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Youbet.com Inc.

Year Founded: 1995

Core Business: Offering subscribers full-service betting on horse racing over the Internet

Revenues in 1998: $250,000

Revenues in 1999 (projected): $7 million

Employees in 1998: 30

Employees in 1999: 77

Goal: To offer online betting on horse racing 24 hours a day around the world

Driving Force: Growing popularity of gaming over the Internet

By JASON BOOTH

Staff Reporter

Want to place a bet on a horse race at four in the morning? All you need to do is log onto Youbet.com, the West Los Angeles firm that brings online gambling right into your living room.

"We believe we can expose horse racing to a whole new generation," said Ron Luniewski, chief operating officer of the 4-year-old company, which began full-fledged Internet operations earlier this year.

In promotional material sent to race tracks, Youbet describes potential subscribers as "millions of martini-drinking, cigar-smoking yuppies; stir-crazy cyber-surfers; action-driven sports fans; and suburban families that just can't find a baby sitter."

Among those specifically targeted are day traders and video-game players.

At this point, Youbet is the only online horse-racing and wagering network in the United States. Many other online services typically located overseas have run afoul of U.S. regulations because they offer games that are illegal outside casinos.

By focusing on horse racing and working with established race tracks, Youbet has been able to work within existing laws.

Currently 42 states allow betting on horses, while only one state (Nevada) allows betting on other sports. The Interstate Wire Act of 1961 prohibits the use of phone lines for transmitting of gambling information, but makes an exception for horse racing. And legislation recently passed by the U.S. Senate Judiciary Committee makes Internet casino and sports gambling illegal, but provides an exception for wagering on legal horses races, as long as it is done on a closed-loop, subscriber-based system such as the one Youbet uses.

"Youbet has taken a different approach," said Mark Hardie, an analyst at Forrester Research Inc. in Cambridge, Mass. "When you sign up, you are joining a private network that runs in conjunction with established, legitimate gaming establishments. I don't think they will run up against the same kind of regulatory hurdles that other online betting services face."

To provide the service, Youbet collects about 4.5 percent of the total amount of money wagered by its subscribers, along with a monthly subscription fee of $5.95.

But like most Internet ventures, the company has been in the red in the second quarter ended June 30, there was a net loss of $4.3 million (28 cents per share), compared with a loss of $5.4 million (54 cents) for the like period a year ago. Revenues were $733,262 vs. $20,170.

Still, the potential market is huge. In 1997 (the most recent year for which figures are available), about $15 billion was wagered on horse racing nationwide of which $11 billion was bet off-track. Worldwide, $104 billion was wagered, of which 65 percent was off-track.

To use the Youbet system, a subscriber first deposits money into a special account. Bets can then be placed on any races shown over Youbet.

Winnings and losses are immediately added or subtracted from the account. The system also gives users access to a variety of data, ranging from current odds to past performance and track conditions.

"This is a game about strategy and thinking," said Russell Fine, who along with David Marshall founded the company and is now its chief technology officer. "It's like video games, but it's the real thing."

Youbet traces its roots to Thailand in the mid '80s, when Marshall and Fine, fresh out of college, were helping renovate a provincial race track. As part of the refit, they designed a personal computer-based software program for tabulating wagers at the track.

Over the next 10 years the partners further developed the software, which they sold to various tracks around the United States. When the Internet caught fire, it became clear that the real money was in online wagering.

Armed with $4.5 million in seed money raised with the help of an investment banker friend the partners merged their embryonic gaming firm into a publicly traded company. Later on, they hired Luniewski, along with Robert Fell as chief executive.

Subscribers can bet on races at 31 tracks in the United States and Canada. Last month, 50 tracks in Australia were added to the system. Eventually, Youbet hopes to offer links on race tracks around the world, so wagers can be placed 24 hours a day, seven days a week.

"Currently, there is no competition for Youbet.com's product," said Harry Curtis, an analyst at BancBoston Robertson Stephens. "No other online service allows the user to access information about horse racing online, make wagers online, watch races online, and collect winnings online."

But there have been hiccups.

Last month, Hollywood Park announced it was ending its business relationship with Youbet because the level of wagering was less than expected. But Fine argues that a deeper reason for the severing of ties was Hollywood Park Chairman R.D. Hubbard's interest in a cable betting system that could eventually rival Youbet's computer-based system.

In June, Youbet launched a new joint venture with Station Casinos Inc. to allow residents in Nevada to make online bets on various sporting events. While the deal is limited to one state, it is designed to prepare the company for offering online wagering overseas, where gaming rules are often more liberal.

"We want to become a global franchise," said Luniewski

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