Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Online Gambling's Mr. Big John Anderson's Web casino is a profit machine. If only he could convince the U.S. government that online gambling ought to be legal.
By Ralph King

(Business 2.0) – There's something of the night about this industry," a Merrill Lynch investment banker has warned. One evening in November in the lobby of London's Landmark hotel, where the elusive operator of the world's largest online casino is about to appear, the banker's words ring true.

The few people in Internet gambling who have met the operator refuse to talk about him. His organization, scattered around the globe under names like Cassava Enterprises and Virtual Holdings, hasn't responded to e-mail. It took weeks just to learn his identity amid rumored ties to the Russian mob and porn money. He never talks to the press. Any minute now, the operator will arrive, probably in a Rolls Royce, wearing gold chains, with bodyguards in tow. More likely, Mr. Big won't show up at all.

Then, in strolls John Anderson. With shaggy brown hair and round wire-rimmed glasses, he looks vaguely like John Lennon. He is alone, buttoned-down, and speaks with the flat, clinical precision of an accountant--which, as it happens, he is. Those rumors of mob or porn ties are, by all accounts, nonsense. Sipping soda in the Landmark's lounge, Anderson explains how the lessons of 26 years as a respected gaming and hotel executive molded the company he now runs, an amazing profit machine called Casino-on-Net.

Anderson's online casino made about $50 million last year, as much as a big Las Vegas casino and more than all but a handful of Internet companies. Analysts estimate its 2002 revenue at about $200 million and say the company is the biggest casino in the fast-growing $4.2 billion-a-year online gambling industry. Anderson, at 52, has found an especially sophisticated way to tap a lucrative vein of stay-at-home bettors. "Lots of cash flow, no distribution, and no real estate," Anderson says. "It's the perfect business."

Actually, there are a few flaws. More than half of Casino-on-Net's customers live in the United States, and the Justice Department asserts that taking U.S. bets online is a crime. Congressional critics have been thundering against the moral scourge of online gambling, pressing for tougher laws, and even accusing Internet casinos of laundering money for terrorists.

"Do I look like some money-laundering terrorist?" Anderson asks in a thick Scottish brogue. Then he grins. "I don't know," he says. "Maybe I do."

Or maybe not. The point is that Anderson's industry has a monumental image problem, which poses a mortal threat to his money machine. And so he has embarked on one of the biggest long shots in business today: He's trying to clean up the online gambling industry.

He's lobbying for regulation--anathema to many of his colleagues--in hopes that a "legalize it, regulate it" message will stave off the authorities. But more fundamentally, he is trying to show, through the exacting and open way he's building his own business, that online gambling is not just the shadowy province of hustlers, ex-cons, and the occasional fugitive. "We have to be cleaner than clean, transparent," he says.

Dragging the industry into the daylight won't be easy. But a lot is at stake. A fully legal online gaming industry wouldn't be a $4 billion-a-year proposition; it could peel off much of the $150 billion gamblers spend in Vegas and anywhere else you can lay down a legal bet. Anderson has already made some headway. And in his dreamed-of world of highly regulated and stigma-free online gambling, Casino-on-Net isn't a $200 million business. It's a billion-dollar business--at least. "The opportunity is truly huge," he says. "It's exponential."

Casino-on-Net was conceived in 1996 at, of all things, a dentistry convention. True, it was in Monte Carlo, and there among the baccarat tables and roulette wheels, Israeli dentist Aaron Shaked concluded that a Web casino could be more rewarding than pulling molars. He brought the idea to his brother, who knew a pair of computer engineers. The four co-founders remortgaged their homes to bankroll the company and buy a $100,000 gaming license from the island of Antigua.

Hundreds of sites offering more or less the same games and a similar look and feel launched at about the same time, but what quickly set Casino-on-Net apart was that it poured most of its profits into developing a highly sophisticated Web marketing system. Its real-time tracking software, developed by graduates of Israel's famed Technion institute, monitored the results of banner ads and pop-ups on thousands of websites simultaneously and could instantly boost the company's presence on productive sites while dumping laggards. As rivals squandered millions on offline advertising and fancy websites, Casino-on-Net trained this powerful technological vacuum on a hunt for the sizable fraction of the population that likes to gamble frequently. The bets rolled in. More than 7 million people have downloaded Casino-on-Net game software. The company currently has about 300,000 active customer accounts.

By early 2000 the founders realized they needed a seasoned manager, and turned to Anderson. His first job, at age 12, had been delivering hot buns at 3 a.m. to factory workers in his native Dundee, and he never attended college. In the late 1960s, he sang and played guitar in a rock band that had one immortal moment: It was on the same bill as a group that included future members of Led Zeppelin--and Anderson's band was the headline act. But his real gift lay in a knack for numbers, and it won him a cashier's job at Ladbrokes, the gaming giant that transformed two-bit bookmaking into a respected business with betting parlors all over Britain. He rose quickly, moved over to the hotel side of the business after Ladbrokes bought Hilton Group PLC, and wound up running the company's real estate division. He left in 1996 and later led a buyout of Burford Group, owner of London's landmark Trocadero retail complex. Through business contacts in Israel, he met Casino-on-Net's ultra-private founders.

"I did my due diligence," Anderson says. "They checked out 100 percent."

They may have checked out, but a lot of people in the business did not--especially down in Antigua, where Casino-on-Net had its license. A lovely little Caribbean spot with lax extradition laws and a carefree attitude toward games of chance, Antigua had become the main global headquarters of online gaming--the Vegas of the virtual world. It also had attracted a cast of characters that anti-online-gambling forces could hardly help but notice.

There's Jack Stroll, for instance. A marketing whiz from Montreal, Stroll founded Golden Palace, considered the second-largest Web casino, in Antigua in 1997. In the mid-1990s, Stroll (a.k.a. Jack Strulovitch) ran a boiler room that promised respondents fabulous prizes that turned out to be near-worthless junk, Canadian authorities say. He pleaded guilty in 1999 to "deceptive telemarketing," and he and his firm paid a then-record $300,000 fine.

Another Antigua pioneer, William "Billy" Scott, launched InterCasino. A Toledo, Ohio, bookmaker jailed in 1984 for racketeering, Scott was charged in 1998 by U.S. prosecutors with illegally taking online sports bets. He's been a fugitive since. Steve Adkins for a time headed the Online Players Association. His real name, it turns out, is Sam Alvin Ashley Jr. His criminal past allegedly includes passing counterfeit cash and bad checks. He was nabbed in 2001 by Ohio authorities after 17 years at large and is currently in jail awaiting sentencing for tax evasion and defrauding a charity he once ran.

Stroll says he pleaded guilty in the telemarketing case to avoid the trial expense and denies doing anything improper. Golden Palace has since been relicensed in the Mohawk Indian tribe's Kahnawake territory in Canada. A spokesperson for Scott says he has sold InterCasino; the new owners couldn't be reached for comment. Ashley also couldn't be reached for comment.

Meanwhile, sleazy if aboveboard operators keep rolling in. DrHo888.com, another Antigua casino, uses webcams to show its bikini-clad dealers in action. The dealers get $50 monthly "cleavage bonuses" and flirt with bettors via instant messaging.

The brazenness of the Antigua crowd fueled the U.S. government's crackdown on online gambling, which at first focused on sports betting. Accepting sports bets electronically is expressly barred by law. The legality of online casinos is a murkier question. The Justice Department says they're illegal, but a federal appeals court ruled in November that they aren't banned by current statute. The unsettled state of the law is the reason Anderson and other online casino operators have to date not been charged with any crimes. It has also prompted Rep. Jim Leach, R-Iowa, and several allies to propose legislation that would effectively ban any form of Internet gambling. Many U.S. banks, bowing to pressure, have already blocked the use of credit cards to pay gambling debts.

Anderson knew when he came to Casino-on-Net that he would never hold off the prohibitionists if he didn't distance himself from the business's seedier elements. "The days of carrying a laptop to Antigua and opening up shop are gone," he says. That helps explain why, on a recent blustery afternoon, he came to be chain-smoking Marlboro Lights in temporary offices at the base of the Rock of Gibraltar.

By this summer, Casino-on-Net will have relocated its nerve center to the British territory of Gibraltar. Gibraltar is an offshore haven too, but it's far more reputable than most. It also provides Anderson with several practical business advantages, including modern communications systems. Its online licensees include Ladbrokes. "Gibraltar is clean as a whistle," Anderson says.

Anderson is building a 20,000-square-foot headquarters in Gibraltar with sweeping views of the Mediterranean. There'll be 350 employees staffing a 24-hour customer service center and maintaining a server farm with 200 computers. No other online casino has ever had that kind of technological muscle, according to people in the industry.

Though the facility is only half-finished, Anderson has a fully formed vision of the business model it will house. Online gaming, he believes, is as close as anyone has come to the much-hyped ideal of the virtual corporation. It scales like crazy--overhead hardly changes whether you have 300,000 customers or 300 million. Adding to the product line usually requires no more than tweaking some software code. And Anderson has the ultimate edge shared by gaming operators everywhere: The house always wins in the end.

Yet Anderson's greatest asset, people who know him say, is a mastery of the most crucial skill in gaming: making each player feel like an esteemed member of some exclusive club. In Las Vegas it's called "stroking" the customer, and it's done with a stream of freebies, from poker chips to cocktails. Anderson can't pass out cocktails over the Web, but with his background in gaming and hotels, he has a natural instinct for how to relate to his "punters" and keep them coming back, even if they're losing. And he's figured out how to use the power of the Web to forge bonds with players that an offline casino can only dream of.

First he has to find them, which is why Casino-on-Net spends $40 million annually on rich-media Web advertising, more than any company except Hewlett-Packard, SBC Communications, and Microsoft, according to Nielsen/NetRatings. It's also why its key software, which checks response rates to ads on thousands of sites daily so Casino-on-Net can target its spending, is such a critical competitive edge.

Even so, analysts estimate that it costs about $350 to corral a single new player. Holding onto the ones you find is the real name of the game. That's where Anderson's customer reps play a pivotal role, monitoring players electronically and interacting with them by e-mail and sometimes by phone, stroking assiduously.

Casino-on-Net reps go through six weeks of intensive schooling. On a recent training day, recruits from Brazil, Japan, and the Netherlands listen intently as instructor Vahe Baloulian, a former air traffic controller in the Soviet army and a gambling-psychology expert, explains that gamblers spend (that is, lose) an average of $10 an hour online and consider it a fair price. But novice gamblers often lose $100 in minutes and instantly conclude that the game is rigged. That's a problem for Casino-on-Net, because bad experiences travel fast on the Web. The solution, Baloulian tells the class: Give sore losers a one-time $100 bonus and tell them to bet $1 to $3 per hand; they'll spend the next several hours having fun.

"Prolong their pleasure and you create a relationship," Baloulian says.

For clues about how to show customers a better time, company marketers comb a database with detailed betting histories and biographical information for all 7 million people who've visited the site. If a player logs in on his birthday, Casino-on-Net is likely to send out an instant "Happy Birthday" e-mail or a gift of bonus money to gamble with. A player on a losing streak may receive e-mail tips on how to win. The technology also allows Anderson to continuously poll his players for their opinions, and statisticians scour the data to detect any subtle shift in player behavior or tastes. "You can't fly on gut," he says.

The level of personal care Casino-on-Net's technology allows it to lavish on players goes far beyond what offline casinos can provide. Recently, Baloulian had to intervene with a gambler who had dropped more than $20,000 and complained about rigged games. Baloulian's e-mailed response reads in part: "You may disagree with me, but allow me to question your definition of 'misery.'" After giving a minutely detailed breakdown of the gambler's playing history, Baloulian noted that he had spent an average of $10.20 an hour in the casino. "If you treat gambling as entertainment, which it is, I think $10.20 an hour is a fair deal," the message continues. "If you treat it as a source of income, which it can be but most often is not, it is certainly no fun at all."

"People are predisposed to lose," Baloulian later says. "The problem is to convince them they lost fairly." In this gambler's case, it must have worked. He's been logging on again lately.

The very power of the net to find and keep gamblers is one of the reasons that opponents of online casinos want to ban them. "Internet gambling is a danger to family and society at large," Leach says. "It should be ended." To blunt that threat, Anderson says, Casino-on-Net spends more than $500,000 a year on lobbying. He's hired one of Washington's top power brokers, law firm Akin Gump Strauss Hauer & Feld, to press Congress and state legislatures. Dan Spiegel, the point man on the campaign, stresses the benefits of a regulated online gaming industry, including the fact that it would mean protection for consumers and tax revenues for badly strapped state treasuries. Still, Spiegel foresees an uphill battle. "This is one of the hardest assignments we've ever faced at the firm," he says.

Meanwhile, Anderson continues to try to prove his point through his own business actions. When Rep. Michael Oxley, R-Ohio, accused online casinos of laundering money for terrorists, Anderson responded by hiring a former FBI computer crime expert to devise internal safeguards and train his staff in detection. (No online casino has ever been charged with money laundering, although the FBI says it is investigating the industry.) He has invited a fact-finding mission of regulators and government critics to Gibraltar to examine everything from his Ernst & Young-audited financial statements to his PricewaterhouseCoopers-certified payout ratio. He has joined a fledgling industry body called eCommerce Online Gaming Regulation Assurance--modeled on the National Association of Securities Dealers, the stock-market watchdog--which will give its seal of approval only to operators who meet a long list of tough standards. Casino-on-Net is the first and, so far, only casino to join.

It would seem a lonely crusade with bleak prospects--except that Anderson is already closing in on one coup. Britain is expected to begin licensing online casinos within a year or two, finally creating an environment for squeaky-clean operators under a regulatory regime that's beyond reproach. Anderson has quietly lobbied for that in Parliament for years, and he has been an adviser to the government on the regulatory structure. "You have to learn about the opposition's concerns and prove to them that they don't exist," Anderson says. "You have to gradually build trust."

The British generally get far less worked up about betting than Americans do, but Anderson is convinced that, in his logical, meticulous way, he can eventually chip away at the mistrust, even among powerful U.S. politicians who see gambling as a sin. He knows gambling isn't for everyone. He himself never bets. But banning it is far more morally troubling, he believes. "It's a freedom of choice issue, like drinking or smoking," he says. "A society where a customer has no choice but to show up and sing the company song, that's communism." And even if Anderson doesn't win, other players will likely take his place at the table. "You cannot buck a market," Anderson says. "A Luddite attitude will always fail." That, at least, seems a pretty safe bet.

Ralph King (rking@business2.com) is a senior writer at Business 2.0.