Sunday, October 08, 2006
Global players will be gambling an estimated US$295-billion annually by 2010. In Canada, it is the biggest growth industry. And that begs the question -- should governments hold 'em, fold 'em, or raise the ante? Peter Nowak Financial Post
Saturday, October 07, 2006
Cranes dot the landscape of tiny Macau, the special administrative region of China and former Portuguese colony. The heavy machinery is dredging the waters of the South China Sea in a hurried land reclamation project, all in an effort to make way for a horde of new casinos. The border with mainland China, meanwhile, heaves with busloads of tourists who have made their way to Macau for one reason and one reason only: to gamble.
Macau is projected to surpass Las Vegas in overall gambling revenue this year, but it is only the tip of a global iceberg. Despite a U.S. crackdown on Internet-based gambling, the industry in general is powering ahead with no signs of slowing down.
Global consumer spending on all gambling -- including casinos, lotteries, horse races, book-making and Internet -- was estimated at US$244-billion in 2004 and is expected to grow to US$295-billion by 2010 with the introduction of new casinos. Merrill Lynch expects at least 50 new casinos will be built in Asia alone by 2012.
Total gambling revenue in the United States was US$78.6-billion in 2004, up 42% from US$45.1-billion in 1995, with expansion projected to continue indefinitely.
Statistics Canada says the growth of this country's gambling industry has far outpaced all other industries since 1992. Provincial governments last year pocketed $7.3-billion in profit on revenue from lotteries, video-lottery terminals and casinos of $12.9-billion -- a figure that has risen a staggering 79% from $2.7-billion in 1992.
In pure numbers, Canada now has 60 casinos and has seen explosive growth in the number of slot machines since 1999 -- to 47,878 from 31,537, or a 52% increase.
Internet gambling, meanwhile, is booming. The first gambling Web site launched in 2005 and there are now more than 2,000, according to the American Gaming Association. Global revenue was estimated at US$11.9-billion in 2005 and projected to double by 2010.
The industry was shocked when U.S. Congress passed surprise legislation a week ago banning banks and credit card companies from accepting bets from Internet gambling sites. President George W. Bush is expected to sign the bill into law shortly.
With more than half of all online bets originating in the United States, the legislation wreaked havoc on Internet gambling providers and associated companies by wiping away billions of market capitalization this week. Several Europe-based companies, including PartyGaming and 888 Holdings PLC, immediately ceased taking bets from U.S. residents, while firms that supply the software these sites run on -- including Toronto-based Cryptologic Inc. and Oakville, Ont.-based Parlay Entertainment -- saw their respective shares tumble about 25% and 35% over the course of the week.
The gambling industry -- both online providers and land-based casinos -- decried the legislation as backwards, short-sighted and religiously motivated, likening it to the alcohol Prohibition of the 1920s. They said there was no way to stop the spread of Internet gambling and the legislation would only serve to create a black market of more shady offshore operators and fewer legitimate businesses.
Industry experts say that if governments want to combat the perceived ills of gambling, there may be only one way to do it: with more gambling. In other words, the only way to fight fire is with fire.
"Or when the house is burning down, you can roast marshmallows," says Jason Azmier, senior policy analyst at the Calgary-based Canada West Foundation consultancy.
In a June 2005 report on gambling demand in Canada, Mr. Azmier wrote that trapping the "leakage" of gambling revenue to overseas or illegal operators has served as effective justification for expansion of legal lotteries and casinos. Continuing growth in demand and changing technology "will no doubt make compelling future arguments for expansion." After all, if the demand for gambling is there and it's growing, shouldn't Canada capitalize on it and keep the proceeds?
"It provides a compelling argument to say we need to have our own sources because people are going to gamble anyway," Mr. Azmier says. "We're better off controlling it, regulating it and providing the most healthy outcomes associated with it."
Most governments in the world have bought that argument and have helped fuel the massive expansion of industry and demand, says Eugene Christiansen of New York-based Christiansen Capital Advisors. Governments have also found that by spurring gambling development, they have unlocked an entirely new category of consumer spending, he says.
"If I started another hundred newspapers, I might not increase consumer spending on newspapers at all because the United States is fully supplied with newspapers and has been for some time," he says. "But there is substantial unsatisfied demand for casino gaming in the United States. That means every time a state legalizes casino gaming in some form, it stimulates new consumer spending."
Mr. Azmier agrees new casinos translate into new consumer spending. The money consumers spend at casinos comes from their savings rather than from other forms of entertainment spending, such as movies or non-gambling games. Whether that's good or bad, of course "is another debate," he says.
The rising demand and spending is what makes the move by Congress that much harder to swallow for industry players. The battle over whether gambling is immoral or not was over long ago, says Alan Feldman, spokesman for MGM Mirage, Las Vegas's biggest casino operator.
"Government needs to think about legislating behaviour. Throughout history that's proven unsuccessful," he says. "Government shouldn't be in the position of fighting gambling to begin with. Government has throughout history been built on gambling."
The casinos were just as upset by the legislation as the online gambling operators. Up until about six months ago, the casinos -- represented by the AGA -- were against Internet gambling, but they changed their tune after an experiment by MGM and Kerzner International Ltd. on the Isle of Man last year. The two casinos set up betting sites on the British island, which allows regulated online gambling, to see if the software could stand up to official scrutiny. The sites were tested to see if minors and bettors outside the jurisdiction could bypass safeguards, and they passed with flying colours, Mr. Feldman says. The AGA then asked for an inquest by Congress into whether Internet gambling should be legalized, regulated and taxed in the United States.
The World Trade Organization has also weighed in on the issue, finding in 2004 that the U.S. government's aggressive efforts to curb Internet gambling was in violation of commercial service accords. The ruling was recently reversed, but the AGA has requested it be revisited.
The casinos don't see the Internet as competition, but rather as an opportunity for brand extension. The AGA says only about 45% of the big casinos' profits now come from gambling, as opposed to about 70% a decade ago. People are going to Las Vegas and Atlantic City in New Jersey more for the shows and other entertainment.
"Gambling is secondary," says AGA chief executive Frank Fahrenkopf. "Internet gamers are not the same customers. The [casinos] would view it as a new profit centre."
Mr. Feldman says MGM would "absolutely" launch an Internet betting site if it could, since the customer base is completely different from traditional casino clientele.
"We've not yet met the customer who would say, 'I've got poker nights on Wednesday nights, so I'm not going to go to Las Vegas this weekend.'"
But the removal of the United States -- which at around US$4-billion in betting makes it the world's biggest Internet gambling market -- does major damage to any business plan for doing so.
"Having this unavailable to customers really diminishes the business opportunity," he says.
Other governments, however, are moving in the opposite direction. Despite the Chinese government officially "opposing" gambling, Macau has over the past four years become the undisputed Las Vegas of Asia. Canadian-educated region chief executive Edmund Ho in 2002 ended Hong Kong tycoon Stanley Ho's (no relation) 40-year monopoly by opening up casino licences for bidding, spurring a wave of foreign investment and development. The result is that overall gambling revenue is projected to this year surpass Las Vegas's take of about US$6-billion. And that's before at least another 10 casinos are slated to open in Macau by 2009. China is also rumoured to be in the process of launching an online lottery.
Singapore last year lifted a ban on gambling in an effort to compete with Macau, and multi-billion-dollar bids for casino licences are under way. Japan is also looking to build its first casino by 2012 and plans to introduce legislation in 2008.
In Canada, the British Columbia Lottery Corporation and its Atlantic counterpart both introduced Internet gambling in 2004. Residents of those provinces can bet on sports, pick Lotto 6/49 numbers and play keno online.
"It's a convenience channel for us," says Rhonda Garvey, director of e-business for BCLC. "E-commerce is very much a part of British Columbians' lives and the natural opportunity for us was to give them the ability to buy their favourite lottery games online."
Other provinces have yet to follow suit, but Mr. Azmier says it may not be long. Gambling revenue growth in Canada has slowed in recent years after an early surge in the 1990s, climbing only about 7% over the past four years. The industry in its current state has reached a plateau, he says.
"Perhaps it is more accurate to say the current gambling industry has matured to the limits of its regulatory boundaries. There are new technologies (the Internet, cellphones), new markets (First Nations' casinos, international gamblers), and yet-to-be-explored opportunities (interactive gambling) that suggest a very large potential for gambling revenue growth," he wrote in his report.
Some provinces, including Ontario, have placed a moratorium on casino and Internet gambling development. As in the United States, there is still considerable public will against more gambling, which could impede future growth in Canada, Mr. Azmier says.
"You have a very sensitive public policy issue there," he says. "It's not entirely clear that these arguments will prove to be effective in saying we need to have legalized expansion of gambling."
