The dealer does not always win. That's the cautionary message from Rank Group, which - unlike too many of its customers, apparently - is losing money on internet gambling.

The company's Blue Square website, which offers punters the chance to bet on Monopoly and Cluedo as well as horse-racing and football, made an an operating loss of £1 million in the fiscal first half. That reversed a £1.3 million operating profit in the same period last year, and came despite revenue jumping 43 per cent to £283.9 million. So, while the division contributes a third of Rank's group revenue, it provides nothing to the bottom line.

Blue Square was bought in 2003 for £65 million, and has shown falling profit ever since. The problem, Rank says, is that too many of itsm156,000 sports-betting customers are winning too often.

Today's results revealed that Blue Square's gross wins from internet and telephone gaming of just £12.9 million in the period, down by £300,000 against the same period last year despite the huge jump in sales. Rank is therefore keeping just 4.5p for every pound wagered, compared with 7.8p this time last year.

These low margins are an industry problem, Rank argues, pointing to recent results from competitiors. It may have a point.

Ladbrokes, the high street bookmakers owned by Hilton Group, this week posted a 6 per cent fall in interim operating profits, which it blamed on unfavourable horse-racing results and tough comparisons from last year's European Football Championships. And yesterday, Irish turf accountant Paddy Power blamed the wrong winners at the Epsom Derby and the Grand National for lower in first-half earnings.

However, beyond the newspaper-friendly talk of too many winners, there is a vicious price war developing in the sector. Bookmakers are slicing odds and undercutting rivals simply to attract the punters an increasingly overcrowded and informed marketplace. New entrants, with balance-sheets propped up by venture-capital cash and flotation proceeds, are driving down prices and offering loss-leader promotions as they bid to grab custom from the established names. And, given anyone with an internet connection can check competing odds in seconds, brand loyalty is proving to be minimal. No wonder margins are falling.

Rank is trying to address the problem by pushing games that do not involve unpredictable variables, such as horses and football referees. Its poker and bingo games are already up and running, and investment has been diverted away from sports and into new, as-yet unexplained markets. The company already has 4 million visitors a year to its bricks-and-mortar casinos, and obviously wants to see more of them playing predictable-margin games such as poker and blackjack from their own homes.

(It's worth noting, however, that laws deregulating the British gaming industry will bar Rank from putting Blue Square products directly in front of this audience. Synergies between the businesses are looking increasingly fragile.)

Casino gaming is undeniably far more profitable than sports at the moment, as two of London's most recent flotations demonstrate. Partygaming, the industry leader in online poker and an odds-on favourite to gain entry to the FTSE 100 index this year, is forecast by Morgan Stanley to produce a 2005 pre-tax profit of about £580 million, an impressive return on sales of just over a billion. Sportingbet, meanwhile, is expected to make a profit of just £56 million on revenue of £1.6 billion.

But, as today's Rank numbers show, Blue Square's revenue from casino-style games such as these already exceeds the sportsbook. So why are profits still stalled?

The price war, perhaps, has moved beyond the racetrack and is now at the gaming tables. That spells trouble for any company that doesn't have sufficient player numbers to maintain a decent return on the wafer-thin margins.

Online casino-style gaming is already as crowded a marketplace as sports betting, so profitability will undoubtedly suffer as soon as the growth in customers begins to level out. When that happens, consolidation will be only path left for the industry to grow. 888 Holdings, a poker-site operator which yesterday announced a plans to float on the London market, said the cash was needed because consolidation "will be the name of the game over the next 18 months." Some analysts expect the crunch to come even sooner than that.

This dog-eat-dog message is one that Rank management should heed. The group may have resources to buy a rivals as it tries to bolster a weak market position. But what are the chances of getting a fair price when there are stronger, better-funded players already at the table? And, given Rank's failure so far to make any kind of profit from the internet, shareholders may prefer if the company is the seller rather than the buyer.

By gambling on Blue Square, Rank looks to have lost much of its £65 million stake. Investors should now be asking when management are prepared to cut their losses.

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