Archive for July, 2017

Macau, Hong Kong and the Chinese Dance of Time

Macau and Hong Kong have much in common.  Both are former colonies that have been reclaimed by China.  In 1997, Hong Kong left the shelter of the United Kingdom and submitted to the authority of China.  Macau was transferred from Portuguese control to China in December of 1999.  In the process, both cities became unique governmental entities – Special Administrative Regions of China – with autonomous legal and economic systems.  Hong Kong is a banking, finance and technology center.  Macau’s economy is famously founded on casino gambling.  China embraced the concept of special regions under the slogan: “One Country, Two Systems.” The commercial activity of both cities is important to China’s economy.

The cities may have a common foundation, but in the years since the colonial era ended, Hong Kong and Macau have taken different paths.  Hong Kong has never fully embraced Communist China and its legislature continually resists Chinese laws and authority.  Macau on the other hand seems quite content to be part of the one country with its communist government.  China recognizes the difference in attitudes of the two cities.  On his last visit to the region, Chinese president Xi Jinping, praised Macau and its leaders for the city’s progress in integrating into the greater China identity and embracing the communist party’s vision of the future. In contrast, Xi has issued veiled threats to Hong Kong, telling the city’s citizens they must get aboard the Chinese train.

Hong Kong is undoubtedly frustrating for the Chinese; Hong Kongers act as if they are still citizens of the British Empire and show no inclination of wanting to become more “Chinese.”  Xi would like Hong Kong to begin acting like Macau and has told its citizens exactly that.  The difference between the two cities in their acceptance of the one country, two systems concept was a mystery until on July 21st, Reuters published an article entitled: China reaps payoff from hand-picked team placed in Macau.  The Reuters article described a group of 40 young Chinese trained in leadership and sent to Macau in the early 1990s, long before the transition in 1999.  Those young people were placed in key government departments and today hold important positions of power.  Besides the leadership cadre, over half of the population of Macau has immigrated to the city from China in the last two decades.  The leaders in Hong Kong were not born or trained in China and its residents are not recent immigrants.  Their loyalties are to democracy, a free economy, a free press and independence.  They easily take to the streets to protest and demand independence.  .

The article explains why it has been so easy for China to rule by suggestion in Macau.  There is no opposition; the government and the citizens want to please China.  The governing of Macau includes regulation of the casinos.  The changes in casino operations that fit China’s goals are written into regulations and enforced.  Thus, the casinos are falling in line with President Xi’s plan to make Macau an international destination and to limit or eliminate any dependence on a few VIP gamblers from China.  When the casino licenses come up for review, we can assume the most important factors to be considered will be those that fit the Chinese global plan; amenities and policies meant to attract as many people as possible.   Xi’s China has grand plans for its place in the world’s economy and power structure.  It is building a new silk road to connect China, the Middle East, Africa and Europe and Xi wants Macau to be an active participant.  China is also creating a mega-region that will include Macau.  It will be the 12th largest economy in the world and Macau is expected to be a key player.  The casinos are important in both roles because they will help diversify the region’s economy and drive large numbers of tourists and foreign currency into the region and by extension into China.  They have already invested between $10 and $20 billion in building resorts to meet those goals.

China’s government is well-known for its long term planning.  Its plan for Macau and the casinos is part of a strategy that began over 25 years ago.  It started before the negotiated transfer of power, before the one country, two systems concept, before casinos were fully legalized and before foreign companies were encouraged to apply for licenses.  That was long before any of us had heard of the new Silk Road or a new regional designation in China.  The Chinese are famous for their long-term world view; after all they have been living in the same place for at least 5,000 years.  As the situation in Macau has matured, it has been increasingly obvious that the foreign casino operators are not aware of the exact nature of China’s plan for Macau and its casinos.  But until the article by Reuters, I would never have guessed just how long-term and well thought-out the strategy is.  In fact, without the contrast between Macau and Hong Kong, one might still not believe the strategy existed.  However, when you see Hong Kong constantly striving to be something of its own invention and not a puppet for the Chinese, while Macau does exactly the opposite, it is clear that the foundation China started to build in Macau with those 40 young people has been very effective.  Its casino policies are also proving to be successful.  Macau generates more casino revenue than any other gaming jurisdiction in the world.  And although there was a drastic downturn in gaming revenues after President Xi cracked down on graft and corruption in 2012, the revenue is again growing at double digit rates and is almost back to the pre-crackdown levels.  One word of caution, conditions are about to change again. The crackdown was an outgrowth of the 18th National Congress of the Communist Party of China.  The 19th Congress is set for later this year and Xi is promising a dramatic new direction for China.  It is certain that both Macau and Hong Kong will have assigned roles in the new dance routine.


Piggly Wiggly and Daisy Usher in a New Era

Make no mistake about it, Illinois is a gambling state.  In the Land of Lincoln, there are ten casinos, five horse race tracks, a $3 billion a year lottery and 26,000 VLTs located in 6,000 bars, restaurants, truck stops, fraternal and veterans establishments.  Illinois has more separate places to gamble than any other state.  And yet every year, the legislature debates adding more options for gamblers; this year poker, online gaming, fantasy sports and six more casinos were proposed.  However, the next wave of expansion may be beginning without any discussion on the floor of the House or Senate in Springfield.  In Chicago, a Piggly Wiggly became the first full service grocery in the state to receive a video gaming license.  However, the second license has already been issued to a grocery store in Park Forest.  To qualify for a gaming license, a grocery must have both liquor and food for consumption on the property.  Providing space and prepared food to eat in the store is a growing national trend.   In New York, Wegmans Food Markets offers entertainment and other special events to go with the dining.  Shoppers can make an evening of a trip to their favorite market.

Dining in grocery stores may be relatively new, but putting in slot machines is not a new idea. Nevada has allowed them for years and for the most part it has been a success for the state and the stores.  The machines did very until a law was passed prohibiting smoking in grocery stores and other public places.  When smoking was no longer permitted, revenues and taxes dropped dramatically.  Still, most stores in Nevada have slots that rely on impulsive play of shoppers on the way out the door; they rarely stay and play the way they might in a casino.  In Illinois, a different model is being contemplated.  Piggly Wiggly following a Wegmans-like model is seeking to provide a more complete experience.  In that model, buying groceries is only part of the experience and sometimes only a minor part.  Now in Chicago you can meet your friends for dinner, have a drink and if you feel like it, play the slots.  And on your way out the door, you can pick up milk and bread.  That was not what people imagined might happen eight years ago.

The Video Gaming Act was enacted on July 13, 2009, but the state was not flooded with VLTs immediately.  It took several years to pass the necessary regulations, approve the video games to be played and license the distributors.  Each city or county in the state had a veto right and local elected officials were uncertain they wanted video gaming in their backyard.  They sat on the fence and watched.  Over time attitudes changed, as more and more cities saw advantages in allowing gaming.  In October 2012, the second month of VLT gaming, there were only 169 establishments operating 712 devices in the state; a year later there were 11,000 units in 2100 establishments.  The growth in the next three years was as great as during that first year.  In 2017, it has started to slow and may be approaching its limits.  Now, that could change; I think Piggly Wiggly is going initiate a new trend.  The new trend might not have the growth potential that existed in 2013, but it will give a second wind to the expansion.

Piggly Wiggly also illustrates a shift in creative thinking on the subject.  For the last five years, video gaming has grown because conventional bars and restaurants realized VLTs offered an opportunity to drastically improve their profits.  In fact, Illinois is much like Nevada in one sense, the majority of the VLTs in the state are operated by slot route operators like Penn National, Golden Gaming, Delaware North and Dotty’s; their primary business is gaming.  Grocery stores will not be as reliant on the VLT revenue as other licensees.  Rather the video gaming will be an extension of the services offered.  It will be another new product and a relatively minor addition to the store’s cash flow and profitability.

Another example from Illinois suggests other businesses become creative in using VLTs.  In Joliet, Kathy Wilda applied for a gaming license to compliment the products and services she wants to offer in her Daisy’s.  The not yet open, Daisy’s, is planned to be a place for women to gather and socialize. Wilda hopes to offer food, drink, painting, pleasant companions, conversation and VLTs.  The city council rejected the VLTs; somehow a place for women with gambling was against their standards.  Ms Wilda protested and said the gaming was just an adjunct to the business; the VLTs would provide a little something for hubby to do.  Ironically, that was the conventional wisdom when I started working in casinos. “Real gamblers – the men – played craps and maybe blackjack.  The only reason to have slot machines in a casino was so the little lady had something to do while her husband threw the bones.”

Back to my point and for a minute ignoring the blatant sexism of the Joliet City Council.  Daisy’s and Piggly Wiggly could be the leading edge of the next generation of slot operators in Illinois.  Both are seeking ways to add services, products and create a more social and friendly environment.  Under those circumstances gambling is not the reason the business exists, it complements the core business.  For the bars, restaurants and truck stops that have VLTs, gambling is the most important part of the business.  Any social activity that develops is simply a byproduct of the gambling.  For Piggly Wiggly and others like it, the gambling will be the byproduct of the social activity.

Fantasy Sports Catches a Wave

In the waning days of June, Delaware, New Jersey and Maine passed fantasy sports legislation and Indiana approved regulations.  Those states have joined Arkansas, Colorado, Indiana, Kansas, Maryland, Massachusetts, Mississippi, Missouri, Michigan, New York, Rhode Island, Tennessee, Virginia and Vermont in permitting it in some form, bringing the total to seventeen states that permit fantasy sports.  Another eighteen states have bills in the legislature.  The tide appears to have turned again, this time in favor of fantasy sports.

It has been almost exactly two years since daily fantasy sports entered the national consciousness in a big way.  In September 2015, wagering on imaginary teams online wasn’t new, but it was still in a kind of legal closet.  Suddenly and with a burst of advertising energy, DraftKings and FanDuel announced their presence to the world.  The two came out on national television during a Monday night National Football League game.  To attract the attention of would-be gamblers and in an attempt to out-do each other, they spent millions on television advertising.  DraftKings alone spend $21.8 million on 5,800 ads in the first week of the football season.

Like most people, I was caught completely off guard by the FanDuel and DraftKing advertising and its implication for legal sports wagering in the United States.  I have written two previous columns on fantasy sports.  The first described my shock upon encountering the phenomenon while watching a football game with my sister.  It was stunning to see how much money the two companies were spending on television advertising. During the first week of the 2015 NFL season, DraftKing spent more on television advertising than any company, including car manufacturers and drug companies.  I was certain the CEOs of the two companies would either end up owning the world or in prison.  In the second column I opined that the two major fantasy sports companies had bet everything on one season, their first season operating in full view of public. It seemed to me that it had been a fool’s wager.  At the time, both DraftKing and FanDuel appeared to be headed for bankruptcy.

The sheer number of the advertisements shocked television audiences and caught the attention of law enforcement agencies nationally.  Almost immediately, AGs across the country weighed in with opinions on the legality of daily fantasy sports; most found the activity to be a form of gambling and therefore illegal.  New York reacted immediately insisting that DraftKing, FanDuel and all other providers cease accepting wagers from New Yorkers.  New York is the fourth most populous state and its loss hit both companies hard.  Other states followed closely on New York’s heels.  At that moment things did not look good for the future of fantasy sports.

For at least a year, the tide went against fantasy sports. According to the Wall Street Journal, FanDuel burned through $225 million in 11 months and struggled to keep its head above water.  Only a handful of states had found the activity to be legal and by the end of a year, neither company had enough money to keep up the advertising blitz.  The Journal estimated that every new customer had cost each company $150 as a result of the advertising.  It was too much to sustain and left nothing for operating.  The WSJ and others thought both companies would simply bleed to death; without the advertising they could not recruit new customers nor attract investors. The investors who had been rushing to invest became reluctant to invest in a questionable enterprise.

But as the anniversary of that pivotal Monday night game approached, things began to change.  In August 2016; New York passed legislation to permit fantasy sports.  The law defined the online contests as “games of skill.”  Once again other states followed New York’s lead. It started as a trickle, but the trend to legalize fantasy sports is becoming more of a wave.

That wave is threatening to engulf the entire country, excepting of course the traditional gambling holdouts of Utah, Alaska and Hawaii.  The keys to becoming a true national industry are California, Texas, Florida, New York, Pennsylvania and Ohio because these states represent 45 percent of the national population.  New York has already signed on and the others are in the cue, except for Texas.  There are no guarantees as the process is always very political and each state has separate issues to resolve.  However, once again the future is looking bright for daily fantasy sports.  The Fantasy Sports Trade Association reported a record 59.3 million players in June.  The organization estimates fantasy sports has become a $7.2 billion a year industry.

For the two giants, DraftKings and FanDuel, there are still some major challenges.  First, they have to stay the course and hope the trend toward legalization continues.  However, the most pressing issue at the moment is their merger.  After the initial battle to death, both companies realized there would be no profit for the victor.   Under the circumstances, the most logical course of action was merger.  It would allow a newly formed company to drastically reduce its expenses by reducing duplication of effort thereby achieving the same results at half the cost.

But the Federal Trade Commission issued an unfavorable opinion, stating: “This merger would deprive customers of the substantial benefits of direct competition between DraftKings and FanDuel,” As one might suspect, the companies disagree.  They claim that the FTC’s attempt to block the deal “reflects an unnecessarily rigid and uninformed application of the antitrust laws to an underdeveloped, nascent industry, and largely ignores rigorous economic analysis that has demonstrated unequivocally that prices are not likely to increase as a result of the transaction.”   Just days short of the completion of the merger, a federal court issued a stay, postponing it.  And thus the battle lines are drawn.  Beating the FTC in court is never easy, but it can be done.  It is expensive and it is time consuming.  Still, two years after they first entered onto the public stage, those two giants of daily fantasy sports are in the strongest position yet.

In November a court will hear an appeal to the stay. Coincidentally, the U. S. Supreme Court will be looking at the constitutionality of a New Jersey sports betting law at the same time.  Should the Supreme Court find the law constitutional and DraftKings and FanDuel get final approval to merge, the country could be entering a new era of sports wagering.  The odds seem better now than ever before that it will no longer be illegal to place a bet on sporting events, real or imaginary.


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July 2017
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