10/03/2002 11:00PM

The real futures betting is on Internet gambling


NEW YORK - If the battle for account-wagering dollars were a horse race, Television Games Network and Youbet.com would be pulling away.

The two services dominated telephone and Internet gambling in the second quarter, according to statements filed in Oregon, where both companies are licensed as betting hubs. And according to both companies, the figures will be even better in the third quarter, likely dwarfing the numbers put up by their closest competitors, XpressBet and AmericaTab.

That market lead, however, has come at a stiff price. Neither of the companies are making a profit. In fact, TVG and Youbet.com - which collectively took in $75 million in wagers in the second quarter - have collectively lost approximately $200 million since being launched.

The losses have taken some of the steam out of the recent wagering gains and underscore the uncertainty surrounding both companies. But the losses also underline the longterm commitment that many gambling companies have made to Internet and telephone wagering. Like TVG and Youbet, many companies are staking unprecedented amounts of investment dollars on becoming the preferred site for millions of potential racing customers.

Without even approaching a profit, TVG has lost at least $100 million since 1998 on its television network and account-wagering operation, according to financial records. TVG's parent company has always stuck by its commitment to the network, but that parent company - Gemstar-TV Guide - is now one of Wall Street's biggest dogs. Gemstar's stock has lost 91 percent of its value this year as it struggles with adverse court rulings, questions about its accounting, huge write-offs, and the possible delisting of its stock from NASDAQ.

At Youbet.com - which was delisted earlier this year from NASDAQ - losses have reached nearly $85 million over the company's four-year market history. Officials have said for six months that the company will need additional financing to become profitable. Recently, its liabilities ballooned in the second quarter from $4.6 million to $8 million, leading to questions about its ability to pay its bills.

Officials from both companies argue that the racing industry should shrug off any concerns about their financial health - as should bettors who maintain TVG and Youbet accounts. The officials said this week that strong growth numbers over the past two quarters are allowing the companies to approach cash-positive territory, if not long-term profitability.

"We've taken a number of prudent and reasonable steps to cut our expenses and improve our revenues," said Chuck Champion, a former newspaper executive who was installed as chief executive officer of Youbet.com in mid-September. "We are a much different company than we used to be." Champion said that Youbet has reduced its "burn rate" - the amount of cash the company loses in a month - from $500,000 to $200,000, and that it can last until at least the second quarter of 2003 without any additional financing.

A TVG official who spoke on the condition of anonymity said that Gemstar's troubles would have no impact on TVG's future. The official said that TVG is close to being revenue-neutral and that even if Gemstar folded, the company would have eager buyers.

Mark Wilson, TVG's chief executive officer, was traveling Friday and not available for comment.

Youbet and TVG are partners, of a sort. An agreement the two companies reached last year allows Youbet to offer wagering on TVG exclusive tracks, a roster that includes the most popular tracks in the country, but Youbet must forfeit most of the net revenue on the bets to TVG. The agreement has allowed Youbet to tough it out by attracting millions of new users to the service, even if the majority of the handle brought in is on TVG tracks.

Both companies have benefited from new customers in California, where account wagering became legal early this year. But initially, TVG and Youbet struggled in the state. XpressBet, which is owned by Magna Entertainment, dominated the market for the first three months of the year, largely because it prohibited TVG from offering bets on two tracks it owned, Santa Anita and Gulfstream, which are the two most popular winter signals.

That strategy has since backfired on Magna. After Santa Anita and Gulfstream closed, bettors flocked to TVG and Youbet on the strength of their spring signals from Churchill Downs, Hollywood Park, Belmont Park, Arlington, and Lone Star - which weren't available on Magna's Xpress Bet. Betting through TVG rose from $16 million in the first quarter to $47.9 million in the second while Youbet's handle spurted to $26.3 million from only $7.7 million.

Meanwhile, handle through XpressBet has slowed substantially, according to reports provided to the California Horse Racing Board. While the service was averaging $1.7 million at the end of the Santa Anita meet, handle has dropped to $300,000 a week since, Magna officials told the California board at a recent meeting.

Youbet officials said that handle averaged $3 million a week in the third quarter, which ended Oct. 1. That would give the service $36 million in handle in the past three months (although much of that total is on TVG tracks). At TVG, handle is up 250 percent through the first eight months of the year compared with last year, when handle was $45 million, Wilson said at a recent conference.

Despite the growth, some bettors have become nervous as the two companies continue to hemorrhage money, fearing their accounts could be jeopardized if either of the companies failed. But officials said the accounts are not used for operating expenses, and that the accounts are further guaranteed by cash bonds put up in California and Oregon.

"Deposits are not commingled at all with any operating funds," Champion said. "The funds are only used to pay customers their winnings, that's it."