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January-12-2007,
Do you remember where you were when Pinnacle shut its doors to U.S. customers?...By Jay Graziani

This question may one day be to sports gamblers what questions about the Kennedy assassination are to the general public. Shockwaves were sent through the gambling industry yesterday as one of the most well respected sportsbooks, Pinnacle Sports, decided to stop accepting wagers from U.S. residents. Sports betting forums were abuzz with panicked bettors discussing the ramifications of this news. This is certainly not the first, or even most traumatic, sports book closing - there is no reason, at least not yet, to believe that customers will have trouble recovering their funds. But Pinnacle's stature in the offshore betting industry has caused many to speculate what this means in the broad scope of the online gambling world.

While numerous factors for this decision have been debated, most seem to focus on U.S. law enforcement, particularly the recently-passed Unlawful Internet Gambling Enforcement Act (UIGEA) and the federal investigation of numerous "credit shops" in the past year, including ongoing prosecutions. Pinnacle's decision to exit the U.S. marketplace has already caused more speculation than the other major offshore events of the past year: the arrests of sportsbook management on U.S. soil, the closure of numerous sportsbooks including BetonSports, and even the passage of the UIGEA itself.

Clearly the loss of a big-name sportsbook is news in itself, but this comes on the heels of repeated bad news for U.S. gamblers. The past few months have seen U.S. bettors take a beating on the number of sportsbooks they can patronize. Bet365, Bowmans, Canbet, Sportingbet, and WWTS (and associated books) all recently exited the U.S. market, and the huge operation of BetonSports was shut down by the all-powerful United States District Court for the Eastern District of Missouri, with player funds still remaining in limbo to this day. U.S. bettors are also shut out of the sportsbook side of Mansion, as well as the largest betting exchange, Betfair. Of course, this doesn't even tackle the issue of poker, as U.S. players have already been kicked out of many lucrative online card rooms.

Pinnacle will certainly be missed by U.S. bettors, who salivated at the high limits, reduced juice, and wide range of betting options offered, as well as the perceived safety of an industry leader with an impeccable reputation. The clout of Pinnacle should not be underestimated - they were even mentioned on an episode of "The Sopranos". While the loss of a terrific betting shop is an obvious downside for U.S. customers, there are a lot of other potential implications of this news, with both potential winners and losers.

The Losers:

"Whales" and "Sharps" - Few books allowed the betting limits that Pinnacle had in place. They also didn't "boot" winners, meaning smart players had a place that would accept their wagers at high limits and reduced juice. Pinnacle's financial reliability also calmed any fears that big players had about keeping large amounts of money in their betting accounts. Some serious players will creatively find their way back in, but many will not have the resources or know-how to do so. While other betting opportunities are out there, no competitor at the moment has the combination of low juice and high limits that made Pinnacle so popular.

Arbitrageurs - Commonly referred to as "scalpers" and "middlers", arbitrageurs take advantage of price discrepancies in a marketplace. Pinnacle's reduced juice model and aggressive line movement made them a "must have" for players looking to close out a middle or scalp when the price moved in their favor, or to take an early lead at a cheap price. The loss of Pinnacle will certainly reduce the amount and profitability of arbitrage opportunities in today's marketplace.

Horse Players - Pinnacle offered full track odds, great track selection, high limits and high rebates. Those benefits are going to be difficult to duplicate elsewhere for serious horseplayers. Many do not want to bring their horse betting back "onshore" for a number of reasons, and the offshore offerings are much less enticing with the loss of Pinnacle's race book.

Affiliates and Gambling Portals - For those that make their living on the "promotional" side of the counter, today's news couldn't be worse. Nearly every sports betting-related forum, portal, or website was connected to Pinnacle in some way. Pinnacle affiliates were generally offered a minimum of 30% of "net losses" from an affiliate's referred customers. This adds up to big bucks for the larger affiliate sites, which may have had hundreds of active players making thousands of dollars of wagers daily. For them, the lack of Pinnacle affiliate income will be sorely missed.

The Sports Betting Industry - Although the passage of the UIGEA caused some initial panic, it was generally perceived as being "all bark, no bite". The main ramifications were seen as affecting the publicly traded sportsbooks who were faced with a big liability by not abiding by U.S. law. Privately owned books were thought to be fairly free to operate, as long as the owners and employees were willing to stay off U.S. soil. While money transfer issues became slightly more complicated, there were always creative ways around them. Now we are realizing that the UIGEA may have a little more bite than initially thought. As more established operators start to give in to U.S. federal pressure and exit the American market, the future of the sports betting industry as a whole must be questioned. Federal law enforcement will be emboldened by the apparent "success" of their efforts in shutting down offshore gambling, which can only lead to more pressure on those books willing to stay the course and service U.S. citizens.

Non-U.S. bettors - Although sports gamblers residing outside of the U.S. may think they are in the clear, nothing could be farther from the truth. The low-juice Pinnacle model requires volume to make profit. Pinnacle has just greatly reduced their "handle" by excluding the rich U.S. market. Will they be able to maintain their vig at such low levels? Will they be able to continue to offer such high limits and variety of betting options (particularly for the U.S. sports) without the larger customer base? Only time will tell, but it is prudent to think that some policy changes will need to come into effect in order for Pinnacle to stay profitable on a greatly reduced betting volume. While not directly affected, non-U.S. bettors may still feel the long-term impact of this announcement.

The Potential Winners:

Other Reduced Juice Books - Pinnacle's absence will leave a tremendous void in the U.S. marketplace. Cascade, BetTrojan, and BetRoyal-associated Lay107 are three existing reduced juice shops that can vastly expand their client base as customers accustomed to low vig betting look for new options. Betmania is now offering -107 for football and -108 for basketball, and BetRoyal has unveiled a "discount juice" offer. Other established bookmakers may also be enticed to enter the low-juice market now that the competition has diminished, either by changing their own lines structure or by spinning off a separate reduced-juice brand.

Betting Exchanges - Exchanges have grown over the past few years but haven't really caught fire amongst mainstream bettors. One reason is that Pinnacle's competitive pricing made playing there extremely attractive even compared to the low-cost exchanges. Mansion and Matchbook are two of the biggest U.S.-facing exchanges, and both have potential for a huge influx of customers if they play their cards right in the coming weeks. Likewise, Tradesports and BetBug are two smaller industry players that can certainly use this opportunity to leapfrog their traditional sportsbook counterparts. All have a lot of ground to make up on exchange giant Betfair, but by accepting U.S. customers in Pinnacle's absence, any of them may be able to quickly build up to the critical mass necessary for a successful betting exchange.

The Other Big Sports Books - WSEX, Olympic, CRIS, and other "full juice" shops have had a hard time competing against Pinnacle's low juice and high limits (although each certainly has other merits that has made accounts at each worthwhile). Now with the loss of a major competitor, the larger, established shops are in an excellent position to grab Pinnacle's now-abandoned market share, much as PokerStars did with the exit of PartyPoker from the U.S. market. Some have already begun efforts to roll out the welcome mat to exiting Pinnacle customers. MajorWager was first to announce an exclusive special offer for those relocating Pinnacle deposits, and other portals and sports books will likely follow suit.

The U.S. Pro-Gambling Movement - Surprisingly, this event may end up being a boon to U.S. bettors. The Department of Justice has not been shy about cracking down on offshore bookmakers, and Congress recently decided to flex its muscles as well with the passing of the UIGEA. Poker players were able to mobilize, and while they have not yet realized any positive results, they have made their presence known, particularly in the most recent U.S. Congressional election. Sports bettors have been much slower to act, presumably because they felt the risk to the sports betting industry was minimal. Now sports bettors are seeing the effect of U.S. government policy hit them where it hurts - in their betting "outs". Perhaps this recent development will cause sports bettors, sportsbooks, and gambling portals to take a more proactive stance in the political arena. Hopefully this can help provide some much-needed leadership in protecting the interests of online gamblers, and possibly lead to improved conditions in the future as online gamblers exercise their rights and reject the federal government's interference in their personal affairs.

The Future:

The ramifications of yesterday's news may not be known for some time. While Pinnacle's absence leaves a void in the reduced juice marketplace, will anyone step in to fill that void? Theirs is a difficult model to succeed with, and in the current climate others may be unwilling to take that risk. This could actually lead to a reduction in low-vig betting opportunities in the long haul. Furthermore, does this spell more trouble for U.S.-facing sportsbooks down the road? Emboldened by this closing, the U.S. government may decide to press its advantage now and put more effort into shutting down offshore gambling for good. Although there are certainly losers in Pinnacle's recent decision, there are also potential long-term winners. Certainly there are opportunities for enterprising individuals in the sports marketplace today that were not around yesterday. Whether anyone takes advantage of them is another question altogether.

01-12-07
Jay Graziani
MajorWager.com
graziani@majorwager.com



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