The New Filipino President Is Taking his Country and Gaming in Hand

Rodrigo Duterte was sworn in as president of the Philippines on June 30th and he hit the ground running.  In his first few days, Duterte set up a national complaint line, changed the emergency call number to 911 and delivered a speech: “I am sorry for my country.”  He revealed the names of hundreds of government officials, including 23 mayors of cities and 5 top police officials who he said were involved in illegal drug trading.  The newly minted president called for a reinstatement of the death penalty and encouraged ordinary citizens to kill drug “pushers and addicts.”  It is estimated that as many as 1000 people have been killed by the government and citizens in just two months.  The killings have shocked the world and is virtually unprecedented in a country with a constitutional government.

When the supply of drug lords dwindled, President Duterte turned his attention to public officials singling out 150 he said should be removed from positions of authority.  The statement caused a constitutional crisis and Duterte backed down, although not before threatening to declare martial law.  He apologized to the chief justice of the Supreme Court; for the moment the rule of law has been preserved – except for those “drug lords” executed mob style without a trial or an opportunity to plead their innocence.

President Rodrigo Duterte’s is also after business tycoons who he has termed “oligarchs.”  One of his first targets was Roberto Ongpin.  He is chairman of the electronic gaming firm PhilWeb and a minister of trade under former President Ferdinand Marcos. Ongpin offered to sell his shares of the company, but that was not enough.  The company license was not renewed and it was forced to close.  Duterte assures other business leaders they do not have to worry: “The campaign against oligarchs must not impose fear to the business community.” Unfortunately for those who are not supposed to be concerned, the president is the only person who knows exactly who the oligarchs are.  It’s rather like trying to guess who the flies and tigers are in China, isn’t it?

After unleashing a crackdown on drugs, Philippine President Rodrigo Duterte is turning his guns on a booming online gaming industry, abruptly scrapping one firm’s 13-year monopoly this week and denouncing its billionaire chief as a corrupt oligarch. Neil Jerome Morales/ Farah Master, 8-11-16

Former PhilWeb Corp. Chairman Roberto Ongpin has been singled out by Philippine President Rodrigo Duterte in a campaign to end the influence of big businesses on the government, said he will sell his stake to protect the electronic gambling company and its workers. Duterte on Aug. 3 named Ongpin as among the businessmen he says have undue influence on the government and whom the newly installed head of state wants to “destroy” as he seeks to end online gambling in the country. Macau Daily Times, 8-11-16

In fact, on the surface the “clean up” of the Philippines and campaign against crime and corruption in China have much in common.  Both presidents took office on the promise of cleansing their countries of bad people doing bad things.  Both presidents have had a major impact on gaming.  In Macau, revenues have declined for 26 months since President Xi started his efforts to improve Chinese political culture.

The situation is still unfolding in the Philippines and it is hard to know what else might happen or what the impact on the country’s casinos will be. In the midst of the turmoil, the Philippine Amusement and Gaming Corporation (Pagcor) reversed a previous position and raised casino tax rates. Four casinos have been put on notice that the tax rate increase is effective immediately.  It has a new governing board appointed under Duterte’s direction.  In a rapid series of announcements, Pagcor denied licenses to 124 online gaming sites, announced a merger with the national lottery and then put itself up for sale. The changes can be seen as part of Duterte’s polices as Pagcor answers directly to the president.

Philippine president Rodrigo Duterte is pushing for the merger of state-owned gaming companies, Philippine Amusement and Gaming Corp and lottery operator Philippine Charity Sweepstakes Office.  Asia Gaming Brief, 8-26-16

The Philippines government has directed Philippine Amusement and Gaming Corp. to sell its casinos in order to raise funds to support the proposed P3.4-trillion 2017 national budget. she said. Asia Gaming Brief, 8-29-16

And then as if intended to confuse everyone even further, Duterte changed his mind about online gaming.  In a very personal statement, he said “he would restore online gaming” as long as the operators paid their taxes and stayed away from schools and churches.

“I will restore online provided taxes are correctly collected and they are situated or placed in districts where gambling is allowed, which means to say, not within the church distance or schools,” Mr Duterte told a briefing. Gross Gaming Revenue Asia, 8-25-16

Duterte might appear to be a crackpot, but he has a long and distinguished political career behind him.  He has been consistently against crime, drugs, alcohol, and tobacco. Even if he has not attacked legal gambling in the past, he has traditionally maintained an anti-crime and corruption position. He has also always shown support for minority ethnic groups in the Philippines and to Islam and a willingness to negotiate with communists.  Duterte is trying to move his country into the 21st century and leave its 20th century persona behind. He is also establishing to create a new identity for the Philippines in the Pacific region.

Unlike Macau, there are no major American casino companies invested in the Philippines. As a consequence, the gaming industry and its dance with Duterte does not get much coverage here. However, the Philippines is developing into an important international casino destination.  The Philippines, Cambodia, Korea and Vietnam along with Macau are all competing for the Chinese gamblers.  The Chinese/Asian market is huge, but each jurisdiction has its own unique idiosyncrasies that make operating a casino challenging.  However, the potential rewards are so great that many are willing to take the risks.  At the moment, things in the Philippines are unstable, maybe even life-threatening.  But once they settle down, I think the gaming landscape will be predictable and stable.  It will never be as lucrative as Macau, but in the long run, it will be an easier place to operate than Macau or even Vietnam.

 

Voters in New Jersey are Facing a Tough Choice

The nation is heading into the final phase of the campaign season.  Everything up to this point has been child’s play compared to what we will see in September and October. Trump and Clinton are lining up their forces, finalizing policies and preparing to debate. In the meantime, they are on tour making speeches and trying to make friends.  The majority of us will not see or hear them speak, except during the televised debates.  What the majority of us will experience is incredible noise and distraction created by hundreds of millions of dollars of advertising.  Prepare yourself; we will get no respite until the votes are counted.

At the same time, the residents of New Jersey will be besieged with advertising on another subject: To casino or not to casino?  It will be a very difficult choice for many voters and the advertising rhetoric is not likely to make the choice any easier. Of course, the amount of money spent on billboards, radio and television in New Jersey will be minuscule compared to presidential spending, but in New Jersey it will still be significant.  It is also likely to be the most hotly contested ballot issue in memory.

The ad war over North Jersey casinos is underway. Groups that support or oppose expanding gambling in the state outside Atlantic City recently launched ad campaigns… “New York and Pennsylvania have stolen billions of our gaming revenue, robbing us of dollars to fund programs like Meals-on-Wheels and the property tax freeze,” a woman says in the ad. “Vote yes and support gaming expansion in Northern New Jersey to protect our seniors.” Christian Hetrick, Press of Atlantic City, 8-15-16

The stakes are high for the citizens of the Garden State and even higher for those with a horse in the race. The proponents believe it is a chance to get back some of the gaming revenue, jobs and taxes lost to other states over the last two decades.  The politicians in favor of more casinos in the state see Atlantic City as a lost cause.  They think a couple of casinos on the border with New York could regain the lost tax revenues. Of course, the operator of the Meadowlands Racetrack sees this as chance to get rich.  The proponents cite jobs, tax revenues and an overall economic boost from two new casinos that will at least partially replace everything that has been lost in the last nine years since casinos started opening in Pennsylvania.  And no one would deny that competition from other states has a painful impact on the economy in Atlantic City and to a lesser degree on the state of New Jersey.

The opposition takes no issue with the claims that jobs and taxes have been lost. But, it makes a completely different argument – more casinos in the state will not create a net gain.  Instead, new casinos would take much of their revenue from the existing casinos in the Boardwalk city and further reduce jobs and tax revenues in the state.  In a best case scenario, additional casinos would be nails in the coffins of two or three casinos in Atlantic City.  In the worst case they would sound the death knell for all of the casinos in Atlantic City.  In that scenario Atlantic City would slide back to the city that hosted the Democrat convention in 1964; it was that dismal and embarrassing city that eventually lead to the casino legislation that created the Atlantic City of the last thirty-eight years.

Millions of dollars will be spent trying to convince the voters to believe those arguments.  The casinos in Atlantic City are staunchly against the plan; clearly more casinos in the state would not be good for the existing ones.  They have picked up some interesting allies including Monmouth Park racetrack in Oceanport, Genting Resorts in Queens and New York trade unions. Monmouth Park wants a larger share of the revenues than Meadowlands is offering.  The New York casino doesn’t want any more competition than is already on its way and the unions have only a conditional objection; they want the right to organize the workers in any new casino.

A major New York union and the operator of a Queens casino are anteing up against a New Jersey referendum to allow gambling outside of Atlantic City. The New York Hotel and Motel Trades Council will begin running a television and digital ad campaign against the referendum. Kenneth Lovett, New York Daily News, 8-15-16

The casinos also have strong support from local government.  Atlantic City is already in dire straits and its problems are directly related to the issues facing the casinos.  If casino revenue declines the city’s taxes decline, when casinos close the city loses tax revenue.  And one more casino, the Taj Mahal has said it will close in October.

A $73 million state loan could come with many conditions for this city, including dissolving its water authority by next month.  The city must first use redirected casino tax funds included in a state recovery bill to pay back the state…But if those funds aren’t enough, the state could collect proceeds from a Bader Field sale; the assets of a dissolved Municipal Utilities Authority; any state aid received by the city; and a portion of casino payments in lieu of taxes. Christian Hetrick, 8-2-16

When a celebrity owner hosted a lavish opening of Trump Taj Mahal Casino Resort in 1990, it made huge news well beyond the city. And with the current owners’ announcement they plan to close, it was a big deal all over again. Martin DeAngelis, 8-4-16

Atlantic City is on a downward spiral that reflects the casino revenue trajectory.  The government is embattled, bankruptcy and a threatened state-takeover are howling at the door.  The government grew its services and expenses with the growth of the city’s casino industry for thirty years, and now it is desperately trying to shrink itself to fit the size of its revenues; it is a vicious cycle that is not likely to be broken soon.  More casinos in the state would exacerbate the problem.

Will there be layoffs at cash-strapped City Hall? “To be determined,” Mayor Don Guardian told workers last week.  Christian Hetrick, 8-10-16

It is easy to understand why the casinos and the city and the casino in Queens oppose additional casinos.  And it is easy to see why Meadowlands would like to become a casino.  But the political proponents of adding more casinos are not easy to understand.  The governor, the assembly speaker and the president of the senate all support it. Especially confusing is Governor Chris Christie. Just a few years ago he was Atlantic City’s champion.  He promised to stand by the city, to make operating a casino less expensive and more profitable.  He helped the stalled Revel get enough money to finish construction and open. He was there during Hurricane Sandy.  In every crisis Christie could be counted as a supporter of the city and its primary industry.  But now Christie has joined those who think the future of casinos in New Jersey does not lie on the Boardwalk, but in the meadows in the shadow of New York City.

A group that backs building casinos in North Jersey has formally entered the campaign, and its supporters include some of the biggest names in state politics… The top two names in that first group are state Senate President Steve Sweeney and Assembly Speaker Vincent Prieto. Other powerful political backers include state Sens. Ray Lesniak and Joseph Kyrillos. Martin DeAngelis, 8-5-16

Gov. Chris Christie says he will cast his ballot this November in favor of expanding casinos to northern New Jersey.  The governor also said he would campaign for the ballot question if asked. Nicholas Huba, 8-16-16

Maybe I should not be surprised; politicians can be a fickle lot who change their minds often.  Christie’s Atlantic City attitude reversal is so extreme it makes one wonder if it is related to his failed presidential bid.  Would he be in favor of expanding gaming outside of Atlantic City if he had gotten the presidential nomination or been chosen as Trump’s running mate?  We will never know, but we do know he is putting as much effort into undercutting the casino industry in Atlantic City as he once did to protect it

In the next couple of months, the issue will be debated at length and with much heat; lots of money will be spent by both sides.  At the moment, in the language of the bookies, it is a “pick’em.”  Even with the governor and the leaders of both houses coming out in favor of expansion, the measure is not guaranteed to succeed. In fact, polls show the measure down by a few points.

In the national election, people have become very, very polarized.  Republicans and Democrats alike are declaring that this is a do-or-die time for the nation; neither side has an unblemished candidate and that allows each to predict a national disaster if their opponent is elected.  I am not certain that I agree, but I do think this is a do-or-die election for the casino industry in Atlantic City.  If the voters authorize two more casinos in the state, Atlantic City will continue its long decline and in time become a tiny, unimportant remnant of its former self.  There are approximately eleven more casinos entering the northeastern market, all of which will impact Atlantic City.  But none will do more damage than a casino at the Meadowlands.  Some voters in New Jersey will be faced with a tough choice in November.  But for those with a vested interest in Atlantic City and its casinos, voting “No” should be an easy decision to make.

 

Steve Says He and His Palace Are Ready

At what seemed like the last moment, Wynn Palace finally received its table game allotment.  It was given permission for 100 new-to-market tables for its August 22nd opening, less than expected, but Wynn is ready to open.  The tables are designated mass market, not the VIP tables that most expected and there is a significant difference. Mass market tables historically earn less than half of VIP tables.  It is less than the 400 games the property was designed to operate, but, Wynn has a backup plan. It will move 250 of underperforming tables from Wynn Macau.

Observers are taking the allotment as a reprimand as for two years the governments of both Macau and China have been sending clear signals – they want destination tourist resorts, not gambling halls.  Wynn does not agree and thinks the allotment is adequate.  However, there are others who see a coded message in the allotment. Wynn has not pleased the powers that be in their eyes.

When making the announcement, the Secretary for Economy and Finance, Lionel Leong Vai Tac said, “We consider different factors when granting new-to-market gaming tables.  This includes whether the project is helpful for the development of Macau into a World Centre of Tourism and Leisure, whether the company supports local SMEs, as well as its input to developing non-gaming elements.”  Wynn apparently fell short by those measurements as his competitors Galaxy and Melco were awarded 150 more tables.  In the logic of those who see the allotment as a reprimand, Galaxy and Melco built better tourist attracting resorts and do more business with local companies than Wynn.

Wynn Palace will be authorized to operate 100 tables when it debuts Aug. 22 in the world’s largest casino hub, with 50 more to be allocated in the following two years, Macau’s Secretary for Economy and Finance Lionel Leong said. The government stipulated all the tables will be for mass-market players. The resort also received approvals for 1,145 slot machines. Daniela Wei, Bloomberg, 8-12-16

While Wynn may not be upset by the allotment, others are clearly disturbed. Investors and analysts are wondering how Wynn can get a fair return on $4 billion with 100 mass market table games and 1100 slot machinesBut by transferring tables from Wynn Macau, Wynn will have a better hand than the one the government dealt to him.  In fact, he apparently thinks by moving tables around he will have better utilization and be more efficient than Wynn Macau is currently.

Union Gaming has downgraded the stock for Wynn Macau to Hold with analyst Grant Govertsen saying that, while he thought it possible for Wynn Macau to achieve the firm’s estimates over the next two years, “it does raise concerns on how an operator can ultimately get to where they need to be on a longer-term basis with only 150 tables on a $4bn+ investment… While we do think it is possible that the company could apply for more tables post-2018, we are more comfortable being on the sidelines for the time being and until we get more clarity on how future table allocations will be dealt with (for all operators).” Asia Gaming Brief, 8-12-16

Regardless of the concerns of the observers, this is Steve Wynn we are talking about.  Every time Wynn opens a new property the pundits predict his demise.  The doubting started with the Golden Nugget in Atlantic City, but the Mirage really upped the game of doubt as all of the analysts agreed it was simply impossible to generate the million dollars a day that was necessary to service the debt. Of course it was possible.  In a way, the opening Wynn Palace is like the opening of the Mirage.

 “A casino is a passive place,” Wynn stated. “Its value as a revenue source depends solely on how many people come through it and what their average per person spend is. What is dynamic in my business is the non-casino stuff: that is what brings people from afar.”  Wynn Palace – which Mr. Wynn dubbed as “arguably the most beautiful hotel in the world” – would be themed around flowers, he said. The property features several large-scale floral installations to be changed on a regular basis. “People who come to Macau, they come frequently. So the building has self-change built into it,” Mr. Wynn explained.  Gross Gaming Revenue Asia, 8-17-16

While to others, a billion dollars in debt is impossible to service in today’s market and especially with the number of games allotted, Wynn is confident as usual.  He is confident and proud to be opening a resort that will once again redefine casino resorts in Macau and worldwide. He shared his strategy for dealing with opening in uncertain times with the media:

“I say don’t overreact, cool your jets. Focus on things that you can control: your business, your employees’ welfare, your guests and the quality of the product that you dish up,” he said. “Do that, keep your chin down, pay attention to business and the sun will come up tomorrow. That’s the way I figure it.” South China Post, 8-17-16

Wynn certainly speaks from experience. He has faced challenging times before.  He has faced a sea of doubters and he has made extremely high-value, high-risk wagers many times before.  It has been 36 years since the Golden Nugget opened in Atlantic City and in all of that time Steve Wynn has yet to fail. So if you are considering a wager on Wynn Palace, I would recommend putting your money on Steve.  Wynn Palace could fail, but it would be a first for Steve Wynn in over 40 years in the business.

 

Is MGM Becoming Grand Again?

MGM International Resorts has a storied history; founded by Kirk Kerkorian and called MGM Grand; it was the largest hotel casino in Las Vegas and it was indeed grand. However, with the mergers and acquisitions like that of Mirage Resorts, it morphed into another kind of company. MGM now owns the Bellagio, MGM Grand, Mandalay Bay and Mirage brands and operates casinos in Michigan, Mississippi, New Jersey, Nevada and Macau. MGM Resorts also owns 76 percent of MGM Growth Properties (MGP). MGP is a REIT that raised $1.05 billion in an IPO this spring and currently controls nine casinos.  Historically, MGM’s expansion outside of Las Vegas has been slow and selective, but the pace is picking up.

MGM Resorts decided it did want to be in Atlantic City in May after years of waffling.  In 2010, MGM was ready to give up its New Jersey license.  The company then called MGM Mirage told the Casino Control Commission a license in Macau was more valuable. It refused to throw away its partnership with Pansy Ho and its chances for a casino in Macau for a license to co-operate the Borgata.  Good thinking, today MGM gets 26 percent of its revenue from Macau; and is in the process of building another property in Pansy’s home town.  But back to Atlantic City, there were no buyers MGM’s 50 percent share of the Borgata and it was forced to become a holding company until New Jersey was willing to grant a casino license. In the world of plunging revenues, New Jersey regulators are no longer so difficult and now they think MGM is just right for Atlantic City.  MGM Resorts paid $900 million to buy Borgata from Boyd and immediately sold it to its REIT. With the purchase of Borgata the company has a 26 percent market share. That market share is likely to grow with the collapse of the Taj Mahal.  But control of Atlantic City is just the first step in becoming the dominant casino operator in the region.

In December, MGM National Harbor is scheduled to open just outside of Washington, D. C. in Maryland.  MGM CEO Jim Murren is really enthusiastic about the casino and its location; he is predicting MGM National Harbor will be the most profitable casino in the country.  MGM Springfield is expected to start operating in 2018.  At that point MGM will control three major markets on the east coast, in addition to Detroit where MGM Detroit is the most profitable casino in that market with a 42 percent market share.  But a word of caution, there are some challenges in all of this; MGM Springfield will only have about a year before a Wynn Resort opens very close to Boston; Wynn is certain to take some of MGM’s market share; and then across the border in Connecticut the Mohegan and Pequot tribes are planning a casino to further attack MGM’s market.

Detroit is struggling under the burden of competitive pressure from surrounding states, and as everyone knows Macau is not healthy.  MGM has postponed its Cotai property once again to sometime in mid-to-late 2017.  Having said that, the REIT appears to be working and MGM is certainly positioned to be extremely competitive in all of its markets, including of course its home base, the Las Vegas Strip.  In Las Vegas, the company continues to invest and improve its position and that begs the question, can we call MGM Grand again, even without a name change?  Kirk Kerkorian died a year ago, but I am certain he would have called this new and growing MGM just grand.

 

Fantasy Giants Might Have Gambled Their Future on a Single Season

It is amazing how much change can occur in just twelve months.  Last year before the beginning of the 2015 National Football League season, online daily fantasy sports was nearly unknown to a majority of Americans, law enforcement agencies and the media.  Until that fateful first Monday night game of the year, when we were all smacked upside the head with a gazillion commercials on the joys of fantasy by FanDuel and DraftKings.  In bold, but possibly fool-hearty attempt to grow its customer base, DraftKings spent $21 million on television advertising in that week; it was the nation’s number one advertiser with 5,800 commercials in seven days. The advertising campaign worked. In September alone one million new customers signed on with DraftKings.  FanDuel did not spent quite as much or get as many new players, but it was close; however each of those new players was very expensive.

The advertising barrage increased brand recognition and the number of users enormously.  But the cost of the ads was enormous—an estimated $174 per new user at DraftKings and $123 per new user at FanDuel, according to Eilers & Krejcik. —which meant operating losses at both companies last year. Alexandra Berzon, Wall Street Journal, 8-2-16

That September media blitz was like a tsunami and it threatened to engulf the entire gambling industry and change the nature of gambling on sports forever.  However, on the way to the bank and glory both FanDuel and DraftKings ran into a little trouble – the New York Attorney General.  The AG put the brakes on fantasy sports in New York and soon other states followed suit.  For New York and most states, the question of whether fantasy sports was a contest of chance or skill was central.  The New York AG said it was gambling and that started the ball rolling against the two companies.  They could not engage with anyone living in New York, it was a major financial and legal blow to both companies.  However, they did finally catch a break when the state legislature passed a bill defining it as a game of skill and legal in New York.

Gov. Andrew Cuomo has signed a new law to allow the resumption of daily fantasy sports in New York. The measure calls the popular online contests a “game of skill.” That legal definition resolves the central argument in a lawsuit brought against the country’s two top fantasy sports companies by the state attorney general. He had likened the online matches to illegal gambling operations based on chance.  Associated Press, 8-3-16

Since last September, some twenty states have reviewed the issue; but so far only five have found it legal or passed legislation to legalize daily online fantasy sports.  In the major of states fantasy sports games are still considered gambling and not a games of skill and therefore illegal without specific permission and licensing.

Over time, the legal status of daily fantasy sports games and indeed all sports betting may change.  But as football fans wait eagerly for the first Monday night game, FanDuel and DraftKings might not have the staying power necessary to stay in the game until those changes take place.  According to the Wall Street Journal, in June of 2015 FandDuel had $275 million in cash, but by May of this year, it was down $50 million.  While DraftKings probably has more cash than FanDuel, both desperately need more legal jurisdictions for them to survive and become viable, profitable businesses.  Key to their success are California, New York, Texas, Florida, Illinois, Pennsylvania and Ohio as those seven states have 44 percent of the nation’s population.  Unfortunately, thus far only New York has legalized it and that just happened.  The governor did not sign the bill until August 3rd.

After inundating sports fans with a barrage of commercials during last year’s football season, fantasy-sports websites FanDuel Inc. and DraftKings Inc. are cutting back sharply on their advertising, as they seek to rein in spending and limit the impression—partly created by their own ads—that they are peddling a form of gambling… Flush with cash from media-company investors FanDuel and DraftKings together spent an estimated $500 million on advertising last year… FanDuel had a cash balance of about $50 million in May, down from $274 million last June.  Alexandra Berzon, Wall Street Journal, 8-2-16

The situation is uncertain, but one thing is certain; televised professional football in September will not be swamped by DraftKings and FanDuel the way it was last year.  Although New York is now safe ground, the advertising will still have to walk a line trying to demonstrate the skill required for the game.  That is a difficult task; the top level winning players in the daily games are very skilled, but the majority of players are not skilled enough to eliminate the gamble.  They are playing a game of chance where the outcome is heavily weighted toward the upper echelon contestants.

However, the true gamblers in the game of daily fantasy sports are DraftKings and FanDuel.  Starting a new business is always a gamble, but a business with no clear legal status is a very risky venture.  When those two jumped onto the national stage last year, they may have unknowingly been putting all of their chips on that one season.  Of course, neither DraftKings nor FanDuel thought it was a gamble.  They believed it was a contest of skill and they were only playing the game against each other.  But, that is not the way it has played out. Instead their venture turned out to be a wager placed on a contest with vague, uncertain and ever-changing rules, like playing crochet in Wonderland.  This year instead of duking it out to see which will become the richest, the giants of daily fantasy sports are struggling to survive.  A year ago, they were cash cows capable of dominating sports broadcasting, but no longer.  Now it is questionable if either DraftKings or FanDuel has the resources to hold on until California, Texas, Florida, Illinois, Pennsylvania and Ohio legalize their game.

What do Pennsylvania and Macau Have in Common?

Pennsylvania and Macau, not a pair that crops up in everyday conversation; both have casinos, but Sheldon Adelson is probably the only casino guy in the world with a major stake in both.  Normally I try not to mix metaphors or casino jurisdictions.  The reason is simple; each jurisdiction is unique, a fact even when two states border each other.  In every case the conditions that led to legalized commercial gambling were unique to that state and that time.  The political and economic conditions when the enabling legislation passed led to a unique set of regulations and levels of taxation.   However, there are times when I think I see a broad principle at work which crosses jurisdiction lines and the recent news from Macau and Pennsylvania is one of moments.

In the 1980’s I attended a gaming conference where legalized, commercial gambling outside of the United States was on the agenda.   One of the speakers was an employee of Hilton Hotels, which at the time had several international hotel operations that included gaming.  And for a short period of time, Turkey was home to one of those Hilton hotels with gambling.  But Hilton had been forced out of Turkey.  The Turkish government wanted to push out foreign investors and had raised the tax on gaming past the point of profitability.  Hilton cried foul, but no one listened, so Hilton packed its bags and left Istanbul.  The executive speaking at the conference warned other gaming companies to be very careful when investing in foreign countries: “Be especially wary of unstable and unpredictable governments and uncertain tax rates,” he said.

Everyone in attendance thought that was good advice, but it hardly applied to us.  At the time only Nevada and New Jersey had casinos and internationally, except for Monaco there weren’t many legal jurisdictions.  Today the international picture has changed, most notably with legalized gaming Macau sanctioned under the umbrella of Communist China.  When given the opportunity to invest in the wild-wild world of casinos in Macau, operators from this country and Australia jumped at the chance.  They rushed in as soon as they got permission, invested billions and immediately started to cart home billions of dollars in profit. Then in 2012, the new president of China, Xi Jinping, started a campaign against graft and corruption and everything changed.

A Chinese military court sentenced Gen. Guo Boxiong to life in prison for accepting bribes…The wide-spread bribery investigations and convictions may have had some surprising consequences, particularly in decreased appetite for the high-end products favored by many in China’s elite. Since late 2012, Xi has initiated a battle against corruption, trying to reform a “bloated, bureaucratic, and corrupt” party that “has largely lost the trust of ordinary Chinese citizens.  J Walker Glascock, Christian Science Monitor, 7-25-16

The casinos are scrambling to find a way to survive and service the debt they incurred building very elaborate and expensive palaces in Macau.  Should they have suspected something long ago and been more cautious in investing in a place controlled by the Chinese Communist Party?  Certainly if they had listened to that Hilton executive from the 1980’s, the outcome in Macau was imaginable, if not foreseeable.  Communism does not place the same value on business as in a market based economic system.  Clearly, it is risky for any capitalistic enterprise to invest billions of dollars in a communist system; that is not a stable business environment

Communist economic systems don’t value and protect business the way market-based systems do, right?  Here is where my metaphor and jurisdictions get mixed; Pennsylvania is going rogue.  Pennsylvania is the Keystone, the very block of stone that held together the original union of colonies and made the United States of America possible.  Nothing could be more American or one might argue capitalistic than good ole’ Pennsylvania.  And yet, it seems the politicians in Pennsylvania can be as untrustworthy as the Chinese communists.   In the midst of a billion dollar budget deficit, the lawmakers in Pennsylvania turned on the gaming industry like a rabid dog and started changing the rules and the tax rate.

Beginning next week, the state’s 12 gambling halls will start paying a higher tax on table games…from 14 percent to 16 percent — is projected to cost Sands roughly $4.6 million a year. Matt Assad, Allentown Morning Call, 7-25-16

Now a measly two percent increase in tax may not seem like much, but it is.  Pennsylvania already has the highest casino taxes in the nation and any increase will harm the state’s casinos.  But more than the specific rate change is the implied threat that whenever the state wants more money casinos taxes are fair game.  The industry fought off attempts to legalize VLTs the way that Illinois has, but there is no guarantee the issue will not be back – that billion-dollar black hole still looms on the horizon.  While the legislature was raising the table game taxes, it also decided casinos could buy liquor licenses for the hours that liquor sales are currently forbidden.  They looked into their crystal ball and decided a million dollars was a good number for the license.  Unfortunately for the politicians, the casinos don’t agree that the price or the concept is reasonable.  In the six weeks since the bill was signed, no casino has exercised its right to buy the extended-hours liquor license.

State legislators figured giving casinos the right to buy a $1 million license to sell liquor around the clock was one of those win-win scenarios politicians covet. The state gets $12 million and casinos no longer have to cut gamblers off at 2 a.m. A no-brainer, right? …But since the expanded liquor sales provision was signed June 8…the word there are no takers has trickled back to legislators. Matt Assad, Allentown Morning Call, 7-25-16

“Who advises these legislators? This doesn’t make sense,” Sands Casino CEO Mark Juliano said.  But Juliano is wrong.  It makes perfect sense to a desperate politician to change the long-term rules to solve short-term problems.  That was the warning from the Hilton so long ago: “Be careful when you invest in a casino venture that the government is stable and predictable and the tax rate is certain.”   It is not just the volatile Turks or deceitful communists that are unstable and unpredictable.  When the chips are down, every government is unpredictable.  Pennsylvania and Macau have that in common; the chips are down and casinos are fair game.

 

Expecting Too Much: A Recipe for Disappointment and Failure

Much of the gaming expansion legislation passed in the last eighty years was driven by a need for tax revenues, employment and economic stimulation.  For example, when Massachusetts approved gaming, the state was in the midst of a recession and desperately needed jobs, capital investment and new sources of tax revenues.  The pro-casino forces carried the day with predictions for $300-$500 million in tax revenue, thousands of jobs and hundreds of millions of dollars in economic development.  And in November of 2011 the governor signed the Expanded Gaming Act. The act provided for three casinos and one slot parlor.  Five years later the slot parlor is the only property operating and in its first year it generated just $81 million in taxes; that is a long way from the expectations of the act.

Nothing has been as simple as the erstwhile politicians imagined as the process has been wrought with problems and delays that were unanticipated.   The licensing alone took four years to award two casino licenses and one for the authorized slot parlor.  There were numerous local level regulations, committees, boards and special interests each with special requirements that had to be met adding to the delay between the passing of the act and the eventual opening of the MGM casino in Springfield and the Wynn casino just outside of Boston.   A series of lawsuits by unhappy communities and disgruntled, rejected suitors were also not part of the plan.  All of these factors made the original revenue projections impossible to achieve.

Adding to the complications, the competitive landscape has changed dramatically since the lawmakers in Massachusetts were debating the merits of casino gambling.  That altered environment will have a significant impact on gaming revenues in Massachusetts.  There are simply more casinos in 2016 than there were in 2011 and there will be more in 2019 or 2020 when the MGM and Wynn finally open.   But, Massachusetts is not the only state where lawmakers failed to take into account the expansion of the industry regionally when predicting casino tax revenues.

New York is going to experience the same shortfalls when the newly authorized casinos in that state finally open.  Like Massachusetts, New York is going to have much more competition than the legislation anticipated. Those other casinos will take part of the money that Governor Cuomo and the lawmakers hoped New York would collect.   But even without additional competition, the delay between the enabling legislation’s approval and the casino openings will set the governor’s plans and tax revenue predictions back two or three years.

The only casino unlikely to be affected by the competition or the bureaucratic delays was not part of the governor’s plan, Genting Resorts in Queens.  Genting is getting set to spend $400 million to expand its property with a hotel, spa, restaurants and 140,000 square feet of convention space. It also plans to add 1000 slot machine, bringing its total to 6500.  Genting Resort in Queens is about the only casino in the country unthreatened by new competition.  Genting is the hometown casino for over eight million New Yorkers.  Even a casino in the Meadowlands of New Jersey won’t cut significantly into its business.  However, a casino at the Meadowlands racetrack would affect the other casinos to be built in New York.

New Jersey is poised to expand its gaming; in November a casino referendum will be on the ballot. Voters will be asked if they want more casinos in New Jersey.   The forecasts for revenues from additional casinos in New Jersey will be as tenuous as those in New York and Massachusetts.  Enthusiasm, private agendas and a lack of objective information are distorting the impact and benefits of any expansion in New Jersey.  One of the issues that advocates in New Jersey are ignoring is the possibility of expansion in Pennsylvania.

In Pennsylvania, the legislature and the governor have been locked in a very tense and combative two-year budget debate. The lawmakers finally passed a $1.3 billion revenue package, the budget calls for $31.5 billion in spending.  Besides new taxes on tobacco and a loan from the general fund, the budget anticipates an estimated $100 million from legalizing casino-run internet gambling, slot machines at airports and off-track betting parlors.   In much the same way that Massachusetts did, the lawmakers in Pennsylvania reverse engineered the gaming expansion.  They started with the amount money required and the in a rather arbitrary way assigned numbers to each of the categories.

Pennsylvania lawmakers approved a budget that will require $100 million from an online gambling bill that won’t be voted on until the fall.  In addition to a gambling measure that lawmakers hope will generate at least $100 million, the $31.6 billion budget also relies on a $200 million loan from the Pennsylvania Professional Liability Joint Underwriting Association, a government-chartered medical malpractice insurance fund.  Evan Grossman, Watchdog, 7-15-16

What are the chances the legislators are right about the revenue potential of online gambling or any other expansion?  No much in my opinion.  It is very hard to find an example of a state where the numbers that drove the campaign for expansion were realized.  Ohio might be cited as a state where lawmakers got it right, except that the governor found a way to authorize slot machines at racetracks which more than doubled the number of slot machines in the state.  And that is the core of the problem; the economy and the gaming industry are dynamic and ever changing.  Long term planning that does not contemplate the problems or anticipate major changes in the landscape are destined to fail.

I started to think about the issue of legislatures and politicians expecting too much after reading an article in the Pittsburgh Tribune-Review by Mark Gruetze.  Gruetze quoted Mathew Katz, the founder of a software company, warning anyone who would listen about the challenges in legalizing internet gambling in Pennsylvania.

No matter when online gaming begins in Pennsylvania or any other state, don’t expect an immediate flood of tax money or casino profit, a voice of experience says. “The reality is, it takes time,” says Matthew Katz, founder and CEO of CAMS LLC, a California company that provides software for online gambling operators in Nevada and New Jersey. “It’s not all of sudden you go live and everybody comes and plays. It takes time to educate the marketplace.”  Katz also is founder and CEO of Verifi Inc…“We want to come into Pennsylvania, but if the costs are going to be similar to that of New Jersey, we would probably have to make the decision not to.”  Mark Gruetze, Tribune-Review, 7-5-16

Katz’s warning contains two important concepts; it takes time to build a new market; and if the fees and taxes are too high prudent companies will pass on the opportunity.  Those are not the only issues facing any expansion of gaming in today’s world, but they point out just how complicated predicting the potential of future casinos can be.  The gaming industry has reached a point where no jurisdiction stands alone and each new gaming outlet impacts all others within its reach.  That makes it very important to be realistic in planning gaming expansions; however lawmakers and politicians are rarely realistic.  They expect too much and therefore are certain to be disappointed.  But of course, if lawmakers faced the facts honestly, they would have to deal with the crucial fact that government spending is limited by government revenues.  And we all know that expecting politicians to honestly face facts is expecting too much, don’t we?


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