would not be out of line to guess that their annual handle is in the billions of dollars," said Michael Konik, author of "The Smart Money," a book on sports betting.

Pinnacle's betting menu ( http://www.pinnaclesports.com) is mesmerizing. Not only can customers obtain the most favorable odds on mainstream sports, they can bet on Hillary Rodham Clinton's chances in '08, on the Golden Globe Awards, on Danish hockey or Croatian soccer. They could even wager on the Gaevle Goat. When Pinnacle discontinued its U.S. operations, the customers I know reacted as if there had been a death in the family.

The Eye on Gambling Web site published a brief interview with an executive identified only as Pinnacle's "main man," who said: "When the U.S. focuses on something and says 'Enough,' and when they go to war, no individual company can possibly win in a fight of this nature."

This was yet another war that America didn't need to wage. For years, some right-wing legislators had been pushing for an Internet gambling ban. They maintained that children might get hold of their parents' credit cards, log onto a Web site and gamble away the family's money. At the end of each legislative term, Internet gambling legislation died the quiet death that it deserved.

But on the final night of the 2006 legislative session, then-Senate Majority Leader Bill Frist (R-Tenn.) agreed to insert the Internet gambling measure into an unrelated bill, the Safe Port Act, which dealt with homeland security and was a sure thing for passage. Presumably this was an effort to appeal to the Republican "base" just before the November election. Members of the House-Senate Conference Committee never even saw the bill's language. But overnight the new law changed the gambling world. Banning Internet gambling companies would have been futile, since most of them are located offshore. (Pinnacle is based in Curacao, with offices in London as well.) So the legislation sought to cut off the companies' lifeblood. It prohibits the use of "any financial instrument for unlawful Internet gambling" -- including credit cards, checks and wire transfers.

Pinnacle concluded that it couldn't do business properly without working through the mainstream banking system, though many online bookmakers remain in business, such as World Sports Exchange ( http://www.wsex.com).

But there will probably never be another Pinnacle. Since it was founded in 1996, its operations have been worthy of a case study at the Harvard Business School. Its business model is like Wal-Mart's: By operating with maximum efficiency, the company offers the lowest prices in the business; those low prices in turn attract giant volume.

Historically, bookmakers have required customers to lay $110 to win $100 on a sports bet. Even with these odds in their favor, they often shunned bettors who might be too smart. Yet Pinnacle cut the normal margins in half -- sports bettors had to lay odds of 105 to 100 -- and immediately attracted the biggest players around the world. Cyberspace displaced Las Vegas as the hub of American sports betting.

Pinnacle offers bets on a wide range of sports and activities, presumably by working with subcontractors who are experts in a particular area. It puts up prices on the opening weekend grosses of Hollywood movie releases -- and its numbers are extraordinarily accurate. It offers "matchup" bets on horse races -- letting customers choose which of two horses will finish ahead of each other in a given field. When it offered these propositions on a track I was following closely, I figured I would have a big edge. But I couldn't outsmart the Pinnacle oddsmakers.

Pinnacle even has a sense of whimsy. In December, amid the usual list of betting categories on the Pinnacle menu, there appeared this entry: Gaevle Goat. The wagering proposition was this: Will the goat be standing on Christmas morning? Odds were available for "yes" or "no."

This proposition doubtless sent many Pinnaclers undertaking research to learn that the town of Gaevle, Sweden, annually erects in its central square a giant Yule goat made of straw. This charming tradition has been regularly disrupted by another tradition: Vandals and arsonists annually try to destroy the goat and often succeed. Would the goat survive in 2006? If you bet "yes," laying odds of 260 to 100, you collected.

The goat wager underscores how innovative Pinnacle has been in ways large and small. The company has earned a reputation in the often-unsavory gambling industry for reliability and honesty. It is hard to believe that Republicans, of all people, would be the ones to quash such an exemplar of the free-enterprise system.

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