SOURCE: The Globe and Mail

Getting shut out of the U.S. market would be a death knell for most technology companies with global aspirations.

Nevertheless, at CryptoLogic Inc., one of Canada's fastest growing software firms, the board of directors made a swift decision this week to turn its back on the United States.

“There was no debate,” said Lewis Rose, the president and chief executive officer.

The move came shortly after the U.S. Congress passed legislation on the weekend that forbids Internet gambling companies from accepting U.S. financial transactions. President George W. Bush is expected to sign the bill into law this month.

Toronto-based CryptoLogic provides the software behind some of the biggest poker and casino gambling sites on the Internet, including William Hill, The Ritz Club London and The Sporting Exchange Ltd.'s Betfair. CryptoLogic will now configure that software so that none of the companies licensing its technology will be able to take bets from players with U.S. addresses, Mr. Rose said in an interview.

“We have taken extensive counsel on the issue and our view is that the most prudent, responsible and appropriate course of action now is to insure that none of our licensees take wagers from American residents,” he said.

CryptoLogic is setting its sights on expanding operations in Europe and Asia. At the same time, it has decided to take a non-confrontational approach with the United States in the hope of one day being able to serve that market legitimately. Mr. Rose said he is still hopeful that Congress could eventually choose to tax and regulate Internet gambling, similar to an approach adopted by Britain.

“Internet gaming is here to stay. The genie is out of the bottle. There are millions of players around the world who play the games responsibility,” he said. “We believe that regulation is the best way to bring on-line gaming into the sunshine. And sunshine is the best detergent.”

By some estimates, the global Internet gambling industry relies on the U.S. for approximately half of its $12-billion (U.S.) in annual revenue. Even though U.S. lawmakers have been trying to find a way to choke off on-line wagers for the last eight years, U.S. interest in Internet gambling has skyrocketed. The American Gaming Association estimates that 70 per cent of U.S. on-line players began betting within the last two years.

CryptoLogic expects the new law to erase $30-million of revenue in the remainder of the year, or about a quarter of annual sales. In the short term at least, the company's rapid growth — which measured 43 per cent in the first half of the year — will be hobbled.

Investors have dumped shares of Internet gambling companies. CryptoLogic shares dropped another 5.8 per cent on the Nasdaq Stock market Tuesday, after plummeting 18 per cent Monday.

Todd Coupland, an analyst at CIBC World Markets Inc., cut the stock to “sector underperform” from “sector outperform” Tuesday. “CryptoLogic is unable to offset the lower revenue with lower costs,” he said in a research note.

The bloodletting suffered by on-line gambling companies this week has hurt valuations. CryptoLogic, which has no debt and about $126-million of cash on hand, is considering acquisitions, mergers and joint ventures, Mr. Rose said.

“There are clearly going to be tremendous opportunities now. There's going to be an opportunity for consolidation of the industry. And we believe the cards are in our favour at the moment.”

Mr. Rose said management and the board have spent the last five years preparing for the day when U.S. bets stop. More than 70 per cent of its customers now draw their revenue from countries other than the U.S. Last week, CryptoLogic announced that it would move its head office to Dublin to be closer to the European market, where governments have begun regulating Internet gambling.