Shares in the sector tanked and the internet poker company PartyGaming lost its coveted place in the FTSE 100 index. Last week its four founders, who had become billionaires thanks to the firm's triumphant £5bn stock market debut in June 2005, ignominiously dropped out of the Forbes list of the world's richest people.
Even though players are slowly returning to gaming websites after being put off by the smaller pool of punters following the US ban, operators are now facing new regulatory threats in Europe, with France showing signs of clamping down on offshore companies.
But the betting industry is fighting back - and won a rare victory a week ago when the European court of justice ruled against an attempt by Italian authorities to maintain a ban on cross-border betting.
EU countries including France, Germany and Italy have cemented barriers to protect their state monopolies, but gaming companies now hope that the European commission will push ahead with efforts to open up markets. Brussels is already taking action against several countries, including Italy, over restrictions to their gambling markets.
Last week's "Placanica" ruling that Italy's restrictions on the Liverpool firm Stanley International Betting were discriminatory and out of step with EU law has emboldened other British companies in their fight against state-owned monopolies on the continent.
Ladbrokes is challenging trade restrictions in Sweden, Norway, Denmark and Holland. A spokesman said: "We're getting our lawyers to look at what Placanica means for other territories." But progress towards a single European betting market will be slow and piecemeal, he believes. "Europe is not going to open up into one sweeping market in betting. It will take years and it will be market by market."
Meanwhile, to lure back offshore internet gaming firms - which are licensed from tax havens such as Gibraltar and Antigua - Chancellor Gordon Brown is preparing to announce a change in the tax regime in next week's budget.
But companies have already poured scorn on the idea as they believe the tax rate will not come down far enough.
The online gaming crisis has led to a shakeout in the sector, creating opportunities for larger players to gobble up the more vulnerable firms.
PartyGaming snapped up rival Empire Online, Austria's Bwin has swooped on Sportingbet with a bid approach, and 888 is locked in takeover talks with bookmaker Ladbrokes.
Apart from eyeing a takeover of 888, Ladbrokes - along with industry rivals - also wants to run Britain's first Las Vegas-style supercasino as well as several of the other new 16 smaller casinos.
However, the process has been mired in controversy since Manchester emerged as the surprise winner of the licence. Culture secretary Tessa Jowell faces considerable opposition in parliament to the decision as supporters of Blackpool, which had been one of the frontrunners, have mobilised. Some 100 MPs have been trying to persuade her to ignore the casino advisory panel's recommendations and place the supercasino in Blackpool instead. She also faces opposition in the Lords.
But Ms Jowell will ask for an all-or-nothing vote on the casino package, including the locations of the eight large and eight small new casinos, forcing MPs and peers to accept or reject it in its entirety. Both houses of parliament are expected to vote on the casino package before Easter, and industry sources think it will be passed.
The new casino licences form part of the biggest overhaul of Britain's gambling laws since 1968, which is radically changing the casino landscape and the look of casinos. A relaxation of membership rules under the new 2005 Gambling Act has brought women and younger people into casinos. Companies are also adding restaurants, bars and other leisure facilities.
The new casino licences have lured more overseas operators into the country. Harrah's, the American private equity owned gaming giant, has bought London Clubs, thereby thwarting its merger with Britain's largest casino company Stanley Leisure. Stanley, in turn, has been swallowed by Genting, the Malaysian resort-style casino group.
Casinos, betting shops and gaming sites are looking forward to the next stage of deregulation in September when advertising restrictions will be lifted, allowing them to advertise on television and radio for the first time. Trying to allay fears over a surge in problem gambling, industry watchdogs have unveiled rules designed to ensure advertising remains 'socially responsible'.
Smoking ban
The biggest new challenge for casinos is the imminent nationwide smoking ban. A smoking ban in public indoor places was first introduced in Scotland last March, and arrives in Wales in April and in England on July 1. Bingo clubs have been hit hardest by the Scottish ban and dozens have been shut down. It remains to be seen whether casinos will be deserted by smokers in droves once the nationwide ban kicks in.
Analysts say the hit taken by leisure group Rank's Mecca bingo halls north of the border - and the 10 club closures south of the border ahead of the English smoking ban - doesn't bode well for its Grosvenor casinos. Its bingo woes make it vulnerable to a takeover bid, with William Hill and private equity groups circling.
As far as the Tote, the state-owned bookmaker, goes, its fate is still undecided. Trying to fulfill Labour's long-standing manifesto pledge to sell the chain to racing, the government is currently scrutinizing a £400m buyout proposal from a consortium of racing interests and Tote management.
The consortium wants to take the business into internet poker and bingo to fund its ambitious business plan, but industry figures have questioned the proposal which would saddle the Tote with a huge debt pile thereby endangering its future contributions to racing.
Should the consortium's bid fail, the Tote will be auctioned off to the highest bidder.
(business.guardian.co.uk)
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