Andrew Tottenham - October 27, 2014

Where Next?


In the past decade the now large gaming companies have benefited enormously from the growth in the Macau market. What once was a $4 billion a year market has grown in a decade to over $45 billion in 2013.  Although there has been a slowdown in recent months due to a government crackdown, gaming revenues are likely to grow again as the Chinese middle class grows and more and more of China becomes able to visit Macau. Some estimates put the annual gaming market at more than $100 billion. I am not sure I would go that far, it depends on what happens elsewhere, but it has a long way to go.

This massive and unprecedented growth (in the first few years of this century did any of us forecast it could be as large as it is today? ) has created a few problems for those operating there. I am not talking about the issues related to junkets, triads and money laundering – these are serious issues that should be addressed but not in this article. I am writing about where d the next phase of growth comes from for the large gaming companies that operate in Macau and elsewhere. It is a broad-brush approach and slightly tongue in cheek.

Las Vegas Sands , MGM Resorts, Wynn Resorts, Melco, Crown, and Galaxy are all public companies with investors and stock analysts who have expectations that they have to have a pipeline of new projects to invest the cash that is being generated in their operations in Macau. Caesars is the only large gaming company not to be represented in Macau. Before merging with Caesars, Harrah’s decided not to pursue a license in Macau because it decided that operating in Macau would jeopardise its US gaming licenses and it continued with this policy after the merger with Caesars. A decision it has come to regret ever since; Caesars has been shut out of the largest gaming market in the world with very little hope of finding any entry.

The expansion of casino gaming in the US is running out of steam (running out of States!). Massachusetts is currently selecting operators for 3 licenses (11 entities bid), New York has a contest to issue 4 licenses and after that possibly Florida, in a few years’ time is the only major US market to open up to resort style gambling. Will iGaming be the answer? I doubt it, the inauspicious start in New Jersey and Nevada has made it increasingly difficult for a politician to stick his/her neck out and push for the legalisation of iGaming within his State; at a Federal level legalisation has stalled.

So if it is not the US, where else? Asia is certainly a possibility but there are not many opportunities that these companies can pursue. Japan is the Holy Grail; no one is yet sure how many licenses will be offered nor what the tax rate will be. I have heard of only two licenses being issued; one for each of Tokyo and Osaka (although the Mayor of Tokyo is lukewarm about the idea) and I have heard as many as six. However many licenses are issued the real prizes for the large gaming companies are Tokyo and Osaka. If each city has the right to offer one license, two large gaming companies will be happy, unless they suffer the winner’s curse and the rest will have to make do with smaller opportunities or not compete for them. Timing is also an issue. Much has written or spoken about getting the resorts open prior to the 2020 Olympics. My view is that is a deadline that will be impossible to meet. When you consider the time needed to pass the legislation, public tender, design and construction of the facility, being open before 2020 will not happen. An additional consideration is whether you want to be building a large resort in Tokyo at the same time as the Olympic facilities are being built. This would mean competition for materials and labour as well as City planning approvals; I know what will be the Government’s priority.

We still do not know what the gaming tax rate will be. When gaming swept across the US in the 90’s and the last decade rarely did new jurisdictions propose a tax rate lower than the jurisdictions where casino gambling had already been legalised. It was always higher. In general terms, exclusive licenses or a limited number can support a higher rate than jurisdictions where there is no limitation and operators are allowed to compete.  When it comes to gaming tax in Japan I am sure that canny government officials will certainly be looking at the examples of Macau and Singapore and wondering if operators wanting to enter the Japanese market would tolerate higher gaming tax rates. My guess is that it will be higher.

South Korea could represent an opportunity and Caesars is already involved in a joint-venture that is developing a resort in Inchon. However, Korean nationals are not allowed to gamble in Korean casinos except in one; Kangwon Land Casino about a three to four hour bus ride from Seoul. The town used to have a mine, its only employer, but when it closed as compensation they were allowed to open a casino – makes sense! Given its poor mountain location the operator argued that they only way they could make it work would be if locals were allowed to play. They were issued a license with the exclusive right to allow Korean nationals to gamble. Today this casino generates approximately the same revenue as the other sixteen Korean casinos combined. It is very difficult to make an Integrated Resort Casino to work unless there is a sufficiently large local population. Without this the operation is dependent on flying in overseas customers. The volume of customers you would need to support $2, $3 or $4 billion is substantial. It is doubtful that the Korean Government would break the exclusive license of Kangwon and allow locals to play. Without this Korea is not much of an opportunity for the large gaming companies.

Another possible opportunity might be the Philippines but this market is in danger of becoming overbuilt and so the market could not support the addition of a multi-billion dollar Integrated Resort.  This then leaves countries like Vietnam, Cambodia and Laos. Whilst gambling is legal in these countries, the lack of a proper legal infrastructure and stability and the ever present corruption (Transparency International’s Corruption Index ranks them 116, 160 and 140  respectively out of a list of 177 countries) makes it impossible for large licensed gaming companies to do business there. India? Thailand? Goa has an “on again, off again” relationship with the casino boats that does not build the confidence necessary to invest and elsewhere initiatives to legalise gaming have failed early on due to the massive opposition. I have learnt from experience never to say “never” but it will be a long time before these countries allow anything like large Integrated Resorts.

Where else in the world? South America perhaps. The big prize is Brazil. Again massive opposition from entrenched industry and religious groups makes the legalisation of large Integrated Resorts difficult any time soon. Chile, Peru, Argentina, Uruguay and Colombia all have thriving casino gambling industries. The general theme for South America is that political and economic instability, currency controls plus the perception of corruption makes multi-billion dollar investments all but impossible.

So that leaves Europe. But gaming in Europe is overtaxed, over-regulated and anyway as we all know, Europeans don’t gamble!