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ust follow the money. It has become more than tempting to set aside the tools of any given trade for the ultimate buzz, especially when feasting on today’s pokermania. City finance analysts might wonder: never mind mathematical modeling, let’s get to it and jack those ratings up for ourselves. But wait a minute, are we running with player or operator? Both, in fact, are flip sides of this most tantalising of human desires. This vast, ever inclusive world of gaming is evidently searching for a new definition. What, should we no longer call it what it has long been known as? Some may suggest its strong, expansive presence hints at global institutional gravitas. Its sheer prevalence inevitably draws deepening government involvement, reinforcing both self-interest and gaming legitimacy. The industry’s maturity and capacity for reinvention is much less in doubt now. It reflects also the sense that corporate interests traverse a myriad of globally interlinked concerns today. Aided by technology, enormous impetus has been given to competition and innovation. This remains a constant in pursuit of the bottom line. Precisely because there is such a grounded architecture today, figuratively and literally, there is a cannier sense of the value of corporate governance and social responsibility emerging. No restraint then in the stance of this first issue on regulation, casting an eye over the recent past to assess the globalising casino enterprise. Las Vegas, the chameleon heartland of gaming, has arrived in the 21st Century on top form and the vista is as exciting and dynamic as ever: from new casino frontiers in Asia to the big cyber waves roaring across Continents. Together with UK legislation, this complex pressure is pushing at the boundaries of American resistance to Internet gambling. A shrinking world is bringing the industry closer together and its effect becomes more significant beyond, economically, politically and socially. It was given a public edge recently with assistance to the Asian Tsunami aid agencies, which occurred across much of the gaming industry earlier this year, despite the odd ethical glitch. Millions were raised by NSW Clubs and Tabcorp in Australia; through NIGA and Native American casino-linked tribes; via dotcoms: Playtech, Neteller, PokerStars, CasinoMeister, Got2Bet, Sportsbook, GoldenPalace to name just a few notables and certainly understating its full global extent. In part it is derived from a community-sensitive trend that is well established as a necessary public counterpoint to core capital growth. Identifying new sources of development increasingly requires attention to the wider international landscape. Ian Gosling, Hyatt Thessaloniki’s COO, thinks bold strategic direction is needed to meet new challenges: “For too many years the real issues have been skirted around, never addressing the questions that need answering. “So it is with great pleasure that I have the opportunity to introduce this new and exciting title, Casino & Gaming International spanning all aspects of gaming. The opinions you will get, will be the ones you can depend on. Over coming issues, Casino & Gaming International will give an insight into a business that is expanding on all fronts. “In the last few months we have seen monumental decisions taken, the watering down of deregulation in the UK, mega casinos opening in Macau, Singapore to award two casino licences, the explosion of poker in casinos and on the Internet and PartyPoker’s successful IPO. “These are just a few examples of the vibrant gaming world we live in; this is the time to launch a quality gaming title.”
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Stephen Lawton is editor of Casino & Gaming International
Casino & Gaming International ■ 1
CONTENTS
47
15
21
37
FEATURES 7
PREFACE By Larry L. Lewin
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AGA AND A DECADE OF RAPID MATURITY By Frank J. Fahrenkopf, Jr.
15 NEVADA: FOLLOWING THE MONEY IN A SHRINKING WORLD By Peter C. Bernhard 21 STRONGER AGEM SIGNALS TURN TO LEGISLATIVE CONCERNS By Jack Bulavsky 23 ORGANISATIONAL PRACTICES, MARKET MATURITY, AND THE AMERICAN CASINO INDUSTRY By William R Eadington 29 PUNTERS, POLITICS, VEGAS AND CAPITAL MARKETS By Michael Tew 37 GAMBLING: A QUINTESSENTIALLY GLOBAL BUSINESS By David G. Schwartz 43 HOW WE OVERCAME THE MENDOZA PESO RIOTS By Nick Hughes 47 THE MEADOWS MAKE A MODERN CITY By Michael Green 55 GETTING TO GRIPS WITH ONLINE LIMITS By Mark Stone, Rick Smith and Keith Furlong 65 THE GOLDEN ERA OF BROADBAND GAMBLING By George M. Mangion Casino & Gaming International ■ 3
CONTENTS
107
87
91
101
FEATURES 68 INTERACTIVE MERGER BOOSTS OBJECTIVES By Clive Hawkswood 69 AN EYE FOR THE FUTURE OF REMOTE GAMING By Clive Hawkswood 73 CREATING A NEW INTERACTIVE DYNAMIC By Wes Himes 77 GLOBAL GROWTH AND THE CHINA FACTOR By Cathy Hsu 83 GREEN TEA AND THE MILK OF PARADISE Interview with Sue Jacob 87 CHANGING THE PERCEPTION OF A MODERNISING INDUSTRY By Penny Cobham 91 WHAT WE NEED: A MEASURED, PROGRESSIVE SOLUTION By Andrew Love 95 ENTERING A CRITICAL PHASE: DECISION TIME AHEAD By Julian Harris 101 RESOLVING THE REMOTE GAMING CLASH BETWEEN THE US AND ANTIGUA By Joe Kelly 107 CASINOS AND PROBLEM GAMBLING: WHAT DO WE KNOW AND WHAT SHOULD WE DO? By Peter Collins
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PREFACE
PREFACE BY LARRY L. LEWIN
hen I look out across the international gaming landscape of today, I see things I could never have imagined when my father – Henri Lewin – was running places like the Flamingo and the Las Vegas Hilton in the 1970s. Vegas-style casino gaming is spreading into markets that didn’t even exist then – dozens of American states, several Canadian provinces, South America, several European nations and, of course, Asia. Giant corporations run multiple casino and resort properties across the globe worth billions of dollars. The casino businesses of today are no longer run by individuals or families. They are major companies with high profiles on Wall Street. Sophisticated electronic technology has permeated almost every aspect of the business – security, surveillance, slot machines, cages – even the cards and chips themselves are like something out of a science fiction movie. I often wonder what our slots players in 1975 would have said if they had suddenly received a small white piece of paper with some lines on it instead of a tray of shiny tokens when they cashed out! There is a rigorous emphasis on compliance and social responsibility in most markets that I, for one, welcome wholeheartedly. In short, the industry is in immeasurably better shape than it was when my father was running those smaller places in the desert 30 years ago. The industry’s unprecedented growth spurt has created an abundance of the very thing that rests at the heart of every free market – choice. Today’s gaming enthusiast has choices in every imaginable shape and size, from a billion-dollar resort in Canada to the native-run giants in Connecticut to sparking new properties in the Pacific rim to the mega-resorts of today’s Vegas. But customers don’t develop loyalty to bricks and mortar. They don’t care that their $5 chip actually contains a microchip. They don’t care that their casino of choice is owned by the same company that owns 12 more. They want the same thing the slots player at the Flamingo wanted in 1975 – they want a great experience. The key to that great experience is, was and will always be the one-on-one interaction between the front-line casino employee and the customer. I believe that positive interaction between people is more than merely a human want – it is a human need. As we push toward ever larger casino and resort properties with ever more sophisticated technologies, we must never lose sight of that basic need. We ignore it at our peril. The gaming organisations that invest in all the amenities and technology without losing sight of that all-important human element – with both their customers and with their staff – will be the ones that succeed despite the explosion of international competition.
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AGA AND A DECADE OF RAPID MATURITY
BY FRANK J. FAHRENKOPF, JR.
Any discussion about the American Gaming Association (AGA) should begin with the understanding that when we opened our doors in June of 1995, there were at least as many “experts” who believed it wouldn’t work as those who believed it would. And, having been intimately involved with the industry since I began practicing gaming law in 1965, I must admit I understood that viewpoint. Implemented in 2004, the AGA’s Code of Conduct for Responsible Gaming is a pledge to AGA members’ employees and customers to make responsible gaming an integral part of their daily operations nationwide.
t is easy now that we are celebrating our 10th anniversary to forget how competitive, young and unaccustomed to thinking of itself as an “industry” the commercial casino industry was in 1995. The spectre of a federal gaming tax had created the need for a unified industry response, but whether the industry could sustain its own national association after that threat had passed was a great unknown. After all, the gaming industry was among the last bastions of true entrepreneurs. Casino companies competed ferociously for every customer and for every license in every new jurisdiction. Every company sought to express its individuality – individuality that was often a direct reflection of the men who led them. Unlike more mature, longer-existing industries that were into their fourth or fifth generations of leadership, the casino industry was still very young. In 1995, it had barely been six years since casinos were legal anywhere in the United States beyond Nevada and Atlantic City, with first- and second-generation leaders – leaders accustomed to facing challenges independently. The continued existence of the AGA and the ability of our industry to work together on a wide range of difficult issues – many where there exists wide disagreement among our members – are tributes to those leaders and to the rapid maturity and growth of the industry itself. The growth of commercial casino gaming in the U.S. has been one of the late 20th century’s great business and economic success stories. In 1989, Iowa and South Dakota legalised the first casinos outside of Nevada and Atlantic City, marking the beginning of a dramatic expansion over the next three to five years. In the year before the first riverboats began operating, casino revenues were well below $10 billion. In 2004, 445
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commercial casinos posted revenues of nearly $29 billion. This rapid growth has brought jobs, a stable tax base and hope to many areas of the U.S. that had been severely economically depressed for decades. Rapid growth and expansion also brought a host of challenges and ultimately the need for the industry to create an association to help meet those challenges. The proverbial straw that broke the camel’s back was a proposal in 1994 by the Clinton Administration to impose a four percent federal tax on all gross gambling receipts. Although the idea of a federal tax on gaming never got beyond the proposal stage, it was the catalyst for the creation of the AGA. But that decision, in retrospect, was a natural progression toward the “normalisation” of the industry. Normalisation began with the removal of the criminal element from gaming. By the time the AGA was created – in fact, by the time of the expansion in the early 1990s – organised crime had been eliminated from casino gaming. When I began practicing law in Reno, Nevada, only the aura of the outlaw days of gaming and a very few of the notorious players still existed. And even those few were gone by the early 1980s. Today, no industry in the U.S., other than perhaps the nuclear energy sector, is more closely regulated and scrutinised than the commercial casino industry. From the individual state gaming commissions to the Securities and Exchange Commission (SEC), casino companies run a gauntlet of rules and regulations that cover every aspect of the industry. If elimination of organised crime influences from the industry was a harbinger for the national acceptance that was to come a decade later, then the assimilation of the industry by Fortune 500 companies paved the way for expansion across America and the movement of casino gaming into the mainstream of the nation’s economy. Acceptance of casino gaming as a legitimate investment by corporate boards and tens of millions of stockholders took the industry that much closer to normalisation. Expansion itself has proven to be the most significant step toward normalisation. A number of states legalised gaming in the early 1990s because they saw the opportunity to boost their flagging economy and tax rolls. In the process, people became more familiar with the industry and, as I will explain later, familiarity accrued to the industry’s benefit. The expansion took place in the face of a veritable firestorm of opposition and dire predictions that the communities that welcomed casino gaming would live to regret the decision. That has hardly been the case. In fact, political and civic leaders in those new gaming communities,
More than 25,000 gaming professionals attended the 2004 Global Gaming Expo, the industry’s largest international trade show and conference.
while initially uncertain, are now the strongest supporters of the industry. They see casino gaming as an important part of the community and find gaming-entertainment a normal leisure activity. The proof of this affinity is found in a survey the AGA released earlier this year. The survey, conducted by one of the nation’s most prominent polling firms, found that 79 percent of the civic and political leaders surveyed in a representative sample declared that casinos have had a positive impact on their communities. And, in the most telling result, 75 percent of these leaders – men and women who are the most involved in their communities – said they would vote “yes” if asked again to legalise casinos. Another finding from
>> Our companies’ stocks are bought and sold on the major stock exchanges and our communities are among the most popular entertainment destinations in the world. All these changes are a testament to a vibrant, mature industry. There is no longer any doubt that this industry can unite within an association to seek the common good >>
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the survey even more emphatically makes the case that our industry has become a “normal” part of the communities where we operate. Eighty-two percent of these leaders said they consider the casinos in their communities to be good corporate citizens. Those results are at the local level, from people who work with the industry every day. Interestingly, policymakers and lawmakers outside gaming jurisdictions, as well as a skeptical media, have always lagged behind the American public when it comes to the acceptability of casino gaming as a viable entertainment option. Industry surveys for more than a decade have shown from 79 percent to as high as 92 percent of the U.S. public find casino gaming an acceptable form of entertainment either for themselves or others. Despite this public support, casino gaming expansion remains highly controversial. It was even more so when the AGA opened in the mid1990s. A robust anti-gaming movement fought expansion at every turn. This movement derived its energy primarily from religious activists who were morally opposed to gaming. These politically savvy activists understood that simply opposing casinos on moral grounds would not persuade elected officials who were motivated by the need to create jobs and economic development. Thus were born a host of myths about the impact of casino gaming. Among the AGA’s
greatest challenges was – and still is – dispelling those myths. The AGA came into existence at almost the exact time anti-gaming opponents were at their strongest. Casino gaming was too new in most parts of the country to have established a track record, and the skewed science used by opponents to stop expansion into new areas and to seek federal intervention played on age-old preconceptions of the “evils” of gambling. There was a long list of these myths, allegedly supported by academic and scientific proof. In fact, the academic sources were clearly biased against gaming and the scientific proof was never peer-reviewed. Still, their “research” was the information most readily available to lawmakers and regulators. The list of myths included: ■ The gaming entertainment industry is controlled by mobsters and organised crime; ■ The introduction of legalised gaming brings an increase in street crime to a community; ■ The social costs of gaming far exceed the economic benefits; ■ When gaming is introduced into a community, casinos succeed at the expense of other businesses; ■ There are no positive economic benefits to the community from the gaming entertainment industry; and ■ Pathological gamblers are the main source of revenue for casinos. Today, all of these arguments have been discredited, and you rarely hear them used in opposition except by die-hard opponents. But in 1995 most, if not all of them, were accepted as gospel by a majority of the media and many policy makers and regulators. The AGA countered the myths with a simple strategy. We were determined that we would allow no negative accusation to go unchallenged. We worked with member companies to identify academic studies that disproved the opposition’s claims. We commissioned several studies of our own by the nation’s top consulting firms that used irrefutable methodology to show the positive impact of gaming on the communities where we operate. And, we began to fund peer-reviewed research by the most reputable universities in the U.S.
U.S. Senate Minority Leader Harry Reid (D-Nev.) (centre) and (l.-r.) U.S. Reps. Shelley Berkley (D-Nev.) and Jim Gibbons (R-Nev.) testify at a hearing on Internet gambling. Casino & Gaming International ■ 11
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All of these activities helped discredit the opposition, but probably nothing had a greater impact than the National Gambling Impact Study Commission. The Commission was created by rabid opponents of gaming in the U.S. Congress and they, no doubt, thought it would be a powerful propaganda tool against the casino industry. In fact, it turned out to be just the opposite. When the Commission idea was first introduced in 1996, it sent ripples of concern throughout the industry. Not because we were worried about the outcome of a fairly conducted study, but because we were concerned that the Commission would be nothing more than a witch-hunt against the industry. The AGA worked extremely hard with its allies on Capitol Hill and in the Administration to ensure the Commission was balanced and had no preconceived agenda. The original version of the legislation authorising the Commission called for a study of the negative impacts of gaming, with no acknowledgement at all of the possible positive impacts of gaming. We also were concerned about the make up of the Commission. We successfully made our case for a balanced study, and the final version of the legislation called for an examination of the overall impact of gaming and ensured a balanced committee membership. With those changes, the industry no longer viewed the Commission as a threat, but rather as an opportunity. The AGA provided the Commission with the studies we had conducted, but the real proof of the positive impact of the industry came during the 17 meetings and hearings from June 1997 to June 1999 where the commission members heard first-hand testimony from the people in casino gaming communities. At every hearing, particularly those that were held in casino communities, the Commission heard from people with intimate knowledge of the industry’s impact, including casino employees, union leaders, community leaders and elected officials. The Commission’s findings, for the most part, laid to rest many of the chronic myths about gaming and acknowledged the positive economic and social impact of casinos on communities. Even in the one area where the Commission expressed its greatest concern – problem gambling – the final report credited the commercial casino industry as the only facet of the gambling industry making significant contributions to addressing the issue. In the end, the Commission’s report provided confirmation of the positive impact of casino gaming with the added benefit of helping the industry deliver that message to a skeptical media. It also proved to a nascent industry the value of working together through the AGA. Our response to the threat the Commission initially posed
and to the opportunity it ultimately presented has been the single most important accomplishment of the AGA. Had the Commission gone the way its originators had hoped, there is no doubt there would have been severely negative consequences for the industry. Even with the largely positive result, the AGA still is faced with daily challenges. Many of those challenges come at the federal level, and the primary mission of the AGA is to help the industry meet those challenges by addressing federal legislative and regulatory issues that affect our members. Over the last decade the AGA has dealt with several threats, including: ■ Proposals from the Internal Revenue Service to tax employee meals and to double or triple assumed taxable tip income of employees; ■ Proposals from Congress to ban college sports wagering in Nevada; ■ Proposals from the Internal Revenue Service to alter depreciation rates for casino equipment; ■ Proposals from Congress to ban automated teller machines (ATMs) from the casino floor; ■ And more. With help from Congressional delegations from gaming states and the active support of our member companies, the AGA has managed to win these battles, and no adverse legislation has passed since we opened our doors. The one certainty about the future for the gaming industry is that there will continue to be challenges. Legislatively, we will always be threatened with federal interest in tax revenues, restrictions on gaming activities and the numerous regulatory requirements all industries face, as well as those unique to casinos, such as those presented by handling large amounts of cash. From working to establish workable indoor air quality standards for casinos, to working with the U.S. Coast Guard to establish fair security standards for permanently moored riverboat gaming vessels, the AGA will continue to address the legislative and regulatory issues affecting our members. Among the major legislative issues the AGA is closely monitoring is Internet gambling – a subject that has been much debated within our membership for a decade. Ironically, the first online casino launched in the same year the AGA was created, and the industry is still not of a single mind on how to approach the issue. The U.S. Congress is equally uncertain of how to deal with the issue: some in that body have recommended a study commission, while others have introduced legislation seeking to make clear that Internet gambling is illegal in the United States. At this point, the AGA is opposed to legalising Internet gambling because we do not believe the technology
>> At this point, the AGA is opposed to legalising Internet gambling because we do not believe the technology currently exists to provide rigorous legal and law-enforcement oversight and regulation of this type of gambling. And, we consider tight regulation critical to the continued growth of our business >>
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currently exists to provide rigorous legal and lawenforcement oversight and regulation of this type of gambling. And, we consider tight regulation critical to the continued growth of our business. As for future legislation, the AGA evaluates specific pieces of Internet legislation on a case-by-case basis, but any Internet gambling legislation must meet three tests to gain our support: 1) The right of states to regulate gaming must be protected; 2) It must not create competitive advantages or disadvantages between and among commercial casinos, Native American casinos, state lotteries and pari-mutuel wagering operations; and 3) No form of gaming that currently is legal should be made illegal. The continued growth of the industry, not only by expansion but within the jurisdictions where we currently operate, also presents new challenges and opportunities for the association. Initially, the AGA did not participate at all in the public or political debate at the state level. In 2003, the AGA board decided our organisation should participate at the state level by providing expert testimony to lawmakers and helping correct erroneous propaganda presented by gaming opponents. As the industry matures, there may be a greater role for the AGA in working with member companies at the state level, particularly when it comes to the perception of the industry among the media and other opinion elites. And the views of the media and opinion elites are a continuing problem. Despite the overwhelming support for casino gaming among the public and local community leaders, there continues to be a disconnect, both at the state and national level, within the media and among those who help set policy and influence lawmakers. The AGA considers changing negative views of our industry among these groups as one of its highest priorities in the coming years. Another priority is the continued growth of Global Gaming Expo (G2E), our industry trade show and conference, which celebrates its fifth year this September. G2E – developed by the industry, for the industry – has grown into the largest gaming business event in the world. With the ongoing expansion of gaming at the international level, we plan to bring G2E to other continents in the near future. Finally, in addition to managing these issues and projects, the AGA directs a number of industrywide initiatives. One issue the U.S. casino industry takes extremely seriously is disordered gambling. From its inception, the AGA has presented a consistent position on disordered gambling. We acknowledge that, while the overwhelming majority of people who gamble do so responsibly, there is a very small percentage (one percent of the population, as determined by the National Research Council of the National Academy of Sciences) that cannot. As an industry, we are committed to funding and supporting research and programmes designed to address this issue. To that end, the AGA has been actively involved in promoting responsible gaming within the industry and in communities where casinos operate. One of our earliest acts was the creation in 1996 of the National Center for Responsible Gaming (NCRG), which is the first and only
national organisation exclusively devoted to funding independent, peer-reviewed research on disordered gambling. Since then, the gaming industry and related businesses have committed $15 million in grants for research conducted by more than 20 leading institutions and universities in the United States and Canada. These grants have resulted in groundbreaking research and have even spurred the U.S. government to begin awarding more grants in the field. The NCRG also sponsors an annual conference, which brings together top researchers and clinicians in the disordered gambling and addictions field with policy makers, lawmakers and regulators to discuss new approaches to disordered gambling. Throughout its 10-year existence, the AGA has provided member companies with the most up-to-date information on effective responsible gaming programmes and sponsored numerous activities to raise awareness among employees and managers. The commitment of AGA member companies to responsible gaming was most dramatically demonstrated in 2004, when all member companies adopted a comprehensive set of guidelines for integrating responsible gaming tenets into their daily operations. The AGA Code of Conduct for Responsible Gaming establishes high standards for employee and patron education, prevention of underage gambling, alcohol service and advertising. The Code also reiterates each member’s commitment to continuing support of problem gambling research. The American Gaming Association celebrates its 10th anniversary this year with a long list of successful undertakings and a new list of challenges that stretches into the future. The AGA represents an industry that has grown well beyond the slot machines and table games that characterised it little more than a decade ago into a multifaceted entertainment industry. Our companies’ stocks are bought and sold on the major stock exchanges and our communities are among the most popular entertainment destinations in the world. All these changes are a testament to a vibrant, mature industry. There is no longer any doubt that this industry can unite within an association to seek the common good. The experts who were uncertain a decade ago have been proven wrong.
FRANK J. FAHRENKOPF, JR. Frank J. Fahrenkopf, Jr. is President and CEO of the American Gaming Association (AGA) in Washington, D.C. In his role as chief executive of the AGA, Fahrenkopf is the national advocate for the commercial casinoentertainment industry and is responsible for positioning the association to address related regulatory, political and educational issues. A lawyer by profession, Fahrenkopf gained prominence during the 1980s, when he served as national chairman of the Republican Party during the presidency of Ronald Reagan.
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NEVADA: FOLLOWING THE MONEY IN A SHRINKING WORLD BY PETER C BERNHARD
After reflecting briefly on the history of casino financing sources for Nevada casino operators, this article then presents a few thoughts about 1
major issues facing regulators looking forward.
These issues, of course, are not confined just to Nevada, and regulators and public officials in other jurisdictions must remain vigilant as well, to address the demands of this evolving industry, while at the same time protecting the integrity of the gaming process and serving the public’s interest as directed by legislative policies.
ooking back on the history of the Nevada Gaming Commission, the past 50 years provide a record of the maturing of the gaming industry in this highly regulated environment. Nevada’s legislators and regulators in the 1950s set up a structure that has functioned effectively in Nevada. However, it is unlikely that any of them (and any casino operators from that era) would have predicted what that regulatory structure would facilitate as seen in today’s gaming industry in Nevada, let alone the industry as it has developed throughout the world. In many respects, the evolution of the Nevada casino industry is reflected in the types and amounts of financings presented over time, and a quick overview of casino financings presents a historical perspective of these changes.
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THE 1950S AND 1960S: DEMAND FOR FINANCING; LIMITED SOURCES OF SUPPLY. Before 1969, any individual with an interest in a Nevada-
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licensed casino had to obtain a gaming license. Financing sources were quite limited, and suitability investigations frequently uncovered applicants’ past involvements in illegal gaming operations. At that time, Nevada was the only jurisdiction in the United States with legalised casino gaming, and many “experienced” operators had obtained that experience in non-Nevada jurisdictions, i.e., illegally. One of the early leaders in providing bank financing for casino operators was E. Parry Thomas, who led what was then a very small Las Vegas bank. Other than Mr. Thomas’ bank, very few institutions were willing to provide capital to a casino operation. Therefore, investment capital was limited to (and capped by) the amount of available individual investor capital or “pay-as-you-go” operations, where today’s cash flow was the only source for tomorrow’s capital expenditures and expansion. Regulators faced constant battles to determine suitability of both operators and the sources of funds used by those operators. THE 1970S AND 1980S: THE ADVENT OF PUBLIC COMPANIES, AND PUBLIC FINANCINGS: INCREASING THE SOURCES OF SUPPLY. In 1969, the Nevada legislature adopted legislation allowing for participation by publicly traded corporations in the Nevada gaming industry. In 1973, the Nevada Gaming Commission adopted Regulation 16, governing public companies and public offerings of securities. Coupled with the well-documented history of Howard Hughes acquiring several Las Vegas casinos in the late 1960s and early 1970s, these statutory and regulatory changes broadened the sources of investment capital for Nevada operators. The availability of debt and equity financing spreads the risk of casino investments among bondholders and stockholders, much like insurance spreads the risk of catastrophic loss among policyholders. As such, more predictable rates of return can be achieved for investors, and more predictable sources of capital are available for licensees. This allows longer-term visions of the industry to develop, not as dependent on local conditions. These concepts, recognised for decades in other industries, spread into Nevada’s gaming industry with the advent of public ownership of casinos, attracting the interest of the capital markets to the stable returns achievable within the industry. The advent of public sources of financing provided comfort for political and regulatory officials as well: the value of a casino license was more than just the ability to operate a casino. It carried with it the potential to reach the public capital markets to facilitate expansion. Along with federal regulatory oversight through the Securities and Exchange Commission, Nevada gaming regulators could rely on additional controls and accountability imposed by the debt and equity investors in their indentures and offering documents. The Stardust Hotel & Casino, Caesars Palace, and the Dunes Hotel & Casino were the first public companies to be approved following enactment of the 1969 legislation. The number of public companies licensed in Nevada increased gradually to 39 by 1989. These included 19 casinos with 2
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>> The overwhelmingly successful debt financing of the Mirage in 1989 opened the door for increased participation by major Wall Street firms, including Solomon Brothers and Bear Stearns, and the gaming industry was a more attractive, and less stigmatised, place for traditional investment dollars >>
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public debt, public equity, or both, along with nine gaming manufacturers and eleven with other licensed interests (e.g., landlords, financing companies, slot route operators). The overwhelmingly successful debt financing of the Mirage in 1989 opened the door for increased participation by major Wall Street firms, including Solomon Brothers and Bear Stearns, and the gaming industry was a more attractive, and less stigmatised, place for traditional investment dollars. THE 1990S AND BEYOND: PUBLIC EQUITY AND DEBT FINANCINGS; THE EVOLUTION FROM GAMING-CENTERED TO ENTERTAINMENT-CENTERED OPERATIONS IN NEVADA By 1993, public debt and equity offerings were seen more frequently for Nevada gaming licensees. Sixteen public offerings of debt were approved that year, along with twelve equity public offerings and two public company registrations not accompanied by a debt or equity offering at the time. Debt financings still reflected rates higher than for investment-grade securities, at least in part reflecting continuing stigma against the gaming industry but also reflecting the relatively short experience that Wall Street firms had with companies involved in gaming. However, these financings moved beyond the traditional asset-based, collateralised debt that previously had been the only money available. Examples of financing rates in the early 1990s include 10.625% senior debt for Circus Circus, 13.75% mortgage bonds for Mirage Resorts, and 13.5% senior subordinated debt for Caesars World. By 1997, interest rates ranged from Mandalay’s 6.45% senior unsecured notes to 14.25% secured debt used to finance the Venetian. By 1997, fifty-eight companies were registered as public companies with the Nevada Gaming Commission. In 1993, the Nevada Gaming Commission adopted its institutional investor regulation, allowing waivers from otherwise-mandatory licensing requirements for passive investors in Nevada licensees. Four companies received such waivers at that time, and the number of companies obtaining waivers increased to eight in 1995 and 11 in 2002, before going back to eight by 2004. In more recent years, Nevada has seen fewer equity offerings, but unsecured debt financings have become much more common. Interest rates have come down significantly, reflecting both the more favourable interest rate environment and the quality of gaming industry balance sheets, as companies have matured and shown consistent cash flows attractive to the investment banking community. These rates have recently ranged from 6% to 8.5%, very attractive in relation to the projected cash flows and rates of return generated by these companies. Newer companies still issue junk bonds, and collateralised debt is still required for smaller operators. For the major casino companies, large credit facilities are very common as part of commercial paper programmes similar to those of large non-gaming companies. These maturing financings have occurred as the Nevada gaming industry has moved from properties focused on selling gaming, to facilities where non-gaming revenues exceed those generated in the casino itself. The destination4
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resort concept has led to an increase in the average lengthof-stay of visitors to Las Vegas. The need for alternative activities for visitors to fill these longer stays has been met by the increased recreational, entertainment, dining and retail options being offered in the Las Vegas market. Other gaming areas, such as New Jersey and the emerging Asian market, are capitalising on this concept as well. The demographics support these ventures, with increased leisure time and spending predicted as the “baby-boom” generation reaches traditional retirement years. OBSERVATIONS GOING FORWARD Technological advances dominate any discussions of current and future trends in casino operations. Technology provides continuing benefits for regulatory accountability, along with the potential for fraud and abuse of a far greater magnitude than presented in past decades. The challenge facing regulators is how to analyse state-of-the-art innovations, so regulatory approvals do not cause inordinate delay in new products getting to market, while at the same time protecting the public and the state from systems or games susceptible of unfair play or inaccurate reporting. In Nevada, as in many jurisdictions, the time for processing new ideas is affected directly by the available human and financial resources. We will continue to work to meet the demands of the industry as promptly as possible, within the context of our regulatory duties to protect the public and the state. Nevada has tried to balance the need for innovation with the obligation to control gaming operations, not always being at the forefront by approving any new idea or concept being advanced, while allowing technological progress that is shown to meet regulatory standards. A sub-set of the technology challenges involves interactive gaming, an activity mired in legal concerns within the United States. In Nevada, our legislature has authorised the regulation of interactive gaming, provided that three determinations are made by the Commission. To date, these determinations have not been made, and prospects for them are not favourable in the foreseeable future. The first determination is that interactive gaming can be operated in compliance with all applicable laws. The federal government has consistently interpreted the federal Wire Act as prohibiting the use of the internet for casino-type gaming, and any Nevada operator violating federal law jeopardises its Nevada license. Second, the Commission must determine that interactive gaming systems are secure and reliable, with reasonable assurance that players will be of lawful age and communicating only from jurisdictions where it is lawful to make such communications. The technology seems to be near a point where these factors can be addressed through appropriate testing and regulation. Finally, the Commission must determine that interactive gaming regulations are consistent with the public policy of the State of Nevada to foster the stability and success of gaming. This is an issue that will require input from many disciplines as part of an evaluation of Nevada’s public policy and its compatibility with interactive gaming. Security is another major challenge in today’s 6
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environment. External threats to individual properties, as well as to the entire industry, require constant vigilance and cooperation among property-level security personnel, state and local police agencies (including the Gaming Control Board in Nevada), and federal and international authorities. Communications must remain open among agencies in different states and countries, as the industry must deal with worldwide activities and ramifications to protect its patrons and properties. In Nevada, appropriate investigative, enforcement and auditing processes must constantly be reviewed in light of the latest intelligence information. Responsible gaming is another policy issue that the industry and regulators should address proactively. In 2005, Nevada’s legislature appropriated funds for the first time for treatment programmes. As greater information is made available through academic studies and on-site observations, effective methods of dealing with irresponsible gaming can be refined and implemented, within the industry and possibly through appropriate governmental regulation. Some jurisdictions are better able than others to enforce selfexclusion programmes, simply because of the existing conditions under which gaming is conducted. For example, Nevada’s gaming licensees are prevalent in neighbourhood locations like convenience stores (with a maximum of seven machines), as well as the large, nonrestricted locations with thousands of machines and hundreds of tables, along with race and sports books, poker, keno, bingo, and other games. Further developments dealing with responsible gaming will include cooperative efforts among the industry, the education and treatment communities, and legislators and regulators. Industry consolidation is a trend requiring continuing regulatory oversight. In 2005, the Nevada Gaming Commission and other state and federal regulators approved the MGM Mirage-Mandalay Bay and Harrah’s-Caesars mergers. Nevada’s review under Commission Regulation 3.070 includes examination of the likely effects of the mergers on employees and purveyors, as well as casino patrons. These issues are certain to arise again, and regulators must review comprehensively all aspects of proposed combinations to evaluate the positive and negative consequences of this trend. CONCLUSION Nevada’s regulators are charged with administering the
US CASINO SCENE
Nevada Gaming Control Act and related statutes and regulations. That process has evolved over the past 50 years in conjunction with the maturing of the industry as seen through the types and amounts of financing available to Nevada operators. Gaming industry activities in Nevada have ramifications in jurisdictions throughout the world, and extraNevada activities can have profound effects on Nevada’s industry. Financial accountability based on industry selfpolicing has been and remains a strong underpinning of worldwide confidence in the fairness and accuracy of the games themselves, as well as the reporting and payment of taxes to governments. In today’s environment, regulators cannot meet their responsibilities without keeping track of industry developments worldwide. Companies in the industry must operate in many jurisdictions, often with conflicting regulatory requirements. In turn, regulators in each jurisdiction must function under the legislative and policy directives given to them. Uniformity in regulation is frequently advanced by the industry as a way to streamline regulatory compliance without sacrificing regulatory control. Much progress has already been made in some areas, with multi-jurisdictional forms being used and information being exchanged to avoid unnecessary duplication. Regulatory requirements and decisions of other jurisdictions play a role in Nevada’s decisions on licensing and disciplinary matters. The world of gaming is shrinking as the industry spreads, with ramifications on gaming matters in one part of the world affecting activities in jurisdictions thousands of miles away. Looking after the money has always been a key regulatory tool, and it requires more expertise, more sophistication, and more diligent monitoring to keep up with the maturing gaming industry. Regulators must keep their eyes on the money, from sources and uses of cash, through accounting for operations, through fairness of games, and through proper reporting and payment of required taxes. With appropriate diligence, the hope is that regulatory controls allow flexibility for operators while protecting the integrity of the industry. Nevada’s regulatory policy is not to micro-manage business judgments of licensees. The Commission does not dictate business practices of licensees, except where those practices implicate a regulatory concern. Within this framework, the past 50 years have seen tremendous growth in Nevada’s gaming industry. With appropriate regulatory oversight, the gaming industry will continue to expand and grow in sophistication, providing entertaining leisure activities to people throughout the world. Fifty years from now, we can expect that the gaming industry will bear little resemblance to what we see today. Innovations tempered by regulatory control can make those changes positive and responsible for the industry, for governments, and for those who enjoy the activities offered. 1 The data used in this article is from public records of the Nevada Gaming Commission and was compiled by Carole Maupin, Supervisor of the Corporate Securities Division of the Nevada State Gaming Control Board.
and comments in this article reflect the personal observations of the author and are not official opinions or comments of the State of Nevada, the Nevada Gaming Commission, or the Nevada State Gaming Control Board. 2 With the enactment of NRS 463.625-643 and the adoption of Regulation 16, all shareholders of publicly traded corporations did not have to be found suitable. 3 The expansion of legalized gaming in other jurisdictions, beginning with New Jersey in the late 1970s, also added to the legitimacy of gaming as an industry attractive to institutional investors. Again, spreading one’s operations to other geographic locales mitigated the risk that an economic downturn in Nevada would have a devastating impact on the licensee’s business. The same logic extends to the more recent consolidation of major gaming companies, and the diversification into non-gaming but related operating components (adding food, retail, entertainment, and other destination-resort activities to the income statement lessens the risk and instability of an exclusively-gaming operation). 4 Circus Circus Enterprises was one of the strongest Nevada licensees at that time. Subsequently, it changed its name to Mandalay Bay Enterprises and was recently acquired by MGM-Mirage in a merger approved by the Nevada Gaming Commission in March, 2005. 5 Recent examples include the Poster Financial Group in its acquisition of the Golden Nugget from MGM-Mirage, and the consolidation of ownership of the Virgin River casinos in Mesquite, Nevada. 6 NRS 463.750-780.
PETER C. BERNHARD Peter C. Bernhard was appointed as Chairman of the Nevada Gaming Commission on October 1, 2001. Prior to that date, he served as a member and chairman of the Nevada Commission on Ethics. He has been a practicing attorney in Las Vegas, Nevada, since 1976, specialising in commercial litigation, reorganisations, and administrative law. Mr. Bernhard received his bachelor’s degree in government from Harvard University in 1971 and his juris doctor degree from the National Law Center at George Washington University in 1975. He has served on various committees and organisations, including as a Nevada representative to the Ninth Circuit Judicial Conference, as Chair of the United States District Court Magistrate Selection Committee, and as a member of the Nevada Supreme Court Advisory Committee to Review the Nevada Rules of Civil Procedure. Prior to his appointment to the Gaming Commission, Mr. Bernhard’s private law practice included gaming licensees and companies doing business with gaming licensees. At various times, he has represented casinos, bondholders, gaming manufacturers and other creditors in chapter 11 proceedings. He has also handled purchases and sales of gaming properties, as well as civil litigation and other dispute resolution proceedings for and against licensed operators. Mr. Bernhard served as interim in-house counsel for a hotel/casino and for a gaming manufacturer, for short periods while a search was conducted to fill those positions on a permanent basis. He has been a Nevada resident since 1952.
Her tremendous assistance is recognized and appreciated. The opinions Casino & Gaming International ■ 19
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TECHNOLOGY & INNOVATION
STRONGER AGEM SIGNALS TURN TO LEGISLATIVE CONCERNS BY JACK BULAVSKY
The Association of Gaming Equipment Manufacturers (AGEM) was organised five years ago to promote and represent the interests and concerns of gaming manufacturers and to provide a united voice on matters of importance to our industry.
The gaming manufacturing industry occupies over four million square feet of manufacturing space throughout the state. AGEM companies invest heavily in new games and new technology, spending over $150 million annually on research and development. Walt Stowe, Aristocrat Technologies President, said AGEM would continue to focus on gaming issues as they affect manufacturers in the United States and around the world. “Over the past five years,” said Stowe, “AGEM has grown
GEM works to promote excellence in the manufacture of gaming devices and equipment, and assist manufacturers in the planning and presentation of industry trade shows. Some of the most successful and influential companies in the industry are AGEM members. They include: AC Coin & Slot, Aristocrat Technologies, Atronic, Bally Gaming and Systems, Cadillac Jack, ECS America, Inc., GTECH, Gaming Partners International, Gary Platt Manufacturing, IDX, IGT, JCM American Corporation, Konami Gaming, KSK, MEI, Shuffle Master Gaming, Summit Gaming, TCS America, TransAct Technologies, Unidesa, Wells-Gardner Electronics Corporation, WMS Gaming, and 3M Touch Systems. While AGEM members are based around the country and globally, most have a significant presence in the state of Nevada. In Nevada alone, AGEM companies employ approximately 8,000 people in high-paying, high tech jobs. Those employees include software designers, graphic artists, engineers, cabinet makes, and a host of other skilled and talented workers who manufacture, market and maintain gaming machines, bill acceptors, video monitors, audio-video display systems, and other state-of-the-art gaming technologies. These well-paid workers pump millions into the economy each month, while creating even more jobs and a steady steam of tax revenue.
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>> “I think that success through innovation breeds more innovation.” Josh Marz, product manager for Shuffle Master. “Security is pretty tight today…Newer games are using cryptographic methods to authenticate code and this will lead to even tighter security.” Jim Morrow, vice president of Advanced Development for Alliance Gaming Corp >>
into a strong and vibrant group with active and interested members. Now that we have established ourselves, we are better able to turn our attention to legislative activities within the United States, and stay abreast of the many gaming changes that are occurring internationally. In an effort to provide a more secure gaming experience for casinos and their patrons, AGEM member companies continually take pro-active steps to ensure their machines are immune from dishonest play and cheaters.” “Security is pretty tight today,” said Jim Morrow, vice president of Advanced Development for Alliance Gaming Corp. “Newer games are using cryptographic methods to authenticate code and this will lead to even tighter security. I believe the advancement of security features and their refinement is more about increasing patron trust in the slot machine.” Josh Marz, product manager for Shuffle Master, said development of security measures for his company’s products is an evolutionary process that will not only benefit casinos, but players as well. “Table games are designed with a built-in house advantage,” said Marz. “It is in the house’s best interest to make sure the games are dealt fairly to maximise profitability. And it is in the player’s best interest to play on games dealt fairly to maximise their playing time and experience. Game protection, through the use of a shuffler, is a self-fulfilling prophecy for both parties.” Marz said casinos benefit from advances in security, as they are able to offer higher payoffs for premium hands, especially from such games as Three Card Poker, Let It Ride, and Caribbean Stud Poker using Shuffle Master’s ACE shuffler. “Because of their popularity among players,” said Marz, “these games yield higher profits than traditional games. People who want to cheat at table games naturally gravitate to high payoff games because the risk-reward factor is more favourable to them. The features of the ACE help prevent cheating these games. Security measures include countdown of the deck with no ability to add or remove cards, eliminating manual manipulation of the deck, and ensuring a random distribution of the cards.” Marz cautioned, however, that it isn’t a matter of measuring how prevalent dishonest play is; it is about removing opportunity for compromised play in hand shuffling by replacing those games with shufflers, and about designing machines to be tamper proof. Morrow said games manufactured by Alliance and its subsidiary, Bally Gaming, such as Blazing 7s, Saturday Night Live and a series of games featuring the Betty Boop 22 ■ Casino & Gaming International
character, include security measures that prevent players from accessing the interior of the machines, as well as thwarting attempts to cheat the machines. “On top of all this,” he explained, “the engineers and managers associated with games and codes are required to obtain a gaming card or full licensure for multiple jurisdictions. In the last few years there has been increasing cooperation among gaming regulators in North America. Thus, a problem found in one area is quickly reported to other areas as well.” These measures benefit players as they believe the game is honest, while casino operators see a better payback percentage in the form of base game and bonusing due to operational efficiencies. At the same time, gaming equipment manufacturers also stand to benefit from improved security on their products. “I think that success through innovation breeds more innovation,” said Marz. “Certainly we plan to be at the centre of making table games more secure with shufflers, but we may hear about ideas from outside our company. Incorporating and integrating new technological measures is an ongoing process, as new technology and better ideas are generated and incorporated into all gaming equipment. There will always be something new as security has always been one of the cornerstones of our development process. It isn’t really a question of ‘why now’ but ‘what now.’ The technology available today is much better than the technology that was available just a few years ago.” During its May meeting, members elected officers for 2005-06. They were Walt Stowe, Aristocrat Technologies – President; Orrin Edidin, WMS Gaming - Vice President; Erik Batzloff, JCM American – Secretary; Brooke Dunn, Shuffle Master Gaming – Treasurer; and Mark Lerner, Alliance Gaming - General Counsel.
JACK BULAVSKY Jack Bulavsky is Executive Director of AGEM
CORPORATE DEVELOPMENT
ORGANISATIONAL PRACTICES, MARKET MATURITY, AND THE AMERICAN CASINO INDUSTRY BY WILLIAM R EADINGTON
By 2005, North America’s casino sector could be classified as relatively mature, stable, and increasingly sophisticated, especially in comparison to the industry that existed only 20 years before, the one that preceded the rapid spread of legal casinos in the United States and Canada. In the 1980s, even though corporate gaming had already been in existence for over a decade, there was still a very entrepreneurial and sometimes renegade character to casino companies, and the only venues with legal casinos in North America were Atlantic City, Las Vegas, other smaller cities and towns in Nevada, along with a number of primitive seasonal or charity casinos in various places in Canada.
he proliferation of North American casinos occurred mainly between 1988 and 1997. During this time, the number of U.S. states with authorised casinos climbed from two to 11, and the number of Canadian provinces with permanent (non-charity) casinos went from none to seven. This was also a period that saw the emergence of an increasingly organised and effective opposition to the
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legalisation and spread of casinos, epitomised by the National Coalition Against Casino Gambling (NCALG), an organisation that came into prominence in 1994. Since 1997, legislative authorisation of Nevada-style commercial casinos has ceased in the United States and Canada. Since the late 1990s, most growth in casino-style gambling has been in the form of tribal casinos (also known as ‘First Nations’’ casinos in Canada), race track casinos (or “racinos”), and gaming devices located outside of casinos (such as Video Lottery Terminals or VLTs, Video Poker machines, and other electronic gaming devices). This shift has occurred in spite of the fact that the unintended adverse social impacts from these forms of gaming often turn out to be more controversial than those associated with full service casinos. In the early 21st century, most North American gaming markets have reached maturity, and experience growth rates that parallel their region’s population and per capita income growth. Furthermore, in recent years, legislatures, parliaments, and voters have demonstrated increasing reluctance to authorise new casino jurisdictions, and in some cases have seriously considered rolling back previously authorised forms of casino-style gaming. Because of these, gaming companies increasingly adopt strategies to improve their profitability and performance through diversification into non-gaming product offerings, and by exploiting economies through consolidation, outsourcing, increasing customer loyalty, and other revenue enhancement and cost control maneouvers. The 2005 mergers of MGM Mirage and Mandalay Bay, and of Harrah’s and Caesars, exemplify the increasing role of enhancing shareholder value through acquisition rather than more traditional strategies such as new facility development or efforts at new legalisation. Casino & Gaming International ■ 23
CORPORATE DEVELOPMENT
The only real exceptions to these trends are to be found with tribal gaming, racinos, and the mega-casinos and locals’ casinos in the fastest growing metropolitan area in America, Las Vegas. The dynamic for tribal casinos in the U.S. began with the passage of the 1988 Indian Gaming Regulatory Act, and has evolved either through tribal-state negotiations or court findings on lawsuits typically brought by tribes. The racino phenomenon has been driven by a combination of declining demand and profitability in the racing industry in the United States and the political savvy of the racing industry to persuade legislatures of the appropriateness of allowing slot machines at race tracks as a way to ‘level the playing field’ against competing forms of gambling, and to save racing—and the associated economic spin-offs—from demise. (In reality, racinos have done relatively little to improve the fundamentals for racing, but have allowed some race tracks to become de facto casinos.) Las Vegas marches to a different drummer than virtually any other gaming jurisdiction in the world. With more than 130,000 hotel rooms and 37 million visitors a year, Las Vegas is the premier leisure destination in America, if not the world. However, the growth that has characterised Las Vegas since 1990 has increasingly reflected the diversification of its casino-based entertainment and service offerings rather than just the expansion of its gaming products. Among the 22 largest casino resorts on the Las Vegas Strip, nearly 60% of the revenues are generated by non-gaming offerings such as accommodation, restaurants, convention sales, live showroom entertainment, and leases on retail shops. Unlike most other casinos anywhere else in the world, gaming revenues on the Strip do not dominate the financial performance of the resort casinos, and have been steadily declining in relative importance for more than the past two decades. In light of these observations, what can be said of the current status of the casino industry in comparison to the rest of corporate America? As is the case with many other industries, the American casino industry can be divided into two distinct business dimensions. There is the retail side of the business, involving ongoing casino operations in established markets, where the legal and regulatory environment is relatively stable, the competitive conditions are well established, and the attention of casino management is focused on increasing revenues, containing costs, and being good corporate citizens within their respective communities. In such markets, the task of operating and managing casinos is not much different than running a supermarket or a department store. Market positioning is very important, as is presentation of the product, customer service, location, convenience of access (especially parking), and events or promotions that are intended to bring customers through the front door. Operations are fundamentally the same day after day, and improvements in performance are likely to occur only incrementally, based on either the success of endeavours to enhance revenues by attracting new customers, retaining existing customers, or increasing spend per visit; or by reducing costs through finding less expensive ways of completing tasks and providing services. 24 ■ Casino & Gaming International
The other dimension is the development side of the gaming business. For many casino companies in the 1990s, and occasionally at present, this has been the most important division in the organisation. It is where the action is. In development, companies actively seek out economically valuable but currently unexploited opportunities, engaging in economic rent seeking in the hopes of capturing substantial rewards. Companies often involve themselves in the political process by trying to influence legislation that would legalise or liberalise casinostyle gaming activities, hoping to create potentially profitable opportunities for themselves and—if they are really effective—simultaneously thwarting opportunities for their competitors. Such endeavours can be filled with political intrigue, and often resemble a high stakes poker game, where wagers are made in legislative committees and statewide campaigns, and sometimes in rigorous competition for winning the privileges of exclusivity as gaming purveyors in a particular jurisdiction. Many industries participate in rent seeking behaviour, through their lobbying activities, public relations endeavours, political campaign contributions, and legal actions. In this manner, the gaming industry varies little from the rest of corporate America, except perhaps in the relative importance of economic rents as a portion of profit potential, and the explicit nature of the rewards if successful. (For example, a gaming company that is lobbying for an exclusive franchise to offer casino gaming in a particular metropolitan area might be much less subtle than a pharmaceutical drug manufacturer lobbying to prohibit the re-importation of its products into the United States from Canada, where the company sells it drugs at lower prices. However, the ability to capture or sustain excess profits is the primary motivator in both cases.) What makes the gaming industry different from most other industrial sectors of the economy is that—because gambling remains both a popular commodity and a vice— legislative bodies are reluctant to authorise the expansion of gaming to a level that would fully satisfy consumer demand. There is just too much concern that to do so would create greater adverse social impacts—or political backlash—than the benefits from such increased availability could offset. Thus, most gaming, including casino-style gaming products, are offered in a constrained supply or limited exclusivity context, exactly the conditions that create potential economic rents and encourage rent seeking behaviour. Interestingly, in Nevada, where there are only limited constraints placed on the supply of permitted gaming activities (such as zoning restrictions and minimum casino facility size requirements), there is far less rent seeking behaviour than one finds in other constrained supply or limited exclusivity states such as Illinois, Indiana, or Louisiana. The gaming industry has managed to avoid the entanglements of corporate scandals related to ‘aggressive accounting’ practices and the misrepresentation of corporate revenues and profits, which plagued many companies in the early 2000s. This is probably because much of the American gaming industry is already under substantial scrutiny via state regulation, with considerable attention paid by regulators to accounting for gross gaming revenues (casino winnings.) The
CORPORATE DEVELOPMENT
fact that most states with permitted casinos generate significant receipts from percentage taxes levied on gross gaming revenues makes those states interested de facto partners in their gaming businesses. As such, they are going to be diligent in gathering complete and accurate accounting of their tax base. That said, the gaming industries are still subject to a disproportionate level of attention from legislatures who are seeking out new sources of tax revenues. For much of the American population, gaming—along with tobacco and alcohol—is still perceived as a vice. As such, increased taxes not only raise revenues for public purposes; they also might discourage consumption (which—in the minds of many— might be a good thing.) This makes casino industries an attractive target in times of fiscal desperations. This reality— which has played out in the states of Illinois and Michigan in recent years with dramatic tax increases—is another illustration of the important role of rent seeking behaviour among gaming companies. In light of these sometimes eccentric characteristics, what observations and recommendations can we make with regard to the skills required of present and future management in the gaming industry? First, one should note how quickly casinos have evolved over the past couple of decades from relatively primitive ‘seat-of-the-pants’ operations to organisations that increasingly utilise scientific management to better capture economic value and exploit the opportunities confronting them. In the most advanced gaming companies, the ‘art’ of casino management has increasingly been replaced by evidence based scientific methods. Intuition (guesswork) has given way to systematic forecasting. Subjective judgment in operational strategies has been replaced by models utilising data-driven optimisation strategies. Inconsistent practices involving customers and employees have been phased out in favour of standardised policies and practices. Crude metrics such as credit lines, hold percentage, and average daily room rates have been replaced by more focused measures such as player worth, win per square foot, net house advantage, and total yield per occupied room. Strong gaming organisations are increasingly marketing driven rather than operations driven. In other words, the emphasis for casino management has gravitated toward more ‘management’ and consequently less ‘casino.’ These observations suggest that gaming management is becoming—must become—more sophisticated relative to its history and in comparison to other industries. More business school tools and training enhances the abilities of gaming executives to address those dimensions of the gaming business that are fundamentally similar to the broad spectrum of modern industry, as well as improve the more subtle skills of capturing and managing economic rents that are still an important component in many gaming industries worldwide. At this point in time, the American casino industry is well on its way to the type of transition described above. Gaming executives and casino managers are increasingly equipped with business school credentials, MBAs, or law degrees. The story is somewhat different in Europe in the early 21st century, however. Many of the continent’s casino
industries are fragmented, with regional protected monopolies or constraints against marketing. They are highly taxed by their respective governments, and are relatively stagnant, both in growth opportunities and in their perception of the product they are offering. Their governments see them as a necessary evil, one which only makes contributions to the public purse, but does not do much else of social value. But one can see the winds of change that have already swept through the United States, Canada, Australia, New Zealand and South Africa beginning to come up in parts of Europe. Gaming operators in Russia and the former Soviet bloc countries are experiencing much greater competition than their western European counterparts. Some countries are getting close to establishing ‘Nevada-style’ gaming environments, with lower tax rates, more transparent regulatory processes, and more competitive legal environments. Governments may eventually recognise that casinos, and especially destination casino resorts, can be important catalysts for change, and can be particularly complementary to other tourism assets in a region. The lessons of Las Vegas are not going to go unheeded in Europe indefinitely. If and when these changes come to pass in Europe, then the importance of understanding the broader economic, political, legal and social environments in which casinos and the gaming industry operates—both in terms of internal operations and managing the external environment—will require a considerably better educated leadership than exists at present. The next generation of European gaming executives will probably look a lot more like the current cohort of American executives than the current generation of Europeans. The competitive and strategic challenges of the European markets will make this a necessity.
BILL EADINGTON Bill Eadington is Professor of Economics and Director of the Institute for the Study of Gambling and Commercial Gaming, and holds the Philip G. Satre Chair in Gaming Studies at the University of Nevada, Reno. He is an internationally recognised authority on the legalisation and regulation of commercial gambling, and has written extensively on issues relating to the economic and social impacts of commercial gaming. Since 1991, Professor Eadington has headed the University of Nevada, Reno’s prestigious annual Executive Development Program at Lake Tahoe, Nevada, for senior level casino management. This intense international course, which runs for nine days each fall, has graduated more than 600 executives, many of whom have gone on to substantial positions within their organisations or elsewhere in the gaming industry. He is presently working with universities in China, Macao, Canada, Slovenia, and Australia to develop courses and programmes in Gaming Management and Gambling and Public Policy.
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MARKET PERSPECTIVE
PUNTERS, POLITICS, VEGAS AND CAPITAL MARKETS BY MICHAEL TEW
Arguably, apart from the potential of the market in Macau, the land-based gambling industry in the United States is the most dynamic casino gaming market in the world. Except, perhaps, for the gigantic business of remote gambling. Egaming is the fastest growing part of the global gaming industry.
by eBay, it is the online community, not necessarily the product itself that attracts customers to the web sites. In fact, eBay is a very good analogue for online poker and other interactive gaming sites that offer a “community.” As in gaming, eBay employs a community system where people are 1) competing w/ each other and 2) having to trust that the monetary obligation will be fulfilled. This model plays directly into online poker, where trust is one of the most important elements to a player’s morale and the longevity of the customer. Building a “community” is something on which today’s
hrough 2006, we estimate the market will grow nearly 16% per year since 2001, to a total of $14.8 billion by 2010. It has become clear that the fastest growing segment of the market is the “other” segment; i.e., any gaming that is specifically not casinos or sports betting. One example of this type of site is Intrade, a place where punters can place bets on anything from the outcome of elections to the level at which the Dow Jones will close on a given day. There are also the poker web sites, the latest trend to emerge from the Internet gaming innovation machine.
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Why communities are important. Poker sites are extremely popular with consumers on the web because of the element of “community” the site offers its customers. Within these sites, which compare very closely to the model employed
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MARKET PERSPECTIVE
web entrepreneurs, in general, are extremely focused. Mainly, this element increases the site’s “stickiness,” its longevity, and therefore its revenue potential. But what is this community and why is it so important? According to Cynthia Typaldos, president and CEO of RealCommunities (the leading community software developer), communities are plainly a bunch of people that gather together around a shared purpose or goal; in this case, winning. Or, on second thought, is it really “winning” that has created the thriving culture of community on online poker sites? Could it be that the community itself is what makes gambling so enjoyable for the millions of people that partake in this activity every year? Most likely. Why do people sit at the blackjack and poker tables for hours on end in Las Vegas, even if they have been losing? Perhaps because they believe they can win. Perhaps because they have nothing better to do. Or, perhaps it is the element of meeting someone new and random, conversing with them, and sharing a few moments of their life. The phrase “What happens in Vegas, stays in Vegas” can be passed on to the Internet in this way through community-based sites. How about “What happens on the web, stays on the web?” It is a phrase with similar meaning. Although by no means scientific, from a consumer analysis standpoint, the community element of these sites exhibits the same characteristics of what makes Las Vegas so interesting: Anonymity, combined with the excitement of gambling. As Ms. Typaldos says, “We are not changing human nature; we’re just changing the tools of communication.” It is plain that, going forward, an online community will be one of the most important elements to developing a successful web product. Gaming is no different than any other industry in this regard; in fact, it may be the perfect example of why these “communities” are so crucial to the success of web businesses. Intense Competition. The Internet gambling industry is quite possibly one of the most – if not the most – competitive online businesses in existence today. Market growth is slowing rapidly (perhaps even more rapidly than our estimates might suggest), making competition for customers ever fiercer. This means operators must continue to innovate at an increasingly rapid pace to keep up with customer expectations. For all of these reasons, the Internet gaming industry has remained just that: on the web. Thus far, the traditional landbased casino gaming operators have not made a major effort to compete in this business. For one thing, the land-based operators do not believe that the appropriate technology exists that would allow for “appropriate” regulation; i.e., certain restrictions that would shield operators from any scrutiny among the state regulatory agencies. That technology would include ways to prevent minors from betting and identify the location of a bettor, in order to comply with local laws. A REGULATORY QUAGMIRE At this point, the e-gaming industry is in a state of regulatory 30 ■ Casino & Gaming International
limbo. Without delving into the reasons why this is so, let’s leave it at this: The situation is extremely tenuous, fluid, and legally dangerous for operators. At best, the “legality” owning and operating an e-gaming business is legally questionable in most regions in the world. UNITED STATES AND THE WORLD TRADE ORGANISATION In May 2005, the World Trade Organisation ruled in a widely publicised case that the United States “cannot block other countries from offering Internet gambling to U.S. residents, even if they live in states, such as Utah, where gambling is illegal.” The case was brought to the WTO by Antigua, a haven for e-gaming companies and one of the regions that helped jump start the industry. There are two elements to this equation. First, the U.S. Department of Justice and the U.S. Trade Representative maintain that Internet gambling, of all types, is illegal in the United States. Second, through a very complex and thorough legal analysis of the WTO ruling by renowned gaming lawyer I. Nelson Rose, it has become clear that the ruling actually requires a very simple remedy: An amendment to the Interstate Horseracing Act to expressly allow international wagering. Both industries end up on top in that situation. The domestic horseracing industry gets to tap into the lucrative international wagering market ($80 billion), while the U.S. government would then legally have the opportunity to ban Internet gambling. But the United States has other, grander schemes in mind. They do not want to take action based upon the opinion of the WTO for fear of allowing it to set a standard of `recognition of the international body of law. This could set a standard for the U.S. courts that could be potentially damaging to U.S. case law and legal precedent in the future. Particularly under the leadership of George W. Bush and this Justice Department, the United States will continue to be as protective as possible over its sovereignty – particularly as it pertains to its legal structure. And what does that mean? For the time being, and perhaps for the foreseeable future, there is likely to be little change in the regulatory structure as it applies to Internet gaming. That means the industry will remain in regulatory limbo. And the United States government has no plans to change its tune. Even though the White House is pushing their agenda like their plans are a slam dunk, the Administration has major hurdles to pass. These hurdles include a tremendous amount of debate within the Republican Party, in addition to the vociferous objections by the Democrats to nearly every Republican agenda item. So, where does the gaming industry stand? Save the Native American gaming business, our industry is relatively free of Federal regulation. The biggest issue for gaming companies, by and large, in 2005, will be expansion opportunities beyond their organic growth potential. This includes states such as Pennsylvania, Maryland, and international markets like the
MARKET PERSPECTIVE
UK, Macau, Singapore and Mexico. The expansion of Indian Gaming will also remain an issue, particularly as competition heats up for a smaller amount of available contracts. Given the President’s full agenda, it is unlikely his Administration will put gaming issues on a high priority, at least for the first two years into his second term. But into his third and fourth years, he will be increasingly focused on political seats in other states. It will become inevitably important for the President to turn toward building the Party once he is out of office. Certainly his brother Jeb is likely to be a candidate for President, but George Bush’s time in office will be over. The President will therefore be making a big push during his latter years in office to strengthen his party’s position in Governorships and in Senate and Congressional seats that are up for grabs. State issues will come to the fore at just this point in time. This is when the President has to campaign on behalf of many Republican governors, and therefore support their issues. If gaming is on the ballot in any of those states, he will be endorsing the position of the particular candidate. So which of the states will be important? There are quite a few, as we all know. Illinois, and Governor Blagojevich, will be faced with the continual question of how to fix that state’s gaming tax issue. For Conservatives, even those that are fundamentally opposed to gaming, the extreme nature of the high cost of running a gaming business in that state is a sin. In Minnesota, if the gaming expansion proposals have not been passed and are still floating around, Governor Pawlenty will find himself in a very awkward position. He outwardly stands in opposition to the Conservatives in the Administration by supporting price controls and reimportation of pharmaceuticals. While the President has not yet taken a formal stance on these proposals (as they are state-level issues), it is doubtful his Administration would openly support either. So the President will be confronted with two very important issues – both at a state level – while also having to support his own candidate. It will be a difficult political situation. These are just two examples of an opportunity for the Administration to confront the gaming industry on a seminational scale. The list of states where gaming is likely to be on the ballot in the next four years is endless. Nearly every state without gaming (save a few) will see one form of legislation or another by the time President Bush is out of office. The real question will be not only how much of a priority the Administration assigns to these controversial topics, but also whether or not they support a member of their own party outwardly opposing official Administration policies on a large scale. In the meantime, investors and onlookers will watch these breaking news stories at the edge of their seat, as they always do. Very few industries are affected by legislation the way the gaming industry is, making it highly vulnerable to political decisions, which means it is affected not by business decisions, but oftentimes by philosophical and ideological decisions. In the coming years, with such a decisive and outspoken Administration, we should all be watching how
decisions at the Federal level are being made, particularly with such an ideologically free-market President at the helm. EUROPE This leaves us with Europe. Although Asia is a market with extraordinary potential in this space, Europe currently provides the most dynamic marketplace for both consumers and operators. We estimate Europe will generate approximately $87 billion in wagering dollars in 2006, or 5.0% of the total global gambling market. Although seemingly this is a relatively small figure, the United States’ casino gaming industry will generate 39.0% of the total global gambling market in 2006. However, the European market, including the UK, is the second largest market in the world (these figures do not including e-gaming). As far as e-gaming is concerned, the European region is offering more opportunities for operators to be innovative and competitive than any other continent. Regional and local governments are dedicating more time to studying the potential regulatory process than most other governments throughout the world. In fact, European operators recently formed their own trade association – the Association of Remote Gambling Operators (ARGO), based in London – renamed the Remote Gaming Association (RGA) following the merger of ARGO and IGGBA from 1st August. According to a March 2005 report by ARGO, Internet gaming law in Europe is based upon the spirit of the “public interest,” stipulated by the EC treaties. However, many of the regulations currently in place are meant to protect domestic operators from competition. Most importantly, ARGO has publicly agreed, in writing (the March 2005 report), that “Prohibition is not a realistic option. It is only by regulating operators rather than prohibiting them that the gaming public across Europe can be properly protected.” There are two immediate thoughts that come to mind from this statement. First, this report comes from operators…many of whom would – of course – see this industry regulated and taxed rather than prohibited. Prohibition may or may not stifle growth – but in the gaming industry, regulation merely controls it. This allows for a more regulated environment, and, most importantly, one that allows a fair chance for the savviest operator. Second, it is refreshing to see a document produced and released to the public – even if by operators – that clearly points out the benefits and facts about regulation versus prohibition. The report is quite clear, and takes a fair view of the regulatory and legal environment in Europe and comes to this conclusion in a balanced manner. It is also clear, however, that in the interests of protecting their local businesses, some European Union member states are unwilling to adopt particular EU laws and regulations that relate to gaming. This is perfectly legal. Unfortunately, this is also perfectly confusing for any business and operator. From the regulators, standpoint, we believe the European market has taken more steps toward harmonising e-gaming regulation than any other major economy in the world. However, as the ARGO report points out, there is still a long way to go before European regulators take it to the next level: Casino & Gaming International ■ 31
MARKET PERSPECTIVE
Harmonising their legal structures from a gaming standpoint. INTERNET GAMING AND CAPITAL MARKETS One would think that the regulatory quagmire – particularly in America – would produce a cold response from the capital markets. Wrong!!! The capital markets are finding the industry extremely profitable and extremely liquid, particularly in the UK, where the AIM sharemarket has created a new source of capital and growth for the e-gaming industry. And the AIM has been particularly lucrative for companies in the gaming space. These companies, which would have an extremely difficult experience attempting to raise capital on the U.S. public markets, have found a new source of fresh capital on the AIM that would not have otherwise been available on other public markets. In fact, gaming companies represent the largest market capitalisation on the AIM (of 49 sectors). In 2004, the total market capitalisation of gaming companies on the AIM was $1.85 billion. Even more fascinating, however, is the fact that this market capitalisation was 39.8% higher than the next most significant sector, the “other financial.” After that is oil and gas, but gaming has a market cap 57.4% larger. Below are just a few examples of the successes the industry has had arising from the UK markets: ■ World Gaming Plc – An Internet software provider for online gaming operators that raised £2.5 million on AIM in May 2005. ■ FireOne Group – Payment processing company for the online gaming industry raised £24.10 million on AIM in June. ■ Empire Online – Responsible for the online gaming site Empire Poker as well as directing traffic to similar sites. Raised £19 million in June, capitalising the company at £512.36 million, one of the largest companies on AIM as of June 2005. ■ PartyGaming – The world’s largest online poker company, which raised £1.04 billion on the Main Market (not AIM) in June 2005. The market capitalisation of the company is £4.64 billion (as of the printing of this report), making it one of the largest companies on the Main Market and likely to be included in the FTSE 100 when the index is revised in September 2005. The founders, Anurag Dikshit and Vikrant Bhargava, 36 and 32 respectively and both computer programmers from India, netted over £420 million and £103 million respectively through the flotation. These are just a few examples of the most recent floats which add to the excitement the gaming market is generating in the UK. There are bound to be many more examples of this phenomenon in the next twelve to eighteen months as the capital markets mature and demand for this type of share offering gains steam. At the same time, the UK government’s sweeping gaming reforms (overhauling the legal and regulatory structure for gaming entirely) includes changes affecting the Internet gaming industry, one of the most progressive moves of major countries that have confronted the situation. When these reforms will take place is up in the air (hopefully by 32 ■ Casino & Gaming International
2007), but the positive and unique message among developed nations has provided a significant amount of momentum for the AIM. LACK OF REGULATION COMES WITH RISKS AND REWARDS Nations. The United States risks losing its reputation as the chief innovator in today’s global economy, because some of the most interesting and advanced applicable technology is coming from the e-gaming industry. This relates directly to the application of “communities” and how that has been utilised in so many successful web sites, many of them U.S. based. Investors. As with any investment opportunity, e-gaming presents its own risk/reward scenario. The regulatory situation has greatly increased the risks of investing in this business. However, signs of hope exist – particularly with countries like the United Kingdom and their proactive effort to provide some regulatory stability to the industry. As this trend continues, investors should reap the rewards, which will create additional momentum for operators. Operators. In this hyper competitive business, operators must continue to innovate at record pace, in order to continue to attract investment in the future. Given the relatively fragmented nature of the industry, innovation should continue, as should consolidation. This development should prove fruitful for investors… But, as always, we should keep our eyes peeled for the next hot trend in this business…the real money will be made there.
MICHAEL TEW In September 2003, Mr. Tew founded the consulting firm Political Capital LLC along with veteran consultant Alexandra V. Preate. Since that time the company’s revenues have tripled. Prior to founding Political Capital LLC, Mr. Tew worked as a leading hospitality, gaming and leisure securities analyst at Bear, Stearns & Co., Inc. As a Vice President in the top-ranked research team three years in a row, Mr. Tew was the youngest officer in Bear, Stearns history. Mr. Tew is a widely quoted expert on the gaming industry, and has provided advisory services to the Federal Bureau of Investigation’s Racketeering and Money Laundering unit. He was also featured prominently in a December 2002 U.S. General Accounting Office report entitled: “Internet Gambling: An Overview of the Issues.” Mr. Tew is also on the Editorial Board of Casino Enterprise Management and the Gaming Law Review. Michael Tew holds a B.S. in Finance and International Business from New York University’s Stern School of Business.
You can see the
WORLD OF GAMING FROM HERE.
September 13-15, 2005 September 12, 2005 |
| Las Vegas Convention Center G2E Training & Development Institute
Word of G2E is getting around—the world! That’s why international attendance jumped 30% in 2004, with attendees representing 107 countries, and exhibitors representing 27 countries at last year’s show. Now in its 5th year, we expect an even larger turnout at G2E in 2005. And we’re prepared. With more content aimed at attendees from abroad, including an International Track at this year’s Conference, global networking opportunities, and special registration and travel deals that make getting here easier than ever. Get ready for the global view of gaming. Register by August 29 to enjoy discounts to the Show and Conference. Visit us online at www.globalgamingexpo/AD to register and for information about special travel packages exclusively for international attendees. Or call 1-888-314-1378 or 1-203-840-5626. To exhibit, call 1-203-840-5341.
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ORIGINS
GAMBLING: A QUINTESSENTIALLY GLOBAL BUSINESS BY DAVID G. SCHWARTZ
Since the late 19th century, the social and economic fortunes of nations have been increasingly tied to events and conditions in other countries, a process known as globalisation. In the 21st century, globalisation has become both a buzzword and a cultural and financial reality. Economic forecasters, industry leaders, and policymakers have cast about, looking for models for globalisation. In some ways, they might be served by a look at one of the world’s oldest pastimes, gaming.
lobalisation is usually defined as “closer contact between different parts of the world, with increasing possibilities of personal exchange, mutual understanding and friendship,” or, in the economic sense, as “more freedom of trade and increasing relations among members of an industry in different parts of the world.”i While this certainly applies to the world today, in many aspects history demonstrates that gambling has anticipated globalisation. From the earliest days of humanity, both gambling games and equipment have spread rapidly throughout the world, leading one to assume that gambling may be a universal language. For hundreds of years, gambling has been remarkably standardised. The most basic form of gambling—simple guessing on odds or evens, or heads and tails, is nearly universal, and appeared early in human development. When people discover new ways to gamble, they spread rapidly. The
G
first dice were anklebones of sheep; with four asymmetrical sides, they made crude games. As early as 3000 B.C., inhabitants of northern Iraq were making six-sided dice out of wood, bone, and ivory that looked remarkably like modern ones. Dice found in Roman ruins could be substituted in craps games played in casinos today, although once players figured out how to use their irregularities to their advantage, pit bosses would want to swap them out. Dice spread so rapidly through the ancient world that even in antiquity no one could plausibly identify their point of origin; the Greeks assigned them to the Lydians and the Romans to the Egyptians, based on legend and rumour rather than fact. Six-sided dice were so popular, and their cross-cultural transfer so rapid, that they became truly global inventions. And they have remained remarkably standard, which is amazing for an item that has spread to so many different cultures and which has been extant for five millenia. Artisans have crafted many novel forms of dice, from pyramidal foursided ones to dodecahedrons. Yet gamblers have remained remarkably true to six-siders. In games throughout the world today, honest dice are virtually identical. Considering how drastically virtually every facet of human existence—diet, food production, clothing, machinery, language, to name a few examples—has changed, this persistent standardisation is all the more remarkable. Dice were not the only gambling form to circulate among ancient civilizations. Cockfighting likely originated in India around 2000 B.C. and spread slowly westward.ii According to Greek account of the Persian War (circa 500 B.C.), the Athenian general Themistocles, observing two game cocks pitched in battle, urged his troops to fight with a similar tenacity. The victorious Greeks brought home fighting birds and staged contests between them, originally in tribute to the Persian campaign but later merely for their own sake. Money was soon changing hands with the outcome. The sport spread from Athens to the rest of Greece, Asia Minor, and Sicily and, by the 17th century, was widespread throughout the world.iii Casino & Gaming International ■ 37
ORIGINS
Cards have a similar story. Though their artistic dimension has given their creators freer reign in their design, the exigencies of a global gaming market forced their stylistic convergence as early as four hundred years ago. At first, card makers of different nations experimented with idiosyncratic variations on a basic card design, but once one standard achieved preeminence, it quickly drove all others into obscurity, though some were preserved as regional curiosities. When they reached Europe in the 1370s, they spread throughout the continent so quickly that later card enthusiasts from Spain, France, Italy, and Germany each claimed that their country had “invented” playing cards, and each had somewhat plausible evidence to back their claims. But it is most likely that the ancestors of European playing cards emerged in Korea or China in the 11th or 12 century, spread via the Silk Road to Persia, and from there throughout the Islamic or Saracen world. Once established in the Mediterranean basin, Venetian and Genoese traders rapidly transmitted them to Europe. Along the way, cards changed dramatically. Most Korean packs had eight suits of ten cards each; the suits were man, fish, crow, pheasant, antelope, star, rabbit, and horse. The ten cards of each suit were numbers 1 to 9 and “the general,” the tenth and highest-ranking card. Chinese cards are also relatively slender (though stouter than their Korean counterparts), usually measuring between 3 and 5 inches long and 1/2 to 11/2 inches wide.iv The simplest “stick card” or kwan pai pack had thirty cards, with number cards 1 to 9 in three suits, as well as three court cards. The suits were tsin, cash, sok, strings, and man, myriads. The most common court cards were hung fa, red flower, pak fa, white flower, and tsin man, thousand myriads. Usually, four packs of thirty, joined by between two and six special kam, or “gold” cards, formed a complete set; the gold cards were wild, being used to take the place of any card needed to complete a set or trick.v Physically, Chinese cards superficially differed from modern European playing cards, though there were some similarities. Like European cards, they were mass-produced by wood-block printing on thin cardboard. Their backs were red, black, or yellow, usually plain but sometimes with a diamond pattern, and their faces had printed black pips on a white background, sometimes with red Chinese characters. Some packs had pictorial depictions of the animals representing their suits, while others merely had the name of the animal. The cards were rounded at the top and bottom, and left a small, unmarked space, which enabled the player to spread the cards in a familiar “fan” pattern; one Chinese word for cards, shen, translates as fan. Chinese players customarily fanned their cards from the top, unlike European players who did so from the bottom. Some Chinese cards had markings at both ends, which let a player easily read them without flipping them over, an innovation that would not become widespread on European decks until the 19th century.vi Similarities between Chinese and European cards leave open the possibility that the former inspired the latter, though there were also key differences. Red and black, the colours 38 ■ Casino & Gaming International
most prominent on Chinese card faces, became the dominant colours of not only European card suits, but even other casino games, like roulette; does this prove the Eastern origin of playing cards? Unfortunately, the evolution of playing cards is so convoluted, and so much of its material remains vanished to history, that it is impossible to say for sure. It is most likely that playing cards spread first to Persia and the Islamic world before their introduction to Europe. Whatever their origin, cards burst onto the European scene in the late 14th century, ready to enthrall a people eager for more gambling. Around this time, Crusaders, though not successful in holding the Holy Land from the Saracens, had brought back several innovations, and the dawn of the Renaissance was beginning to break. As paper money began circulating more freely, it makes sense that Europeans took to a new form of gambling. The material evidence seems to indicate that cards were introduced to Europe by way of Italy. The suit signs on the earliest known Italian cards, coppe (cups), spadi (swords), denari (coins), and bastoni (batons), were clearly derived from the Arab suits, with one sensible alteration. Since polo was not known in Europe until much later, Italians logically turned the polo sticks into batons.vii Further, the swords on Italian decks were
ORIGINS
curved, like Saracen blades, and the retention of a money suit recalls Chinese playing cards. Northern Italians are particularly logical transmitters of playing cards to Europe because of the pre-eminent position they held in the commercial world at the time. Venetians and Genoese traders commanded networks of ships and caravans that spanned from India and China, through the south of Russia, into the Sahara desert, and as far west as England. Florentine families, like the Bardi of the 14th century, maintained commercial agents in cities as diverse as Seville, Majorca, Barcelona, Marseilles, Nice, Avignon, Paris, Lyon, Bruges, Cyprus, Constantinople, and Jerusalem, suggesting that they too helped disseminate playing cards. The exploding wealth of the region both increased the scale of gambling and sponsored those who wished to specialise as
playing card makers. Having an economic surplus and a thriving arts community, northern Italy was uniquely disposed to capitalise on the innovation of playing cards by manufacturing them itself.viii These early Italian decks had 52 cards, with numbered cards from one to ten and three court cards duplicated in the four suits discussed above. They hewed closely to their Saracen models; the court cards, for example, usually consisted of the king, cavallo (“knight”), and fante (“foot solider”), though sometimes Italian card makers may have substituted a queen for the cavallo.ix These cards were most likely hand-painted and, at first, extremely expensive. At first a diversion of the wealthy, after the application of stenciling, wood-engraving, and block-printing that playing cards were produced cheaply enough to become a truly popular game. This happened relatively quickly, as the rapid spread of cards and their quick diffusion to the masses reveals. Playing cards rapidly traced the commercial trajectories that wily Venetians , Genoese, Florentines, and Milanese had established. A Spanish reference to the game of naip in 1371 may be the first European reference to cards (the Spanish word for cards is naipes, and the Arab word is naib, reinforcing the Saracen origin theory). Within a few years, references to cards were legion. In 1377, a revision to a Paris anti-gambling law added cards to the list of prohibited games; in the same year, the Florentine senate passed a resolution regulating the play of “a certain game called naibbe, [which] has recently been introduced into these parts.” A Swiss monk, Johannes von Rheinfelden of Basel, wrote that, “a certain game, called the game of cards, has reached us in the present year, namely A.D. 1377.” He further described the game, which was played with a 52-card deck with four suits, each of which had ten numbered cards, a King, and two “marshals.”x Cards were prohibited (and, it stands to reason, already popular) in Regensburg, a Bavarian city, in 1379 and mentioned in the accounts of the Duchess of Brabant (in today’s Belgium) and her husband, Wenecles of Luxembourg. The ducal couple, the account books noted, had been provided a sum of money to purchase playing cards.xi Also in that year, an Italian chronicler noted dryly: “In the year 1379, was brought into Viterbo the game of cards, which comes from the country of the Saracens.”xii By 1380, then, chronicles and law books in Italy, Paris, Spain, Germany and Switzerland had all noted the recent arrival of playing cards. The new game obviously made use of the Italian trade routes and spread just as quickly as a grimmer, earlier Italian import, the Black Death. By 1393, cards were common enough in France that the treasurer to French king Charles VI could note in his accounts
>> The earliest recorded modern lottery, with chances available to the public for a fee, took place in the Flemish city of L’Ecluse, which in 1444 organised a lottery for the sake of raising funds for the repair of the city’s walls and fortifications >> Casino & Gaming International ■ 39
ORIGINS
that he had paid out to a painter 56 sols for “three packs of cards, gilt and coloured, and variously ornamented, for the amusement of the king.”xiii Playing cards might have been a royal perquisite then, but a scant six years later they had become so widespread that the provost of Paris included them in an edict forbidding working people from playing games of chance on working days.xiv Card makers in Spain, Switzerland, and Germany all pursued their own card designs, substituting various object for suits and experimenting with the court cards. But around 1480, the French introduced a deck design that became the international standard. Though there has been some modification in the general appearance of the card (particularly the invention of the corner index and reversible court cards), French suit signs are immediately recognisable: their piques, trefles, coeurs, and carreaux are, essentially, the spades, clubs, hearts, and diamonds known throughout the English-speaking world today, though they would more accurately translated as pikes, clover, hearts, and tiles. Card makers agreed on a standard that made the first two suits black and the last two red. For reasons of gentlemanly courtesy, or simply to because they were easier to distinguish, the French replaced the cavallo with a dame, or queen.xv French cards ended up sweeping aside Spanish, Italian, and German ones, even in their own countries, for simple reasons of economy. Unlike the intensely detailed German suit signs, which even when executed crudely were shaded and sometimes multi-coloured. French suit signs were uncomplicated silhouettes that could be made efficiently— and cheaply—using monochrome stencils. The twelve court cards might have additional colour and detail, but card makers found the French system congenial to mass production. Because of this, the French pack soon dominated Europe from England to Russia, eventually driving out most other packs, except in the most conservative regions.xvi Lottery games were just as infectious as playing cards; within a century of their introduction, they were common throughout the continent of Europe, and, despite a global turn against them in the 19th century, they triumphed in the 20th, becoming nearly universal struts of government finance, even in ostensibly socialist or communist nations like Cuba, the former Soviet Union, and the People’s Republic of China. The earliest recorded modern lottery, with chances available to the public for a fee, took place in the Flemish city of L’Ecluse, which in 1444 organised a lottery for the sake of raising funds for the repair of the city’s walls and fortifications. Lotteries became increasingly popular in Flanders after this draw.xvii From there, the idea of the lottery spread, via wellestablished mercantile routes, to Venice. In 1522, a Venetian diarist wrote of a second-hand clothes dealer named Geronimo Bambarara creating “a new method of commerce” by offering a chance at carpets and money prizes for any who ventured an entry fee. With the success of Bambarara’s venture, others took up the practice. Soon, the entire Rialto district was filled with nothing but lottery hawkers and players, and the cash prizes had increased from 200 to 1,500 ducats. xviii 40 ■ Casino & Gaming International
Venetian-style draw lotteries, in which players bought numbered tickets that were then drawn from an urn or wheel to determine a winner, spread through Europe. The Genoese substituted numbered balls for paper tickets and thus created lotto in the late 16th century. Both the draw lottery and lotto became key financial instruments for fledgling enterprises and expanding governments. British lotteries, for example, funded everything from London’s waterworks to the Virginia Company’s American colony to struggling booksellers. The easy adaptability of lotteries to nearly every culture in the present day speaks to the universality of the gambling impulse and the global nature of gambling: an innovation in one society, if it is worthy, circulates through global trade networks and quickly becomes universal. i ii iii iv vi vii
viii ix x xi xii xiii xv xvii
xviii
http://en.wikipedia.org/wiki/Globalization John A. Price. “Gambling in Traditional Asia.” Anthropoloica. N.S. Vol 14, N. 2, 1972. 165-167. “Cock-Fighting” in 1911 Edition Encyclopedia Britannica. Tilley, 10. v Culin, 135. Van Renssalaer, 67-69; Tilley 9. Ronald Decker, Theirry Depaulis, and Michael Dummett. A Wicked Pack of Cards: The Origins of the Occult Tarot. New York: St. Martin’s Press, 1996. 30. Sir Peter Hall. Cities in Civilization. New York: Fromm International, 1988. 80. Chatto, 229. David Parlett. The Oxford Guide to Card Games. Oxford: Oxford University Press, 1990. 36. “Playing Cards” Wikipedia. Accessed at http://en.wikipedia.org/wiki/playing_cards. William Andrew Chatto. Facts and Speculations on the Origin and History of Playing Cards. London: John Russell Smith, 1848. 73. Chatto, 76. xiv Chatto, 78. Parlett, 43, 321. xvi Parlett, 43. C. L’Estrange Ewen. Lotteries and Sweepstakes: An Historical, Legal, and Ethical Survey of Their Introduction, Suppression, and Re-Establishment in the British Isles. New York: Benjamin Bloom, 1972. 24-28. Adrian Seville. “The Italian Roots of the Lottery.” History Today. March 1999. 17-18.
DAVID G. SCHWARTZ David G. Schwartz is a respected authority on the history of gambling and casinos. His first book, Suburban Xanadu: The Casino Resort on the Las Vegas Strip and Beyond, was ranked as one of the top ten books about Las Vegas ever written. His second book, Cutting the Wire: Gambling Prohibition and the Internet, has just been released, and his third, Roll the Bones: The History of Gambling, will be out in June 2006. He has presented lectures and led seminars at the International Conference on Gambling and Risk-Taking, the Global Gaming Expo, and several other conferences, and has chaired the Gaming and Casinos World Australia and Asia Pacific Conferences. Schwartz regularly contributes to Global Gaming Business magazine and is a frequent commentator on the gaming industry for local and international media. As Director of the Center for Gaming Research at the University of Nevada Las Vegas, Schwartz maintains the world’s largest collection of books and journals about gambling, fields questions from media, industry, and academic researchers, maintains the university’s gaming studies portal, http://gaming.unlv.edu, and encourages scholarly examination of gaming.
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CASINO FRONTIERS
HOW WE OVERCAME THE MENDOZA PESO RIOTS BY NICK HUGHES
The Greater City of Mendoza is the third largest in Argentina with almost half of the province’s 1.6 million inhabitants living in the city itself. In June of 2001 Hyatt opened the first fivestar hotel in the city, in what was then a dilapidated building with strong historical associations. The right to operate a casino meant that around US$65 million in investment could be injected. So, in addition to the 186-room Park Hyatt, a 250-slot machine and 18-table gaming operation was opened – the Regency Casino Mendoza (RCM).
n December 2001, six months after opening and following a major downslide in the economy, unpopular banking restrictions were introduced by the Government, a law known as ‘coralito’. This included the freezing of all private bank accounts, a period where only 250 pesos a week could be withdrawn, and the forced convertibility of all dollar accounts in a country where for 11 years the peso had been locked in a convertibility peg of 1:1. This culminated in the largest sovereign default in world history with the International Monetary Fund (IMF) and a final devaluation which at its worst saw the peso fall to 4:1 against the dollar. The final outcome was the downfall of the ruling government amidst scenes of President Fernando De la Rua leaving the roof of Government House by helicopter after resigning for his own safety. The catalyst for this final scene was the shooting deaths during days of peaceful rallies of a large number of innocent civilians which then lead to violent protests, riots and looting, taking the country back into the old scenario of proposed military curfews and possible military intervention. The air that Christmas, so soon after opening, was definitely heavy with some serious storm clouds. We had seen the news from Buenos Aires when, after the deaths, the previously peaceful demonstrations went crazy and streets were under siege with running battles everywhere. There was a special unit of police on motorbikes carrying other officers on the back with shotguns who were not afraid to use them. Many big businesses were attacked with a lot of looting, although mostly in the Buenos Aires supermarkets.
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>> The air that Christmas, so soon after opening, was definitely heavy with some serious storm clouds. We had seen the news from Buenos Aires when, after the deaths, the previously peaceful demonstrations went crazy and streets were under siege with running battles everywhere we had a call that a crowd of 3,000 were advancing through the streets and we were right in their path. We closed the casino for the safety of the employees and to protect the property
Mendoza was slower to react. Nevertheless, Hyatt Gaming (Hyatt Gaming Management Inc.) gave permission for families to be sent home. Saying goodbye to my wife and children at the airport was very strange and sad; I felt a little like the Captain staying behind to go down with the ship! On the night of the 29th we had a call that a crowd of 3,000 were advancing through the streets and we were right in their path. We closed the casino for the safety of the employees and to protect the property, but then nothing happened and within days the situation returned to relative normality. It was the calm before another storm: the full force of the banking restrictions then hit us, and you can imagine the effect that had on what is effectively a cash business. I have always thought of casinos being a little like insurance with regard to what we ‘offer’. An insurance agent tells you: ‘Give me $50 per month and I will give you $300,000 - unfortunately you have to be dead!’ In casinos we expect people to come along, lose money and go home happy. The real difference is we sell fun and an experience, at times definitely intangible but at others so real it can get the pulses racing. But try doing that during an economic meltdown! You can grasp the picture of what seemed to be a rapidly depreciating investment for the owners and a very difficult environment in which to run a five star hotel and casino. Add to this the fact that, due to the cost of dollar contracts, we had to release or transfer all our expatriate department heads, which left us with virtually no experienced managers. Without a doubt the focus on development programmes for local staff took on a real sense of urgency, but strangely enough the net result of that was very positive for all involved, including the casino. In fact, the contribution of these individuals to our growth has been a 44 ■ Casino & Gaming International
key factor in our bounce back from adversity to success. Casinos are an amazingly resilient business but even we can be surprised at times. Fast forward to June 2005 and the property has been a major triumph. Year after year of substantial growth, with gaming revenues this year reaching the dollar budget set in the original pre-opening five-year business plan even though the exchange rate went from parity to settle at 3:1. An increased gaming area with 20% more tables and 25% more slots and we haven’t finished yet! Daily coin-in growing 300% to achieve more than a million pesos a day and a customer base which has grown 250%. In addition, the property has won the ‘Best Casino Resort in South America’ award two years running from the prestigious World Travel Awards – the travel industry equivalent of the Oscars. The Argentine people, who have coped with adversity with incredible dignity and fortitude, emerge from the recession in a country that is enjoying renewed economic growth. Mendoza’s growth as a tourist destination is due to its stunningly beautiful natural attractions, the eco-sports,
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mountains, proximity to Chile and the peso-dollar devaluation making it an incredibly value-for-money vacation. Furthermore, we mustn’t forget the growing popularity of Mendoza’s renowned winery, which I personally believe rivals the best in the world and is a real magnet for the international wine connoisseur. Our programmes of creating markets for our product, instead of attempting to dominate existing market share, is an effective way to expand opportunities. With a local team of committed and dedicated managers, the fun of gaming to guests who were previously unfamiliar with the product is more than a cliché: through player reward and recognition programmes, showing that not only do we appreciate customer loyalty but we never take it for granted, we have really created a relaxed and friendly environment here. Even so, there are some other unique issues to acknowledge here. The other casino operator in the city is the Government itself, so at times it’s really challenging to have your Regulator as your competitor as well. Having said that, by embracing their existence and working with them and at
times as partners we have forged a relationship which has created a far more positive impact on our operation than you might usually expect. It is also clear that they have completely altered their product to become a more direct competitor with us: examples of this can be seen in their décor, machine mix and updating of their dealing procedures. They are a true success story and, combined with our two casinos, have added to the entertainment value of both the city and the province. For the future we can only see positive developments, to the extent we are investing in a five million dollar expansion. This includes enlarging the gaming areas by 50% as well as introducing 100 additional machines with the latest technology, plus four new games for tables. The most exciting advance will be the implementation of a completely new on-line system, with ticket-in-ticket-out (TITO) and a full supporting list of modules for cage, player tracking, marketing, live table games, and so on. True to the way the gaming division of Hyatt works, we analysed many different companies and made trips to the United States for manufacturers’ demonstrations before choosing the MCC system of Bally. It’s great for our needs and the attention to detail they have given to tailor this to our situation is exactly what we needed. For the gaming equipment we will continue to deal with all our tried and trusted partners such as Atronic, IGT, Williams, Huxleys, and we will try some new companies eager to expose their wares through Hyatt. The win for RMC has grown almost 300% since the first year’s results, while coin-in has increased by 340% in that period. Total visitations during the past four years have reached almost three million people and we now average 2,600 per day. We have paid substantial sums to the Government in gaming tax and been a major employer in the city, with a total number of staff, direct and indirect, of 500. So life is good in South America and given the growth in the entire region I believe this part of the globe will be a very interesting area for casinos for quite some time to come. I cannot say it has always been easy, but it has never been anything less than totally rewarding from so many perspectives!
NICK HUGHES Nick Hughes, who was part of the preopening team and has continued as the General Manager of RCM through those turbulent times, explains how even the seemingly most unfortunate events can eventually take a turn to success.
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THE MEADOWS MAKE A MODERN CITY BY MICHAEL GREEN
The Las Vegas area now boasts about 128,000 hotel and motel rooms. Its population has climbed past 1.7 million. Once its casinos and their operators were unusual—supposed criminals in a sinful enterprise. Now gambling is legal in 48 of the 50 states, and casino companies are involved in Indian casinos and riverboats. Wynn’s new hotel-casino is but the latest in a long line of innovations and changes—with more to come, assuring not only that Las Vegas has a place in history, but that history has a place in Las Vegas.
THE EVOLUTION OF A CITY On April 28, 2005, the Wynn Las Vegas opened to the oohs and aahs that accompany anything Steve Wynn does. Twice before, he redefined Las Vegas resort hotels: The Mirage, opened in 1989, began the modern Las Vegas boom, and the Bellagio, opened in 1998, set a new standard of luxury with its high-end shopping, conservatory and art exhibits. This time, admirers said, he had built ‘the Bellagio on steroids.’ Wynn deserves credit for building attractive, luxurious hotels that almost belie one old-time casino operator’s declaration that “a joint’s a joint.” And Wynn is quick to give credit—to his staff and his predecessors. Years ago, he cited Jay Sarno, the builder of Caesars Palace and Circus Circus, as an inspiration, and greatly benefited from the aid of Parry Thomas, the first banker to regularly loan money to casino operators. But Wynn’s origins and the Las Vegas he helped create can be traced to the beginnings of Las Vegas gaming as we know it. THE FRONTIER ERA, 1931-1946 Casino gaming in Las Vegas can be divided into four eras. Both similar and separate, these periods help explain how the industry and the city have evolved. By the time the legislature made wide-open gambling legal in 1931, several casinos already were operating in Las Vegas. The Northern Club, the first licensed casino, had opened a decade before. Its name revealed its purposes: while it was supposed to sell soft drinks, most old mining camps boasted a Northern Club—a saloon. If mining camps and northern clubs signified the Old West, Las Vegas operators had no desire to disabuse patrons of that notion. Into the early 1940s, Las Vegas claimed to be “still a frontier town.” One way was through the names of its Fremont Street casinos: not only the Northern, but also through western names like the Apache, the Boulder Club, the Frontier Club, the Pioneer Club, the El Cortez and the Golden Nugget. The trend continued on Highway 91, soon to become Casino & Gaming International ■ 47
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known as the Strip. In 1941, Thomas Hull, who operated several California hotels, began the Strip resort corridor by opening the El Rancho Vegas. As the name suggested, it fitted in with the concept of southwestern, low-rise architecture. A wooden and barbed wire fence surrounded the property. After hotel executive Herb McDonald introduced the buffet, it became known as the Chuck Wagon. The next Strip resort built upon the western idea. Advertising that it offered “the Old West in modern splendour,” the Hotel Last Frontier included barstools shaped like saddles, steer horns on bed frames, wagon wheel lights and, eventually, the Last Frontier Village, the first Strip theme park, with a variety of western memorabilia. But the West is more than the frontier. Many of Las Vegas’s early casino builders and operators came from the west—California. Las Vegas long had been almost an adjunct of southern California, from the Old Spanish Trail of the 1830s and 1840s to the railroad whose construction led to the town’s creation at an auction on May 15, 1905. In the late 1930s, change came to California through the work of two officials determined to drive out illegal casinos: Attorney General Earl Warren, who targeted the gambling cruise ships along the California coast, and Los Angeles Mayor Fletcher Bowron, who sought to shut down illegal games within his city. Even before these reform efforts, some California operators had moved to Las Vegas. But Warren and Bowron helped create an exodus of casino owners and employees who worked their way to Las Vegas, bringing along experience and investors. They included Tony Cornero, who ran The Meadows, an early Las Vegas resort, returned to operate downtown and later started construction of what became the Stardust; Wilbur Clark, who ran the downtown Monte Carlo and the Player’s Club on the Strip before starting work on the Desert Inn; Sam Boyd, who moved up through the ranks until he owned several casinos, and his son Bill has built on that foundation to create the Boyd Gaming empire; J. Kell Houssels, who owned parts of several downtown properties and ran the Tropicana when it was the “Tiffany of the Strip”; and Guy McAfee, who opened the Frontier Club and the Golden Nugget. Another migrant from southern California, Billy Wilkerson, owned the Hollywood Reporter and several fancy restaurants. He wanted to build a swanky Las Vegas resort where he could gamble and hang around with his Hollywood pals. But he ran out of money and one of his silent partners stepped in and took over—a fellow southern California resident with connections to the movie world, Bugsy Siegel. The western and California influences had started something big in Las Vegas. Now the town was poised for something even bigger. THE MOB ERA, 1946-1966 Woody Allen put it best: “the mafia saves a lot of money on office supplies.” Many of the details of Las Vegas casino ownership in the two decades after World War II are murky. How many of the licensed owners and operators were front 48 ■ Casino & Gaming International
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men probably will never be known. But this much is clear: most of those who built and ran the Strip’s major resorts in the 1940s and 1950s were Jews who were immigrants or sons of immigrants during the great migration through Ellis Island in the late nineteenth and early twentieth century. They and their fellow immigrants, mainly Italians, became involved in illegal gambling, alcohol, prostitution and protection, especially during the 1920s, when the U.S. tried to enforce Prohibition laws and failed. During and after World War II, they came to Las Vegas, where they could practice their trade—running casinos—legally, declare their earnings and possibly achieve respectability, whether or not they still dabbled in illegality. Their move began when Meyer Lansky visited Las Vegas just before World War II and decided it was ripe for a luxurious casino. Siegel and Moe Sedway took over the dissemination of race wire results to Las Vegas casinos and sports books. They and their allies invested in downtown casinos and, with Wilkerson starting the Flamingo, the Strip. Siegel took it over, completed construction and opened on December 26, 1946—but for $6 million, a significant cost overrun, some of which he or Virginia Hill apparently banked, and the Flamingo’s early months were unprofitable. While Siegel envisioned a Las Vegas full of resort casinos—“Buy land,” he told a friend, “there’ll be a million people here”—he lacked the business acumen to achieve that goal. Besides, he had earned his nickname: he often lost his temper and acted impetuously. On June 20, 1947, he was assassinated at Virginia Hill’s Beverly Hills bungalow. Minutes after the news arrived, a new team of operators arrived—as Lansky’s biographer, Robert Lacey wrote, “like generals mopping up after a coup.” Gus Greenbaum, a onetime Phoenix bookmaker who had run a downtown Las Vegas casino, was the new boss, aided by onetime Minneapolis operators Davey Berman and Willie Alderman; racketeer Benny Goffstein, a veteran of bloody newspaper circulation wars; Joe Rosenberg; and Sedway. Other onetime illegal operators followed—mostly Jewish, some tied to Lansky, most of them able businessmen who understood customer service and how to run a casino. In the next decade came the hotel-casinos that burned the Strip into the international consciousness: the Thunderbird, where Lansky was a hidden owner; the Desert Inn, run by Moe Dalitz, Sam Tucker, Morris Kleinman, Allard Roen and Ruby Kolod, Jews who were veterans of Cleveland’s Mayfield Road Gang; the Sahara, one of whose executives said, “We knew them all, but we had no connections”; the Sands, a product of the team of Jakie Friedman from Houston and onetime Copacabana nightclub manager Jack Entratter, joined by Ed Levy, Ed Levinson and casino manager Carl Cohen; the Riviera, Dunes, New Frontier and Royal Nevada, all products of a 1955 building boom, and all of which went bankrupt temporarily or permanently; the Hacienda, which catered to families; the Tropicana, which was tied to Frank Costello until longtime local operator J. Kell Houssels came in and cleared out Costello’s crew; and the Stardust, operated by the Desert Inn group. Many Strip operators had run nightclubs elsewhere. Casino & Gaming International ■ 49
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This gave them connections to major entertainers, whom they brought to Las Vegas. The Summit at the Sands, featuring Frank Sinatra, Dean Martin and Sammy Davis, Jr., when they were in Las Vegas to film Oceans 11 in 1960, may have been unique, but it also reflected the importance and greatness of Las Vegas entertainment in the 1950s and 1960s. Top acts played showrooms for low prices, with dinner and drinks provided. The question was whether they brought gamblers to the tables—and those who did became Strip staples. The Strip’s bright lights and success almost obscured the growth of gaming throughout Las Vegas. Downtown, Benny Binion opened his Horseshoe club, where his innovations included carpeted floors, airport limousines to pick up customers and eventually the World Series of Poker. Levinson built the Fremont, downtown’s first high-rise. The Sahara’s operators added the Mint. And off the Strip, the Desert Inn group and Houssels teamed at the Showboat, which began a string of hotel-casinos along Boulder Highway, the road to Hoover Dam and Arizona, while the Moulin Rouge enjoyed a brief life as the only integrated hotel-casino in Las Vegas. Indeed, the numbers the Moulin Rouge attracted were not enough to pay off investors—the resort was badly run. But its existence, and the growth and increasing political strength of the local African American population, helped induce Strip and downtown operators to desegregate in 1960—to allow African Americans to stay and play at their casinos. While political leaders, white and black, applied pressure, the operators ultimately made the decision. But they were feeling other pressures, notably from federal and state officials. Upon taking office in 1961, Attorney General Robert Kennedy joined with FBI chief J. Edgar Hoover to target organised crime in Las Vegas. They were largely unsuccessful: they obtained indictments and convictions of a few minor figures and otherwise made a great deal of noise. As Governor Grant Sawyer, who had backed the Kennedys strongly in 1960, said, “Bobby looked upon me as someone who had just stepped out from behind a crap table.” That was unfortunate, because Sawyer essentially supported his cause. Taking office in 1959, Sawyer had created a new state regulatory agency and a “Black Book” of crime figures excluded from entering casinos, and strengthened the state’s investigative system. With considerable help from his aides, especially Bob Faiss, who wrote the first rulebook for regulators and licensees and went on to become a leading gaming attorney, Sawyer set up the modern gaming control system that other jurisdictions now emulate. But the zeal of his enforcers irked some operators, who contributed to Sawyer’s defeat in his bid for a third term as governor in 1966. Nevada and Las Vegas now were poised for major changes in their largest industry. CORPORATIONS AND EXORCISM, 1966-1989 Sawyer lost the 1966 gubernatorial election to Republican Paul Laxalt, who supported a change in Nevada law that proved almost as important as the 1931 law allowing wide50 ■ Casino & Gaming International
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open gambling. Until the late 1960s, every stockholder in a hotel-casino had to be licensed. That made it impossible for corporations to buy or build casinos—unless, like Del Webb, they created smaller holding companies. Sawyer had feared that corporations would merely serve as mob fronts—and he was right. In the 1970s, Argent Corporation technically owned the Stardust, but as the film Casino showed, mobsters really ran it; the same was true of corporations that ostensibly controlled the Tropicana and Aladdin. Federal and state officials eventually drove out these organised crime figures, who were a different breed than such predecessors as Greenbaum and Dalitz; the newer operators were more overt and less financially shrewd. What also helped drive them out was other corporations seeking to invest in Las Vegas but leery of doing so when the town’s reputation continued to suffer from reports of skimming and street violence. Thus, Laxalt, too, was right: corporate money forced state action and drove out mobsters. Supporters of corporate gaming hoped to attract legitimate investors. One of the problems that Las Vegas and its major industry had long faced was that their reputation scared off major financiers. The only major lending sources from the 1950s on had been the Teamsters Central States Pension Fund, which was tied to organised crime interests, and the Bank of Las Vegas, run by E. Parry Thomas, whose Mormon co-owners accepted his reasoning that, despite their church’s opposition to gambling, making loans to the major business in town was sound business—and that casino operators simply wanted to be treated like legitimate businessmen. The first corporate leader to enter Las Vegas, Kirk Kerkorian, proved both unusual and highly significant. Unusual because while he was and remains well known to Wall Street, he also had been a high-rolling gambler and thus knew the Strip better than many of his corporate counterparts. Highly significant because, three times, he built the world’s largest hotel-casino: The International, now the Hilton, which opened in 1969; the MGM Grand, now Ballys, in 1973; and the current MGM Grand, with more than 5,000 rooms, in 1993. His success inspired others to follow. Another, less likely inspiration, Jay Sarno, ran a motel chain but wanted to build a Las Vegas resort that would dwarf all others. Thanks to partners and staff like Stan Mallin, Nate Jacobson and Burton Cohen, he did. Caesars Palace opened in 1966 as the first truly themed Strip resort, down to stationery resembling Roman parchment. In 1968, he added Circus Circus, with a big top and circus acts. Sarno and his partners sold Caesars to a corporation and Circus Circus to Bill Bennett and Bill Pennington, who had bigger plans of their own. Looming over all of these gaming leaders was an unseen presence: Howard Hughes. Much of his story is famous: Hughes Tool Company’s success; his film production and squiring of Hollywood starlets; his flying exploits; his eventual madness, mania for privacy and drug addiction. In 1966, that combination brought him to Las Vegas: he wanted to be left alone and to invest his vast capital gains. He occupied the top two floors of the Desert Inn and eventually bought it, then Casino & Gaming International ■ 51
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went on a shopping spree, adding the Frontier, Sands, Landmark, Castaways, Silver Slipper, North Las Vegas Airport and Channel 8 to his 25,000 acres of desert land northwest of Las Vegas. By the time Hughes left Las Vegas late in 1970, he had changed the landscape. The claims that he cleared out organised crime by buying out mob-connected owners were mistaken. First, how connected they were remains open to conjecture. More crucially, Hughes eliminated the overseers but not the counting room clerks and casino bosses who had skimmed money before—and continued to do so, right under his nose. But his presence reassured other investors that Las Vegas could be an acceptable market, and his land holdings eventually became Summerlin, a major masterplanned community northwest of town, and the Fashion Show Mall on the Strip. Hughes never actually designed and built his own casino, which was appropriate for his time. After Kerkorian’s MGM Grand opened in 1973, no major new resort broke ground on the Strip for a decade-and-a-half. Smaller operations appeared—a reflection of international economic problems, including an energy crisis and stagflation, and concerns about the future of Las Vegas with the approval of casino gaming in Atlantic City in 1976. Local operations spread: Frank Fertitta opened the Bingo Palace and expanded it into Palace Station, the seed that sprouted into the local Station Casinos empire. Longtime casino executive Sam Boyd joined veteran operators J. Kell Houssels, Jr., Jackie Gaughan and Frank Scott to build the Union Plaza in downtown Las Vegas, then built his own California and Sam’s Town, laying a foundation with his son Bill Boyd that has mushroomed into Boyd Gaming. Another, newer Las Vegan expanded the old Golden Nugget into a major downtown showplace and invested in Atlantic City, but Steve Wynn was thinking bigger—and his thinking would transform gaming. THE MIRAGE/EXCALIBUR BOOM, 1989Wynn first visited Las Vegas as a ten-year-old in 1952 with his father and returned after attending Penn—an Ivy League school. With help from banker Thomas, who virtually adopted him as an extra son, Wynn invested in the Frontier Hotel just before its sale to Howard Hughes and made more than $1 million buying and selling a strip of land next to Caesars Palace. Thomas then helped Wynn take over the Golden Nugget. Wynn proved successful downtown and in Atlantic City, but he wanted to move onto the Strip. The problem was that the Strip had been largely dormant and Wynn had trouble attracting financing. He turned to Michael Milken, the Drexel Burnham Lambert trader whom he knew through personal and business connections. With Milken floating junk bonds, Wynn built The Mirage, opening it at Thanksgiving 1989. It was an immediate hit. Wynn introduced innovations that are now commonplace. He pursued a rain forest theme with a volcano in front, a large aquarium behind the registration desk and a white tiger habitat near the casino—a precursor to the attractions built over the next decade. He signed Siegfried & 52 ■ Casino & Gaming International
Roy, illusionists then performing in a popular but not overwhelming revue at the Frontier, to a long-term contract and charged nearly $100 a ticket to see them—a harbinger of production extravaganzas such as Cirque du Soleil. While Wynn may be credited with beginning the boom, he was not alone. Circus Circus opened the Excalibur on the Strip at Tropicana the next year. Even more than The Mirage, it was themed, from Arthurian shows to the Italian restaurant Lance-a-Lotta Pasta. It, too, was a smash—and it catered to a more family-oriented, middle-class clientele than Wynn’s high-rolling Mirage. Together, the success of the two hotels signified that Las Vegas was back, and they began a new building boom that dwarfed previous growth spurts. Wynn’s Mirage Resorts and Circus Circus had bigger plans. Wynn added the Treasure Island next to The Mirage and imploded the Dunes to make room for the Bellagio, a $1.6 billion luxury hotel modeled on Lake Como. Circus Circus built the Luxor and Mandalay Bay. The two companies collaborated on the Monte Carlo. New themes and new implosions soon followed. Kirk Kerkorian returned to action, tearing down a smaller hotel, building the MGM Grand and, with partners whom he later bought out, New York New York. Sheldon Adelson, who owned the Consumer Electronics Show, bought the Sands, imploded it and built The Venetian. A new Aladdin replaced the old one. But the Strip’s growth has involved more than implosions and simply replacing old resorts with newer resorts with more elaborate casinos, production shows and other attractions. It also has reflected larger trends in American society. One is the technological revolution. Computers have revolutionised not only society in general, but Las Vegas in particular. Casinos once concentrated on table games, with slot machines providing a diversion. Today, the cornerstone of casino operations is slot machines—not coin-operated one-armed bandits, but video poker machines, which accept
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bills. So are casino bosses who simply remembered customers and doled out comps; most casinos have customer data bases, slot clubs and an assortment of internet services. Another trend involves corporate America and mergers. While oil and media conglomerates have grown, so have resort casino conglomerates. Kerkorian’s MGM Grand took over Wynn’s Mirage Resorts in 2000 and merged with Mandalay Resort Group—the onetime Circus Circus—in 2005, the same year that Harrah’s merged with Caesars to create the world’s largest casino company, with Harrah’s having absorbed the Rio, Showboat Inc., and Horseshoe Gaming, and Caesars having combined with Bally’s and Hilton casinos. The results have been staggering. The Las Vegas area now boasts about 128,000 hotel and motel rooms. Its population has climbed past 1.7 million. Once its casinos and their operators were unusual—supposed criminals in a sinful enterprise. Now gambling is legal in 48 of the 50 states, and casino companies are involved in Indian casinos and riverboats. Wynn’s new hotel-casino is but the latest in a long line of innovations and changes—with more to come, assuring not only that Las Vegas has a place in history, but that history has a place in Las Vegas. WHY GAMING? WHY LAS VEGAS? On March 19, 1931, the Nevada legislature changed its state by passing two laws. One reduced the residency requirement for divorce from three months to six weeks. The other instituted “wide-open gambling.” In fact, gambling had been legal off and on since Nevada became a state in 1864. The new law merely eliminated most of the limits on what games could be played. The two moves were more closely related than they appeared. As the 1930 elections approached, Las Vegas real estate developer Tom Carroll had placed ads in local newspapers, touting the benefits of legal gambling. He saw it as a way to attract visitors to Nevada, give them something to do while they were in the state and perhaps convince them that they should stay. Officials could hope for the same from the unhappily married who came to Nevada, as columnist Walter Winchell put it, to get “reno-vated.” Indeed, Reno was the prime beneficiary of the two new laws. It was the biggest city in Nevada, on its way to becoming the biggest little city in the world. It had a long history of easy railroad access. Lake Tahoe and ranchlands beckoned nearby. In its early years, it attracted Harold Smith, whose Harold’s Club pioneered many of the early publicity techniques for which Nevada’s gaming industry is famous (“Harold’s Club or Bust,” ads proclaimed, not that what happened in Harold’s Club stayed in Harold’s Club), and William Harrah, who expanded his small bingo club into the seeds of a resort empire. But by the 1950s, Las Vegas had passed Reno in population and, at least for gaming, in the national consciousness. Why? First, Las Vegas was a newer community. One Las Vegan, transplanted from Reno, wrote at the time that “you didn’t have to be voted in by the ruling elite.” As late as the
early 1980s, one veteran Las Vegas journalist surveyed local growth and said, “This is still a frontier town where the rules haven’t been written yet.” Moving into Las Vegas and the gaming industry, and establishing a reputation and a degree of economic and political power, was easier in the younger community than in Reno. Wynn, Kirk Kerkorian and Howard Hughes all worked their way to Reno at some point—but they started in gaming in Las Vegas. Second, Reno saw itself as more than a gaming town. Las Vegas was still defining itself. So, Reno civic leaders limited casinos to a small district around Virginia Street—still the heart of Reno. When that proved too confining, they allowed casinos almost anywhere. Thus, Reno lacked a “strip” of gambling and entertainment that could rival the one along Highway 91 on the outskirts of Las Vegas. Las Vegas was happy to be a “resort city in the sunbelt,” to use the title of the finest scholarly history of the city. Reno wanted to be something more and remains less dependent economically on tourism than Las Vegas is. Third, Las Vegas was better poised for the post-World War II Sunbelt boom. Las Vegas’s story is mirrored in those of desert-oriented communities like Phoenix, Tucson and Albuquerque. Like them, it had attached itself to the federal government, welcoming an army air corps gunnery school, a magnesium plant and a nearby atomic test site. These provided a strong, built-in economy—not tourist attractions, but locations that also would attract visitors who welcomed a place to play and even to live. Reno had an air force base, but Las Vegas had much more. Finally, Las Vegas was committed in many ways to casinos from the beginning. The tendency has been to think it all began with Bugsy Siegel opening the Flamingo in 1946. If you think so, look at Siegel’s initials. They explain a lot.
DR. MICHAEL GREEN Dr. Michael Green earned his Ph. D. from Columbia University and is currently professor of history at the Community College of Southern Nevada, editor-in-chief at the Nevada Historical Society Quarterly, and a member of the editorial advisory board of the University of Nevada Press. He writes for a variety of publications and is a regular speaker on the history of Las Vegas and Nevada before civic groups and the Las Vegas Chamber of Commerce, and has been a guest on radio and television shows, including an appearance on A&E. He is the author of many articles on the Civil War, including the forthcoming publication The North’s Civil War: The Home Front, which is a summary of his Ph.D. dissertation Freedom, Union, and Power: Lincoln and His Party in the Civil War (Fordham University Press). Dr. Green was also the interviewer and editor for the oral history A Liberal Conscience: Ralph Denton, Nevadan (2001) and co-editor of Nevada: Readings and Perspectives (1997). He coauthored A Centennial History of Las Vegas and the History of Lionel Sawyer & Collins.
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GETTING TO GRIPS WITH ONLINE LIMITS BY MARK STONE, RICK SMITH AND KEITH FURLONG
It is hard to believe that the online gaming industry is approaching a ten-year anniversary. Originally a small, niche component of the overall eCommerce universe, the recent announcements of initial public offerings and stock exchange listings for a few large online gaming operators show that the industry has matured into a multibillion dollar category of its own. We have seen young entrepreneurs turn management of their companies over to seasoned management executives from all walks
gambling is lawful, the means of distribution should not affect the lawfulness. Our efforts are especially well known in the U.S., but our organisation has also been active in Australia, New Zealand and mainland Europe, particularly the UK. In the early days of our organisation, U.S. efforts were important for multiple reasons, including the leadership position and reach of the U.S. government, the high percentage of revenues attributable to U.S. players and the fact that most international credit card transactions, at some time or another, have some nexus with the U.S. The IGC has also been proactive throughout the international Internet gaming industry. In the UK, the IGC provided written testimony to the Gambling Review Body prior to the recent approval of legislation to establish a Gambling Commission, whose duties will include the regulation of remote gambling.
of corporate life, including the gaming and technology industries and consumer products firms. ne of the Interactive Gaming Council’s (IGC) core motivations has been to play a key role in advocating for government regulation. The IGC has consistently promoted an environment where there is an absence of fraud, both fraud by players as well as fraud by operators, and this is why we have positioned our association in favour of strict government regulation. A chief concern of the IGC is protection of the consumer, with particular emphasis on the prohibition of underage participants and the provision of assistance for compulsive gamblers, two highly emotive issues over which the industry is often criticised. Our position is based on the philosophy that a clear distinction needs to be made between attempts to regulate the Internet and attempts to regulate gambling. If a type of gambling product is permitted within a jurisdiction, then the nature of the delivery medium should not affect the nature of what is being regulated or the legal status of the product. If
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AN INDUSTRY MATURES, BUT NOT WITHOUT CRITICISM The online gaming industry has faced and continues to face criticism. The issues and hurdles encountered by the industry vary: credit card fraud, locked player accounts associated with disputes over promotions, spam and pop-up advertisements, underage and problem gambling, and the alleged potential hot-bed for money laundering. ONLINE CASINO PROMOTIONS While IGC members who operate gaming sites are committed to fair and honest gaming practices, these same casino websites are sometimes the victims of player fraud. Over the years, a few players have managed to profit from manipulating promotions at the expense of everyone else. Some, for example, have registered multiple accounts when the rules of a promotion clearly limit players to only one account. The situation can be best summarised by quoting a representative from GoneGambling.com, an Internet site that got caught in the web of this promotional abuse: “Integrity is a 2-way street. Unfortunately, there are a lot of devious people in the real world (and seemingly growing in numbers by the Casino & Gaming International ■ 55
BetOnBet – Better Online Betting Approaching its two year anniversary this August, the online betting exchange services provider BetOnBet is proving to be a formidable contender in the electronic betting marketplace. BetOnBet has developed its very own unique betting exchange, providing punters with extensive betting opportunities, combined with a strong focus on customer service. BetOnBet allows punters to bet against each other, instead of betting against a traditional bookmaker. BetOnBet provides significant features such as multi-bet functionality and dynamic betting accounts, the latter not usually found with any of the other larger Betting Exchanges. This is proving to be of significant value to punters, and it is one of the key selling points for BetOnBet, along with Premium Customer Service, in a competitive marketplace in strong growth. BetOnBet lets you be the bookmaker, with the opportunity to back and lay bets against other punters as you please. Punters are free to request and suggest odds and stakes, giving the punter a wider variety of choices and a more exciting betting experience. The main focus is on European, Scandinavian and American betting events, but BetOnBet also offers online poker and all the traditional casino games and a number of special events and promotions. BetOnBet earns revenue by charging a commission on customers’ net winnings. BetOnBet has recently increased its focus towards the American betting markets, and now offers betting opportunities on NFL, NHL, NBA and MLB games. In the European market, betting is not limited to the top divisions; BetOnBet also covers games played further down in the lower divisions, giving punters the opportunity to bet on their favourite team regardless of the teams’ position in the rankings. Dynamic betting accounts enable punters to back and lay bets without funds being deducted from their account. The deduction is performed only when a bet has been matched by another punter. Punters are therefore able to back and lay a wider variety of bets – in greater volumes – without facing increased exposure. The dynamic betting account functionality also serve to increase the chances of getting bets matched and increases both the diversity and volume of bets on the exchange. Dynamic accounts also provide the ability to enable multi betting where punters can back and lay their own combinations of bets and where the odds are multiplied to make up the total odds. This type of betting is very popular in Scandinavia and has in the past only been available from bookmakers. Multi-betting has already proved to be popular on BetOnBet and accounts for approximately 25% of turnover. Both dynamic betting accounts and the multi-bet functionality are unique to BetOnBet and add significant value for punters of any type and experience. BetOnBet is a member of Pokernetwork.co.uk, which features a number of gaming sites and thousands of players
gaming 24/7. Poker has become increasingly popular around the world in recent years, and BetOnBet is on track to meet the demand with cutting edge software and user friendliness. All the popular poker games are available, such as Texas Hold’em, 7 Card Stud, 5 Card Draw and Omaha, as well as single and multi table tournaments. You can choose whether you’d like to play open games or at private tables. Casino games such as Roulette, Black Jack, Craps and Caribbean Stud are available, along with a number of other games and different variations to each game. Tournaments are also available in various Casino type games. In the near future, both Poker and Casino games will be available for play through mobile phones. BetOnBet has managed to establish a strong customer base of active punters, and the community continues to grow. This is important because as with any betting exchange, the number of players directly affects the possibility of bets being matched and also the range of betting opportunities on offer. BetOnBet Ltd. is based in the UK, and is owned by an international investment company. The company operates from London, under a UK bookmakers permit. The UK was the obvious choice considering the country’s strong and reputable position in the European gaming industry and the solid infrastructure already in place. The BetOnBet.com exchange is currently available in English, Norwegian, Swedish and Danish while German capabilities will be available soon. Setting up an account with BetOnBet is easy. Deposits and withdrawals can be made by Mastercard, VISA, through Moneybookers, Neteller or FirePay, or through ordinary bank transfers. Deposits are accepted in the following currencies: Euros, British Pounds, US dollars, and Norwegian-, Swedishand Danish kroners. Payment solutions are continuously added and new ones implemented to ensure that all customers are provided for. BetOnBet offers different Bonus Programs which gives customers additional funds to their accounts. Programs such as Deposit Bonus, Refer a Friend programs and more, are all in place to ensure value for money and customer satisfaction. In accordance with the market strategy of user friendliness and customer satisfaction, BetOnBet recently extended its hugely popular LIVE support service and is now proud to offer continuous customer support 24/7. BetOnBet strives to become the best online gaming site, continuously improving to meet customer demands. BetOnBet encourages user feedback, and will always make the best effort to ensure customers get the best service and the best online gaming experience possible. Additional information can be found at BetOnBet.com, while specific questions will be answered swiftly through our LIVE support service. BetOnBet – When Queens are away, Kings come to play… Casino & Gaming International ■ 57
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day). They seem really intrigued by any opportunity to corrupt the system, especially where there is the potential for a dollar.” While the difficulty often arises from the unscrupulous activities of a few players, the process of dealing with these problems, jointly, has been one of the growing pains associated with our expanding industry. SPAM & POP-UPS In an effort to reduce spam and promote reputable business practices, the IGC developed and distributed an Advertising Code of Practice for member operators and software developers. The Code warns against unsolicited advertising, including spam, data protection and pop-up ads. Spam often originates from a third-party marketing company or affiliate rather than from the actual gaming operator. But regardless of the source, spam needlessly alienates many consumers who would otherwise bear no ill will to online gaming. As with any industry, a business that engages a third party should be held accountable for the actions of that third party on their behalf. Our concern is that increasing spam complaints about online gaming websites would provide fertile ground for U.S. Senator Jon Kyl and his allies to continue their misguided attempts to prohibit online gaming. Our hope was that the Advertising Code would be a first step toward an international industry standard. However, until such standards are widely adopted, the IGC will continue to lead by example. IGC members, by the nature of their business, and the customers who play at the members’ sites, by the nature of their choice in entertainment, are heavy Internet users. We all see first-hand how spam impacts the enjoyment and usefulness of the Internet. In addition to spam, the Advertising Code covers other issues relevant to the operation of an online business in a responsible manner, for example, adherence to privacy and data protection requirements. The Code states that advertising should not be false or misleading, especially with regard to the odds of winning, should be in good taste and should not focus on minors or be displayed at sites frequented by minors. The website should contain the name and address of the operator, contact information for complaints, and accurate information about the jurisdiction and gaming license under which the site operates. Adoption of this Code is another example of the IGC’s commitment to high standards in an environment of industry self-regulation. But enforcement of these policies really requires regulation by governmental jurisdictions. If the
government licensed and regulated this industry, it would be in a position to force an operator, for example, to stop spamming or to make the proper disclosures on its website. In most of the world’s land-based gaming jurisdictions, government regulators ensure that casinos behave properly. And that is the way things should work in cyberspace. UNDERAGE & PROBLEM GAMBLING The IGC has been a consistent voice for the responsible interactive gaming industry, making the case for regulation and player protection to governments, gaming regulators and policy makers throughout the world. The IGC continues to emphasise that perceived problems of underage and problem gambling can best be resolved through a combination of upto-date technology, proper internal controls and regulatory oversight. In land-based gaming, jurisdictions devote significant
>> During this last session of U.S. Congress, the 108th Congress, Sen. Kyl and his allies has come closer than ever before in his quixotic quest to prohibit offshore online gaming. At the same time, he has criticised the World Trade Organisation for what he calls an attempt to impose another entity’s will on the U.S. quite a paradox >> 58 ■ Casino & Gaming International
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our members undertake steps to prevent this. However, protection of children would be better accomplished through a robust programme of government licensing and regulation. The IGC will continue to accomplish as much as industry selfregulation permits in an endeavour to prevent underage gambling, but we again call on legislators to recognise that government regulation, and not futile attempts at prohibition, is the means to achieve this critical objective.
resources to preventing minors from gambling. Obviously, the physical presence of illegal minors helps to facilitate their identification. Yet, even with the opportunity presented by the physical presence of minors, no gaming jurisdiction is 100 percent effective in keeping minors from gambling. By contrast, many tools, including data cross-checks and age verification software, are currently available for use with efforts to exclude minors from participating in gambling online. The IGC contends that stringent computerised screening mechanisms implemented by Internet gambling operators, and monitored by regulators, will be more effective than existing measures used by land-based casinos in preventing most minors from gambling. With new technologies, there is the need and the opportunity for a stringent registration process for players wishing to participate in online gambling. Coupled with this should be equally stringent verification procedures for each time a person wishes to participate in any form of gambling. New technologies actually provide regulators with tools not previously available in most traditional forms of gambling, including the ability to provide an audit trail for each transaction; enforce maximum wagering limits, either for individual bets or total bets over a designated period of time; and to block participation by specified players or classes of players, such as college athletes. We take seriously the issue of gambling by minors, and
MONEY LAUNDERING Law enforcement personnel often worry that casinos and sports books provide opportunities for criminals to launder money. But in a submission to the Financial Action Task Force (FATF), the IGC pointed out that online gambling, with a combination of regulatory oversight and use of technology, while facing the same threats as real-world gambling facilities, is in a better position to address these risks. The FATF, based in Paris, is an international organisation devoted to combating money laundering. The IGC in its written testimony argued that stringent player registration and ongoing verification processes for online gambling, in conjunction with the appropriate regulatory oversight and banking regulations, can more than satisfy the “know your customer” requirement that underpins any fight against money laundering. Combined with the advanced computer technology that’s available to website operators, this acts as a strong deterrent to money launderers. With software technology tools, online gambling operations can scrutinise “inconsistent” behaviour, capture and report the transaction, and freeze the funds pending investigation. Cash transaction and suspicious transaction reporting as well as appropriate AML training should also be a critical component to online gambling regulation. While there have been no documented cases that legal online gambling sites have laundered money, vigilance is needed. The concern is not so much with the money coming in to an online casino or sportsbook, but with the money going out. IGC members have policies that prevent transfers of funds (winnings or return of deposits) to parties other than the individual who originated the transaction. Operators can’t let players tell the casino to send checks or wire money all over the place. Money must go only to the player who registered at the site and did the betting. It is also best if the money goes back the same way it came in. In other words, if a player starts playing on a credit card deposit, it is best if any winnings are credited to the same credit card. Unfortunately, most U.S. credit card issuers won’t permit that and where this is permitted credit card use is restricted in terms of how much can be paid back directly to a card. The ultimate weapon against money laundering, the IGC believes, is government regulation of the online gaming industry, ensuring that the industry is subject to the same regulatory requirements as regulated land-based gaming organisations. As part of its commitment to licensed and highly regulated interactive gaming, the IGC stands ready to work with any government organisation. In addition to its submission to the FATF, IGC representatives have met with Casino & Gaming International ■ 59
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officials from the U.S. Federal Trade Commission to discuss common concerns about preventing minors from gambling online. The IGC has drafted a regulatory position paper that it has forwarded to various regulators and policy makers including the International Association of Gaming Regulators. THE NEED FOR GOVERNMENT REGULATION The most recent important developments for the online gambling industry include the United Kingdom gambling reform legislation and the final decision of the World Trade Organization regarding Antigua’s complaint that the U.S. prohibition of Internet gambling violates U.S. commitments under the General Agreement on Trade in Services. The reform of the UK’s antiquated collection of gambling laws, the Gambling Bill was passed on 7 April 2005, included provisions for licensing and regulating remote (interactive) gambling, including Internet casinos, sportsbooks, betting exchanges and poker. The law creates a powerful new Gambling Commission that will have the authority to ensure that licensed remote gambling businesses are operated fairly. The Commission will also be charged with ensuring that criminal activity such as money laundering is prevented, and that players are protected by harm minimisation measures, not the least of which are blocking minors from gambling at these sites and mitigating problem gambling. This long-awaited reform in the UK is a huge step forward for the cause of regulated remote gambling. After almost ten years a first world government, one that has successfully regulated terrestrial gambling for years, is taking responsibility for the regulation of this rapidly growing form of gambling. Rather than opposing the industry, as is the U.S. approach, or pretending it will go away, the British are stepping up to the challenge of regulation. The UK will be setting an example of how this industry can be properly regulated so that consumers can be protected and society’s interests can be served. Our members want to be licensed, regulated and taxed just as the mainstream gaming industry is in most countries. Other jurisdictions in the region such as Alderney, Isle of Man, Malta and Gibraltar are also leading the way in promoting a responsible, regulated industry. In the U.S., not only does an often-proposed online gambling prohibition bill intrude on the rights of states to regulate gaming, often establishing financial institutions as Internet police, it abdicates the duty of government to regulate gaming for the protection of citizens and the potential to earn revenue from legitimate businesses. For eight years, anti-gaming legislators in the U.S. Congress have tried using various mechanisms to prohibit online gaming, from making it the responsibility of Internet Service Providers to anointing the U.S. financial services industry as the Internet police to threatening large media companies with potential charges of aiding and abetting a crime for airing online gaming advertisements. During this last session of U.S. Congress, the 108th Congress, Sen. Kyl and his allies has come closer than ever before in his quixotic quest to prohibit offshore online gaming. At the same time, he has criticised the World Trade 62 ■ Casino & Gaming International
Organisation for what he calls an attempt to impose another entity’s will on the U.S. – quite a paradox. The House of Representatives passed the Unlawful Internet Gambling Funding Prohibition Act and the Senate Banking Committee approved a similar bill that Kyl introduced. But the full Senate was busy working on other issues and did not act on the Kyl bill. Internet gambling is a difficult and complex policy issue. The simple solution is to make Internet gaming illegal, and hope that it stops. However, if governments want to provide protection for the consumer, then the answer is regulation. Present U.S. policy not only fails to protect U.S. citizens, it prevents U.S. companies – including some of the world’s largest and most respected gaming companies – from any involvement in interactive gaming, while permitting them to open land-based mega-complexes in the casino enclave of Macau. If governments refuse to regulate this form of gambling and refuse to let responsible companies participate, they create opportunities for unethical, unsavoury operators. The Interactive Gaming Council was created in November 1996 as an affiliate of the Washington DC-based Interactive Services Association and is currently incorporated in Canada with its head office in Vancouver. Members are operators of Internet gaming sites, software suppliers, portals, ecommerce providers, processors of financial transactions, marketing and advertising companies, information-providers and other companies related to this industry.
MARK STONE, RICK SMITH & KEITH FURLONG Mark Stone, a lawyer and the chief financial officer of Creative Edge Enterprises (California) is chair of the Interactive Gaming Council. Mark has more than 24 years of legal counsel and administrative corporate management experience. Rick Smith joined the IGC as the Executive Director in March, 2000 prior to which he served as a regulator in Queensland, Australia and New Zealand. He has extensive experience with both land-based and online gambling, managing regulatory resources with the introduction of casinos in NZ and drafting the first comprehensive piece of interactive gambling specific legislation (in Queensland). Keith Furlong joined the IGC in January 2000 and serves as deputy director. He is Vice-President of the Catania Consulting Group, Inc., a New Jersey-based gaming consultancy and lobbying firm. He is a former Public Information Officer and Legislative Liaison with the New Jersey Division of Gaming Enforcement. The Interactive Gaming Council, www.igcouncil.org
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THE GOLDEN ERA OF BROADBAND GAMBLING BY GEORGE M MANGION
Some may well ask what the potential of mobile games is in this age of vastly changing technology. The answer is not easy to give as most of the industrialised countries are converging on third generation broadband platforms. The possibilities of improved performance over mobile phones is shrouded by sales pitch and hype surrounding the performance of 3G handsets which, for the past year, retailers have used in order to entice users to upgrade their equipment.
ecently, two UK companies developed a secure mobile casino system that will run on any mobile phone. This system is codenamed Spin3. In Malta this provides a wireless casino system ideal for casino operators, mobile network providers and any company with an internet presence. This technology can now offer a secure mobile casino via a large selection of mobile phones and other wireless devices. Without a doubt, mobile entertainment is a newly emerging and fast developing sector and one that mobile operators, as well as content suppliers, are to some extent pinning their future hopes on. Evidence of this success story is that global mobile phone shipments rose to 703 million units in 2004, up 23.3 percent from 570 million in 2003. Analysts are raising their forecasts - 750,000 mobile phone sales seem likely for 2005. In raw figures, that’s an extra one mobile phone for 10% of the planet’s population. Of course, a lot of this growth is the upgrade or replacement market for phones, but this still appears to be adding to a high global penetration rate. In technologically advanced countries, it appears that
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replaced phones are being passed down to children. Now that all teenagers in technologically-advanced nations have mobile phones, the market is getting ever younger. Within this area, playing games on mobile devices is considered one of the most popular activities, and already shows signs of rapid and lucrative growth. Certainly, mobile services are likely to grow to become an astronomically successful form of revenue generation. One of the reports by Juniper Research revealed that at the end of 2004, the total market for mobile games was worth around $3.1bn. However, this figure is expected to rise sharply over the next five years, approaching $18.5bn by 2009. These reports claim that the majority of this revenue will be derived from downloadable games, and a sizeable amount will be derived from game rental to online multiplayer games. Geographically we note that mobile games are propitious in Asia. Estimates show that in Japan and Korea alone, mobile game revenues exceeded $1bn in 2003 and in 2004 Asia as a whole accounts for around 58% of the total mobile games market. By 2009, there is expected to be substantial growth in revenues from the Chinese and Indian markets. The North America market, which currently accounts for just 14% of the total market, should increase nearly tenfold over the next five years to more than $4.1bn or 22% of the total. The widespread adoption of broadband access over the last few years has made the provisioning of broadband based added value services economically viable. Malta is also quietly emerging as a rising star in the Mediterranean allowing high quality regulation of remote gaming opportunities. All this is attracting more compelling arguments for the egaming industry. A start-up in mobile gaming is estimated to generate $40 million a year. The spin-offs would be huge too. Most transactions are by credit-card, which would mean much more business for banks. An e-gaming magazine recently reported that Malta, as an EU member, is expected to be among the top choices for bona fide operators wanting to relocate their business following the latest impositions of the UK Gaming Act. British regulations require gaming servers to be located onshore, but the lack of a clear regulatory or tax picture makes Casino & Gaming International â– 65
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>> Geographically we note that mobile games are propitious in Asia. Estimates show that in Japan and Korea alone, mobile game revenues exceeded $1bn in 2003 and in 2004 Asia as a whole accounts for around 58% of the total mobile games market >>
it unlikely that many will consider moving their servers back there. According to e-Gaming Review, the online journal, this means that the UK could lose several high-profile e-gaming names, which would be forced to relocate to Malta, the only other licensed EU gaming domicile. Malta cannot rest on its laurels. Estonia, for example, has already indicated that it is thinking of fighting for its share of this market, but it would take it two years to catch up with Malta. Latvia has already emerged as a competitor. With proper regulation and a hassle-free application process, Malta can attract massive investment that will lead to job creation, particularly in the online gaming cyberworld. It goes without saying that the opportunities in each alternative jurisdiction depends on many factors. Operators of mobile gambling enterprises should ask about what each jurisdiction can really provide by way of credit card processing, corporate taxes, player fund protection, fair game regulation, compliance costs for software engines, and office and residential costs, apart from considering travel times and airline schedules. Can profits be repatriated without paying withholding taxes on dividends to outside shareholders? Are working permits mired in red tape and unnecessary bureaucracy? Can you find technical support and back-up facilities when the bandwidth is squeezed over the weekend as usage soars? But what is the tempo of the anticipated growth in gambling industry? Let us visit the scene in Britain. In Malta we notice that surveys of gambling spending show over 80% of that is down to heavy gamblers. On the other hand, the traditional methods of gambling such as casino gaming, betting on sports events and playing lottery games are increasingly being augmented with electronic forms of gambling, most notably using the Internet where casino services and betting services are already generating substantial revenues. The industry is planning the next progression in this process which is to transfer these and similar services to the mobile handset. The widespread adoption of broadband access over the last few years has made the provisioning of broadband based added value services economically viable. An authoritative report has examined the growing market opportunity for these services and how each of the key areas will develop. In practice users would normally register by posting an account separate from the mobile device.This account can be replenished either by vouchers, similar to prepay mobiles or by credit/debit card over a fixed line phone. But what can be the social dangers of allowing minors an unchallenged access to gaming over the mobiles? There have been a number of studies tracing the paths that lead to compulsive gambling traits, particularly among teenagers. In 66 ■ Casino & Gaming International
a multiple of occasions one notes that the emphasis on earning quick money is a powerful contributing factor to the development of a gambling addiction. Of course, among teenage first time mobile gambling addicts, one notes other contributing factors such as personality characteristics and environment apart from the family’s focus on money matters. Many observations have been made by researchers on this type of addiction and the common trend among compulsive “mobile” gamblers are withdrawal symptoms such as headaches, restlessness, stomach discomfort and impulsivity of thoughts and actions. The implication of all this is that for a small percentage of the teenage gamblers one has to be extra careful that adequate regulation is in place. In Malta national regulators are keen to make sure that operators ensure that sufficiently robust authentication is in place to prove that applicants are of legally eligible age. Regrettably, recent studies reveal how easy it is to steal a person’s identity and all their passwords. Identity theft and crimes resulting from obtaining passwords to get at information held on corporate networks or into a personal account has never been greater. Given that most people can only remember the PIN number of one of their credit cards, and most don’t bother with the PIN on their mobile phone. The writing down of PINs and passwords will continue to be common practice. Password corruption and fatigue will account for more and more fraud we will begin to see more sectors and companies taking on cheaper, more reliable and secure technology such as fingerprint biometrics. One of the problems regulators face is how to regulate gambling on an international scale to ensure that the gambling addicts of the world are not exploited. That won’t be easy with so many European governments now heavily dependent on gambling taxes. These problems and other issues will be explored by the panel of speakers at the forthcoming conference to be held at Crowne Plaza Hotel in Brussels. GEORGE M. MANGION George M. Mangion is a partner in PKF Malta, a business advisory firm. Web: gmm@pkfmalta.com On behalf of PKF Online Services, George has been invited to join a number of experts at the next conference on mobile gaming. The event is hosted by Informa, a specialist in broadband m-commerce which has pioneered a 3-day conference in Brussels starting on 25th October at the Crowne Plaza.
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INTERACTIVE MERGER BOOSTS OBJECTIVES BY CLIVE HAWKSWOOD
Consolidation seems to be the name of the game as the remote gambling industry matures and so it should have surprised no one that two of the trade associations representing this sector decided during the Summer to merge. On 1 August, ARGO (the Association of Remote Gambling Operators) and iGGBA (the interactive Gaming, Gambling & Betting Association) joined together to become the RGA (the Remote Gambling Association). I was pleased to move from being ARGO’s General Secretary to becoming Chief Executive of the RGA and our first chairman is Nick Rust, Director of Betting and Gaming at Sky. Wes Himes who was previously at iGGBA will lead on European Union issues and management of our affiliate programme. The RGA is now the largest remote gambling trade association in the world and will combine the strengths of ARGO and iGGBA to provide the industry with a strong voice on issues of importance to regulators, legislators and other decision makers. The need to have a clear focus for the industry has never been greater as this newest form of gambling establishes itself as a legitimate mainstream leisure activity. Membership will be open to all operators and software suppliers who are licensed for gambling purposes and operational in the EEA countries, the Channel Islands or the Isle of Man. This does not mean that all of a member’s business must be located within these jurisdictions and it is common for them to also have parts of their operations in the Caribbean or elsewhere. In addition to membership, there is an affiliate programme for those who are involved with the industry but who are not operators or software suppliers themselves. The RGA’s aims will still centre around gaining acceptance for the industry, the adoption by governments and their agents of reasonable regulatory and taxation regimes, and the removal of unjustified trade barriers. In the short term this will mean continuing to work closely with the British Gambling Commission because, even if few remote gambling companies eventually locate to the UK, its regulations are likely to provide a template for other reputable jurisdictions and so we need to ensure that reasonable benchmarks are put in place. In the longer term more and more jurisdictions will open up to this form of gambling and wherever RGA members have an interest we are likely to become involved. On top of that we will provide a forum for the industry to stand together and, where appropriate, to act together. Groups of members, co-ordinated through the RGA, are already contesting legal action brought against them in France, Belgium and Spain. This ability and willingness to pool resources puts them in a strong position to contest any legal proceedings that arise. On the cases so far we have made clear from the outset that settlements will not be considered and that where points of principle are concerned we will see the cases through to the highest courts if necessary. In terms of resources, the RGA will have significantly more at its disposal than either ARGO or iGGBA previously had. This will enable us to be more proactive in several areas and to become increasingly involved in international issues that are of importance to our members. As ever, our priorities will be driven by their needs, but one of our first official actions is for the new association to agree and implement its own policies and codes of practice. For example, by the end of September we expect to have in place a social responsibility code and, linked to that, a code on the age verification of customers. If this all sounds rather familiar it is because ARGO and iGGBA had already identified the main objectives for the industry. The real benefit of the RGA’s establishment is that it better equips us to achieve those objectives. The remote gambling industry is growing rapidly to the extent that even those within the sector are sometimes surprised. It is now past the stage where it can be dismissed as some quirky five minute wonder. Like it or not, remote gambling is here to stay and in all the fights that inevitably lay ahead the RGA will be well placed to ensure that the industry punches its weight.
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AN EYE FOR THE FUTURE OF REMOTE GAMING BY CLIVE HAWKSWOOD
Remote gambling, irrespective of whether it takes place via the Internet, interactive television, mobile phone or some other new media, is still in its infancy compared to traditional forms of gambling, but on some estimates it could grab 25% of the world gambling market by 2012. At first sight that might seem incredible until we look back at how far and fast the industry has grown in the last few years. Even though the international nature of the business means that reliable data is hard to come by, there is no doubt that there are millions of regular customers generating billions of dollars in turnover.
ith an eye on the future, as Internet penetration increases and new generations of mobile communications are rolled out, the markets are guaranteed to grow both numerically and geographically. We can also be sure that aggressive marketing campaigns and an ever more diverse range of products will accelerate that process and bring gambling to completely new audiences. There is clearly a lot at stake and as we know from bitter
W
experience there are numerous governments, regulators and competitors that for differing reasons want to prevent this level of growth or at least slow it down as much as possible. It is inevitable that they will continue to put as many barriers in the way as they can. It is only by working together that the industry can effectively counter the efforts of the anti-remote gambling brigade and that is where trade associations such as the Association of Remote Gambling Operators (ARGO) come in [now the RGA (see panel left)]. ARGO is probably the newest association in this field having been established in 2004 and, as the name suggests, its membership is comprised solely of gambling operators and it exists purely for the purpose of pursuing the issues that are most important to them. Our membership is currently restricted to companies that are operational and licensed for gambling purposes somewhere in the European Economic Area. We have around 18 members at the moment. All offer remote gaming via online casinos or poker, and most also have sportsbooks. They include all of the major British bookmakers, plus purely online gaming brands such as PartyGaming. The full list and other information about ARGO are available on our website, argo.org.uk. Every year seems to be trumpeted as a major one for the remote gambling industry and that may well be justified because there is always some major new development, but safe to say we have had a busy time. In the UK the Gambling Bill was introduced in 2004 and became law as the Gambling Act in 2005. It was principally an overhaul of outdated legislation, but the fact that it provided
>> Since the outset of online casinos the United States has provided the lion’s share of the market and, although that balance is slowly shifting, its importance is always going to be huge. Some of our members are already working actively to persuade the federal government to change its policies. That campaign will only intensify until a rational debate can be had >>
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for a specific licence category of ‘remote gambling operator’ was a milestone for the industry worldwide. It remains to be seen whether, as Government Ministers hoped, that Britain will become a world leader in remote gambling. That is dependent on the detailed regulation and the tax regime, neither of which have been agreed yet, but we should not underestimate the message that it sends to other legislators and regulators when a G7 nation opts so strongly to go down the road of regulation rather than prohibition. If we had to pick one achievement above others from our first year of operation it would be getting the British Government to revise key parts of the Bill so that the framework for the new remote gambling regime is one that we can work within. In particular this meant: ■ persuading them to have clearer and less wide-ranging definitions of the remote gambling equipment which, if situated in Britain, would call for an operator to hold a remote gambling licence; and ■ crucially, showing how the new regulator, the Gambling Commission, could properly regulate operators even if all of their remote gambling equipment was not located in Britain. As a result of this at the eleventh hour an amendment was made (now Section 89 of the Gambling Act 2005) which gave the Gambling Commission discretion to waive the requirement to have certain equipment physically in the country. This degree of flexibility would have been helpful in any circumstances but its practical value is that it leaves open the door for British-based gaming operators to be involved with poker networks which are hosted in other jurisdictions. Even those that do not follow trends in remote gambling will know of the spectacular success enjoyed by online poker. And that is based on liquidity and being able to offer games 24 hours a day. Most operators do not have a sufficient customer base do to that on their own and therefore must be able to pool their customers via third parties who provide the poker rooms. This usually relies on servers based in other jurisdictions and is now such an important part of the product mix that no serious online gaming provider could afford not to offer it. In other words if the British legislation had not provided for this then hardly any operators would have been able to even consider the UK as a base in the years ahead. In the circumstances we were very grateful for the pragmatic approach adopted by the British Government and the existing regulator, the Gaming Board. The concessions were not made as a result of a public lobbying campaign or in the interests of political expediency. They were made because we were dealing with Government Ministers and officials who were willing to view the arguments objectively. It was a refreshing change from the approach adopted in some countries, most notably the United States. With the legislation behind us our focus has changed to the detail of regulation and taxation because all three of these factors need to be right if Britain is to become the destination of choice for the major players. The embryonic Gambling Commission is starting to take shape. It will be relocating to Birmingham and in the meantime a transition team is operating out of the Gaming 70 ■ Casino & Gaming International
Board’s HQ in London. Work has been underway for some time on management questions like the structure of the new regulator (which will subsume the Gaming Board), its staffing requirements, and how it will relate to the many stakeholders involved. The Commission’s primary regulatory tools will be conditions attached to licences and codes of practice which set out exactly what will be expected. It is encouraging that the transition team has given priority to the production of codes of practice, for example about social responsibility. ARGO already has a voluntary code for members covering measures to combat problem gambling and a requirement to have age verification procedures so that we do all that is reasonably possible to prevent children from gambling. We have had productive meetings with them to discuss this and other matters and a programme of additional meetings is already in place. A positive step has been their decision to have a dedicated unit in the new Gambling Commission to deal with all remote gambling issues. We believe this must be the right stance to take and have been asked to suggest what skills this new team will require and, when it is being formed, to have some input to its training. Britain has a tradition of firm gambling regulation and there is no doubt this will continue. We take it for granted that there will be some friction at times between the regulator and those it regulates, but the collaborative approach they have taken to date is very heartening. On the taxation front we have a different type of battle on our hands. Her Majesty’s Treasury is not known for being a soft touch and we have had to get an independent economic report produced to get them to even consider the possibility of what we would see as a sensible remote gambling tax rate. The problem is that we are seeking something much lower than that which has ever been applied to bricks and mortar gambling businesses. However, the competitive international nature of the business is such that the comparison should be with existing reputable jurisdictions where gambling duty is routinely in the range of 0-2% of gross profits and not, for instance, with land-based casinos.
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Although we appreciate that HM Treasury has to balance competing interests, we have a strong case and will continue to argue it vigorously in the months to come. We anticipate that we will discover the outcome of their deliberations when the Government’s next budget is announced in March 2006. In the European Union the state gambling monopolies, especially the lottery operators, have expended years of time, money and effort to protect what they have. They have strong support in the European Parliament and in most Member States where it is common for governments to benefit directly and indirectly from their activities. We face no easy task in overcoming their entrenched positions and this is underlined by their unwillingness to follow the spirit of successive European Court of Justice rulings, such as the famous Gambelli case, and bring their gambling laws into line with European law. The foundation of our case is that under the EU Treaty businesses in Member States have a fundamental right to provide cross-border services. There are accepted justifications for placing barriers in the way and we would not query their legitimacy. The problem is that those justifications are based on public interest reasons for restricting access to gambling opportunities. Those reasons include the obvious ones like protecting the consumer, preventing problem gambling, and combating criminality. Unfortunately for them, in the vast majority of cases their reasons do not stand up to scrutiny. For example, the controls on privately owned British bookmakers are already up to the standards of those of public monopolies in other EU Member States and they certainly offer better value to the consumer. As for restricting gambling opportunities, this is the height of double standards when government-backed operators in countries like the Netherlands already provide a full spectrum of types of gambling which are backed up by extensive advertising campaigns. In short, we have concluded that in most cases the trade barriers that are being imposed are driven by protectionist motives rather than public interest ones. To highlight this we published a report in March called ‘Fair, Honest & Safe’ which set out as plainly as we could why European law was generally on our side. It helped to stimulate the debate and the media coverage forced some key opinion formers to confront the issues. That was the start of our campaign to put increasing pressure on Member States to justify their actions. We will continue to explore all avenues to do that and have forged alliances with two other like-minded trade associations, IGGBA and the European Betting Association, so that we can co-ordinate our efforts and present a united front. Running alongside this a number of ARGO members are also involved in related legal proceedings in several European countries. We have to accept that there will be no easy wins here and we know we have to be prepared to be in this for the long haul. The prize of a fully accessible EU market is worth that sort of effort. It is a question of when rather than if the barriers will come down. As much as we might like it there is no short term solution, but we will get there and our cause
will be helped by the willingness of jurisdictions in the EU to licence and regulate this popular leisure pursuit. Those jurisdictions are a small minority (most operators are in the UK, Gibraltar or Malta), but there are signs that others will follow, most probably from among the newer Member States further east. As and when the European markets open up, it will become increasingly critical to be licensed in an EU Member State in order to benefit. It is at that stage when some of the existing jurisdictions that are outside of the EU might really start to feel the pinch. Our focus has been on the EU because, while it may not sound like it sometimes, that is where we have most leverage and our legal position is strongest. It does not mean that we will ignore it when similar issues arise elsewhere and it seems only a matter of time before our members turn their attention to the United States and other potential markets. Since the outset of online casinos the United States has provided the lion’s share of the market and, although that balance is slowly shifting, its importance is always going to be huge. Some of our members are already working actively to persuade the federal government to change its policies. That campaign will only intensify until a rational debate can be had. Overall, the remote gambling industry faces uncertainty in any number of areas, but that is nothing new. It has thrived despite that in the past and will continue to do so. The remote gambling industry has proved itself to be adept at overcoming challenges and grasping opportunities. Remote gambling has already been embraced and accepted by the consumer; as the UK has shown, governments and regulators will increasingly follow suit.
CLIVE HAWKSWOOD Clive Hawkswood is the first General Secretary of the Association of Remote Gambling Operators (ARGO) which was established in 2004. Membership is open to any type of remote gambling operator as long as they are licensed and operational in some capacity within the European Economic Area. All of its members operate online casinos and most, including the larger British bookmaking companies, also have extensive remote betting businesses. On 1st August 2005 ARGO and iGGBA merged and Clive became the Chief Executive of the new Remote Gambling Association (RGA). Prior to joining ARGO in August 2004, Clive was head of the Betting & Racing Branch at the British Department for Culture, Media & Sport (DCMS), where, amongst other things, he was closely involved with the development of the Government’s policies on gambling. Before that he was at the Home Office, spending time in both the Gambling Section and the Horseracing Policy Team. Earlier in his career he also spent several years working in the bookmaking industry.
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CREATING A NEW INTERACTIVE DYNAMIC BY WES HIMES
One of the fastest rising pieces of content provision on the Internet is remote gambling. Remote gambling is a term used in UK legislation
of which mobile casino style betting would be around $6 billion, mobile lotteries slightly more than $5 billion and mobile sports and other betting nearly $5 billion. Another study revealed that by 2009, mobile gambling services will generate revenues of more than $19.3bn or more importantly nearly one-third of all mobile entertainment revenues.
to refer to online, iTV and mobile gambling and cuts across the main sectors such as traditional casino type games (poker, blackjack, roulette), betting (sports, P2P), gaming (slots), fun and skill games (bingo) and lotteries. The growth of the industry has been phenomenal.
n 2002, the global online gambling industry produced revenues of $4.6 billion, and is predicted to be worth more than $125 billion by 2015. This year the total revenue from online gambling is estimated at $9 billion. Compared to the traditional gambling sector, it was estimated in the UK that in 2002 the online gambling sector made up 2% of the £42 billion in UK gambling revenue or roughly about £840 million pounds. However, in 2004, it was estimated to be close to 10% of the gambling market of £55 billion or around £5.5 billion. This figure is probably far too high an estimate, but reflects a growing trend towards double digit growth and increased market share of total gambling spend. Looking at the specific segment of iTV, it is estimated that the total interactive television (iTV) betting, gaming and lottery market (BG&L) will generate 4.1b a year by 2007, providing operators with a gross margin (once winnings are paid out) of 709.1m. Within this segment, betting on sports and horseracing events will be the largest contributing channel, with almost 1.6bn annual turnover by 2007 while casino style applications will generate 1.4bn in revenues by 2007. The mobile segment, which is even more alluring to investors and companies alike, is estimated to generate around $5.7 billion by 2006. Of this, casino games are estimated to bring in $0.9bn, lotteries and competitions around $2.8bn and betting close to $2.0bn. Worldwide revenues for all forms of gambling on mobile phones could reach $16 billion by 2008
I
IGGBA FORMATION AND MISSION These figures are staggering in their magnitude and propensity for growth. The distinct nature of this market in relation to its traditional offline brethren is why iGGBA was formed. In 2001 the Budd Report was in the process of paving the way for major reform of outdated UK gambling legislation. At that time a retinue of forward looking operators, some from the offline space and some solely focused on the remote gambling side, decided to form iGGBA to parallel the developments in the UK and Europe, as EU laws impinged upon various aspects of the remote gambling industry (data protection and money laundering to name two such issues). Our mission statement at the time mirrors the three licensing objectives ultimately adopted by UK Government, namely providing the customer a crime free environment, being socially responsible to problem gambling and the under-aged, and establishing fairness and probity in the industry. iGGBA has over 50 members today and is drawn from a wide spectrum of the industry. It membership includes operators and software/operator suppliers as well as indirect stakeholders such as third party payment, age verification and legal firms. One of the two main items tackled in the early years of the Association was a social responsibility code and a regulatory compliance project. The social responsibility Code was agreed between iGGBA and GamCare, the leading social responsibility charity in the UK. The fifty-point plan has been noted as one of the foremost Codes of Conduct anywhere in the world. It gives operators and other suppliers an excellent roadmap on how to create a socially responsible business. It includes items such as reality checks for rapid play games, customer imposed limits and education and training for company staff to help identify both potentially fraudulent and problem gambling. The other major effort was to develop, from scratch, a proposal for a regulatory framework for which to underpin the Casino & Gaming International ■ 73
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industry. This framework is constantly evolving and delves deep into issues such as advertising, age identification systems, testing of components, payment systems and change control. This effort has had several iterations, namely in reaction to discussions with the Gaming Board and internal review by iGGBA members. The ultimate adoption of the UK Gambling Act in April 2005 is only the first step in a long road to get a viable UK remote gambling licence. Speaking at a recent iGGBA event, Jenny Williams, Chief Executive of the Gaming Board, rightly pointed out that the Act provided the framework, but the licensing conditions and rules will require a even more intensive period of activity if the remote gambling licences are to be provided in as short as time as possible. RELATIONSHIP WITH THE GAMING BOARD The key to all this will be the organic and dynamic relationship enjoyed between the industry and the Gaming Board, soon to become the future Gambling Commission in autumn 2005. The Gambling Commission will have several new aspects, for instance a broader scope that brings bookmakers under its wing, but the most important new responsibility of the Gambling Commission is that it is now a policy-making body. It will be the duty of the Gambling Commission to interpret the act and convert the spirit of the Act’s clauses into defined regulation, either as part of the licensing conditions or within the Codes or both. While the old 1960 Acts governing the industry left little room for the Gambling Commission to adapt regulations in light of recent developments, like Internet gambling, the new Act deliberately transfers much of the rule making authority to the Gambling Commission. Engaged with the Gaming Board since January 2002, iGGBA regularly meets on important aspects of the regulation. This relationship helps underpin the dynamic between the industry and the Gaming Board. It will be left to the Gambling Commission to create a culture of flexibility which reacts with changes in the marketplace. This flexibility has two components – one to developments in the marketplace and one to developments in a companies offering. As to developments in the marketplace, technology is continually outpacing rules and regulations for the industry. Let’s take, for instance, payment methods. The Act clearly states that the deposit, bet and win/lose transactions of a player must be stored by the operator. But what if a mobile operator chose to handle all billing even on its partner sites? Would this obligate the mobile operator to obtain a gambling operators licence? This example may be extreme, but as the nature of the business models in the industry come up against the legal requirements in the Act the Gambling Commission must adapt and become more flexible. To address this reality, clause 89 now allows the Gambling Commission to take its own judgement into account when an example like the above emerges. Many of the smaller jurisdictions have this flexibility due to the short legislative cycles or supervisor’s discretion in changing regulations. If it cannot offer the same flexibility, the Gambling Commission will be at a distinct disadvantage. Ensuring that there is the appropriate skill set within the Commission, or at least a system of acquiring technical 74 ■ Casino & Gaming International
expertise when needed, is a third element of the new legislation. Although many of the system testing features may be seconded to certified testing houses, the regulator will need to be proficient enough to understand the effect of regulation on the market and inconsistencies between rules and technical limits. The laundry list of technical skills is quite long ranging from a knowledge of operating systems, change control, security measures, payment systems, infrastructure and different remote platforms such as mobile, iTV and online. Many of these areas will require a risk assessment of the component and then be factored into the skill set required within the Gambling Commission. For example, let’s say one was to change the currency graphic. Would such a change require Commission regulation on a pre-approval or positive approval basis? If it was judged to be risky, would that require someone in-house to have knowledge of the system? If not in-house, would the Commission rely on testing houses or industry to bring them “up-to-speed” on the consequence of such a change? There are both shortcomings and advantages in all of these situations which often points to the Commission being able to handle each instance on a case by case basis. But does that compromise the ability to have a level playing field? In order to fulfil its mission, the Commission needs to be able to answer these deep rooted questions. ISSUES MOVING FORWARD: The way the Gambling Commission approaches some of the broad themes will have a direct impact on the issues that remain outstanding to the industry and will determine whether a UK licence is viable. Several key issues need to be resolved in due course, most likely by the Autumn of 2005 when the Gaming Board releases draft Codes for consideration. These include age identification criteria, advertising structure (form, content, placement), testing requirements (based on risk analysis), change control, personal licences, probity checks, fraud prevention and the approach to compliance and enforcement. A. Cross – border concerns Any remote gambling article must include cross-border issues which have come to predominate the conference circuit in the recent past. At the very moment that the UK Gambling Bill was being adopted, the WTO delivered a decision in favour of the island of Antigua which, in essence, said that the United States was violating its WTO obligations by denying Antiguan online casinos access to the US market. The decision has paved the way for other jurisdictions to challenge the US. Reacting to this, Senator Kyl has introduced a Bill in this Congress to prevent the use of all financial transactions for online gambling purposes. This Bill would not only prevent offshore operators from providing online gambling into the US, it would also ban all existing online gambling in the States, including online horse race betting in eleven states. The prognosis for this Bill is that it has no future unless the Administration puts its weight behind the effort. However the UK Gambling Bill has created a new dynamic. The basis of the UK Act which stipulates that all betting and gambling transactions take place in the country for UK licensees is one of the key matters directly related to
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the recent WTO decision. The United States Department of Justice has stated its position that the transactions take place both where the customer is based and where the operator is located. The question for the future will be whether the US government is willing to take on the UK in preventing access to US citizens from UK licensed operators. Although the UK Culture Secretary does have the authority to ban UK licensees from taking US gambling transactions, at the moment there has been little evidence of this actually taking place. It is held in a reserve power that can be exercised at the discretion of the Minister. For instance, if a UK licencee is found to be taking a bet from a minor in the United States, this may result in the withdrawal of all US bets and gambling transactions for UK licencees. Recently, an article in The Economist provided an even more menacing concern – the extradition of management executives for supposed breach of US law. If the UK government is to provide assurance to the industry that it is protected by this provision in the legislation, it will have to back up their intended conviction on where the betting and gambling takes place. It is difficult to say whether a global consensus could arise on global regulation. The closest we have to any harmonising measure is a possible harmonising measure by the EU Commission following on from the Services Directive. The International Gaming Regulators Association is discussing global regulation, but the lack of agreement on anything more than principles has prevented the group from proceeding further. B. Advertising Another key issue is advertising, especially as customer acquisition costs rapidly increase. It is estimated that in the UK over four million people gamble online everyday – from lottery to poker. Therefore the ability to reach such a “gambling-mad” jurisdiction will be essential to increasing the customer database ands thus potential market share. In the UK there is a substantial amount of advertising being ramped up, particularly television sponsorship and public transport hubs and channels such as the Tube and major rail stations. There is little doubt that the Government, empowered by the Act, will impose secondary legislation on the form, content and placement of such advertisements in the future. This will have an impact on advertising reach. It may be that the advertising rules become less permissive today, as opposed to the thinking that the Act would open the door to increased advertising. There is also the issue of offshore operators advertising in the UK. The Act clearly states that offshore operators will not be able to advertise in the UK once the provision come into force. However, that restriction is limited to non EEA countries and jurisdictions not appearing on the Government’s white list. On the face if it, this makes jurisdictions like Malta seem appealing in the narrow advertising sense. Outside of the UK, the United States crackdown on US advertising channels is in constant flux. Recent inquiries against Yahoo, Esquire and others have had a chilling effect on these companies being able to take monies for advertising online gambling. However, companies like Bodog are constantly testing the boundaries of the Government’s tolerance for advertising and major players are cleverly
interfacing online gaming with customer promotion such as poker tournaments associated with ESPN. A final consideration is the effect of advertising on main stream channels in jurisdictions which have state monopolies or exclusive licences. Currently outside bodies are prevented from the same advertising, but there could be challenges in the future for outside gambling companies to advertise at the same level, once the protection of the monopoly itself is eliminated. C. Technology The other key area of concern is technology. Technology and regulation are often uncomfortable partners and remote gambling is no different. Two areas are of concern. The first is age identification. This requires a robust pool of accessible data for verifying date of birth. This pool simply does not exist in the form required to verify at a consistently high level the age of persons accessing the site. It gets even worse for any requirement to vet for age outside of the jurisdiction in which the operator is established. Therefore we may get into a situation where the risks of under-age gambling can not be tempered by technology, thereby leaving operators exposed to regulatory enforcement, repayment of losses and possible termination of a licence. Another key area is testing. There will be a wide ranging debate on the methodology of a risk assessment to determine what parts of an operators system need to be tested. This may, in turn, raise requirements levels for compliance. Such rises would have to be met with mechanisms in the market that would meet the requirement levels, but would these be viable? D. Tax The last issue is tax. There already exist a range of tax schemes in licensing jurisdictions across the world. The UK tax scheme for remote gambling is unknown, although industry sources have stated that anything above two percent would temper operator consideration of the UK as a licensing jurisdiction. There is a critical tipping point as the publication of a tax rate in the UK is not only about the issue of what tax to pay. If the UK licence becomes an empty shell because of the tax rates, then this will dampen the momentum that the Act has generated outside of the UK – mainly in the debate on the EU Services Directive and the US situation. SUMMARY: There is a long road ahead, but the Gambling Act and the WTO decision has once again highlighted the magnitude of this industry and its need for safe and proper regulation. There will be a number of market and regulatory changes which will determine the fate of many a market player and the hard work is still ahead. IGGBA is pursuing all these matters, working closely with our sister associations like ARGO. WES HIMES Former Director of Interactive Gaming, Gambling and Betting Association (IGGBA), 2001-2005, merged with ARGO to form the RGA
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REGIONAL FOCUS: ASIA
GLOBAL GROWTH AND THE CHINA FACTOR BY CATHY HSU
Casino and gaming industry activities in Asia can only be described as vibrant and exciting. The news and business sections of major Asian newspapers report on the casino industry on a daily basis, with most of the reports relating to new projects, expansion, and international investors and operators coming into the market.
n the past two years or so, we have seen Macao’s liberalisation of its casino industry by breaking up a 40-year casino monopoly, the Philippines’ effort to modernise its 55-year old casino industry by inviting international investment, Japan’s continued discussion of legalizing casinos, Singapore’s recent decision to build two resorts with casinos, and the Korean government’s approval to open new casinos in downtown Seoul. India and South Korea have recently opened their first casinos for their own nationals. Border casinos are flourishing in Cambodia, Laos and Myanmar. Most of Cambodia’s 20 or so casinos and Laos’ five casinos operate along the country’s border with Thailand, and
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>> According to a casino industry practitioner in Macao, “basically all Chinese have the gambling gene”. Chinese players have been and will continue to be an integral part of the global gaming industry >>
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cater almost exclusively to Thai patrons. Casinos in Myanmar are located either on the Chinese or Thai borders catering to cross-border visitors. The two licensed casinos in Vietnam both cater exclusively to foreigners. Other companies have discussed the development of casinos in conjunction with hotel projects, however, the Vietnamese government seems reluctant to approve any new casino projects in the foreseeable future. In addition to the two licensed casinos open to foreign customers, 5-star joint venture hotels are now
allowed to apply for licenses to operate slot rooms for foreign guests. Countries that have long resisted opening casinos, Japan, Thailand, and Taiwan, are debating the legalisation of casinos. The Tokyo Metropolitan Government and four other local prefectures have urged the central Japanese government to draw up legislation that would allow them to build casinos, which the local political leaders view as a key to boost tourism. A mid-May 2005 weekend raid on an illegal casino in
>> Having a presence in Asia can also help Western casinos market their other locations by utilising their brand equity and marketing network. Having a portfolio of casinos in different locations could further balance any negative effects on Western markets of the gaming development in Asia >>
78 â– Casino & Gaming International
REGIONAL FOCUS: ASIA
the red-light district of Tokyo arrested more than 70 people; the casino had a daily turnover of 20 million yen (approx. US$185,000). This further fueled casino lobbying activities. The Thai government has historically been opposed to gaming, but there appears to have been a recent change in public opinion due, primarily, to the emergence of casinos on Thailand’s borders with Cambodia, Myanmar and Laos. The outflow of huge sums from the local economy to these casinos, as well as traditional gambling destinations, such as Malaysia’s Genting Highlands, Macao and Australia, has become a major political issue. The discussion on legalisation of casinos on an outlying island in Taiwan has been raging for more than five years. Many pieces of the developable land on the Penghu Island have already been purchased by casino and resort operators. The reasons for legalising/liberalising/modernising casinos in Asia basically mirror those in Western countries, namely for tourism and economic development, for prevention of gaming dollar leakage to other countries, and for collecting gaming taxes from existing illegal gaming activities and better controlling illegal gaming activities that are mostly run by organized crime syndicates. For example, Singapore most recently ended its 40-year ban on casinos for economic and tourism development. It was estimated that Singaporeans spend about S$1.5 billion (approx. US$0.9 billion) in overseas casinos, such as in the Genting Highlands of Malaysia, casinos in Australia and Macao, and on cruises in international waters. The availability of casinos in Singapore could help stem the leakage of gaming expenses, even though the government stated that locals are not the primary market for the casinos. Casinos are not allowed to extend credit to residents, and there will be a S$100 (US$60) daily or S$2,000 (US$1,200) annual charge for admission for residents. THE CHINA FACTOR Why is there such a rush to increase the supply of casino products? Where does the demand come from? In addition to the Thai and Singaporean players, there is an emergence of Chinese players. China’s economy has been growing at double digit rates for the past decade, with a parallel increase in personal income. In addition, urban residents’ income is considerably higher than the national average due to the widening income gap between urban and rural populations. The World Tourism Organisation (WTO) forecast that in the year 2020, China will be the world’s fourth largest tourist generating country, contributing 100 million visitor arrivals to the global travel market. Besides the economic reasons, the demand for casino games is embedded in the Chinese culture. Chinese historical data records betting on dice and Chinese chess matches dating back to around 300 B.C. According to a casino industry practitioner in Macao, “basically all Chinese have the gambling gene”. Chinese players have been and will continue to be an integral part of the global gaming industry. Las Vegas is a favorite destination for Chinese, with 85% of the high rollers that play in Las Vegas coming from China,
Taiwan, and Japan. Even though the volume of Japanese visiting Las Vegas is greater than the volume of Chinese visitors, the amount of money Chinese are willing to gamble is exorbitant. Statistics show that in Las Vegas, losses by Chinese have been extraordinary. Casino operators in Las Vegas reported that in recent years the number of Chinese gamblers has increased dramatically, probably because it has become easier for Chinese citizens traveling to the United States (U.S.) for business or conferences. According to tour operators, most of the Chinese visitors go to Las Vegas as part of their itinerary in the U.S. Popular as it is, casino gaming is illegal in mainland China partly because of the conflict between the very nature of gambling (e.g., there are winners and losers, and the gambling activities are considered as of little utility value) and the communism ideology, which encourages the sharing of resources and engaging in productive activities. However, researchers estimated that Chinese spent US$72 billion in foreign casinos last year, an increase of 50% from the US$48 billion in 1997, due to the rise in individual incomes and increasing ease of foreign travel. China’s policies on gaming have not been consistent over the past decade. The American-style casino resort was once approved in 1994 for Hainan Island as part of China’s economic diversification into global tourism. The Beijing government was keen to develop tourism and saw Hainan as a natural tropical destination for the Asian market. MGM Grand Inc. signed a letter of intent with the provincial government to explore the development of two resorts that would offer gambling as well as other entertainment. However, the project did not come to fruition. Prior to 2000, there were many gaming houses that were ‘not illegal,’ and there were more than 300 licensed gaming machine manufacturers producing slot machines and other game devices for domestic and international buyers. Even though those manufacturers were licensed, they can no longer produce gaming machines after the crackdown in 2000. There were estimated to be some 200 casinos in China’s neighboring countries, including Mongolia, Russia, North Korea, Myanmar, Laos, and Vietnam, catering to Chinese players and run by Chinese investors and operators. A good share of the players are entrepreneurs who made their billions in a short few years due to China’s explosive economic development as well as government and Communist Party officials who play with pubic funds or bribery money. To control the gambling activities of the latter group of players, the disciplinary commission of the Communist Party announced in November 2004 that any party members who went abroad to gamble would be dismissed from the party. A campaign against gambling, by cutting off banking services to the Chinese who ran those casinos and checking more closely on the people crossing the borders, launched in January 2005 forced the closure of some 80 casinos in those neighboring countries. The anti-gambling campaign has had little impact on casinos in Macao, which is a Special Administrative Region of China bordering mainland China. Beijing appeared to have by-passed Macao in its campaign to maintain Macao’s Casino & Gaming International ■ 79
REGIONAL FOCUS: ASIA
economic stability since the gaming industry contributes to more than half of its government revenue and employs more than one-third of its working population. The Individual Visit Scheme (IVS) was introduced in the summer of 2003, under which mainland Chinese residents in designated cities and provinces can travel to Hong Kong and Macao more easily as individual visitors. At the present time, 150 million mainland Chinese can travel to Macao as individual visitors, which means they do not need to take part in organized tours. In 2004, Macao, with a local population of half a million residents, welcomed a record number of 9.5 million mainland Chinese visitors. According to observers, approximately 70-80% of Macao casino visitors come from mainland China; and one of the casinos in Macao receives players from some 200 cross-border buses daily. Seeing such a huge potential market, investors from the U.S. have joined the bandwagon to participate in the building of the Macao Cotai Strip as Asia’s Las Vegas. Seven hotel chains, including the Four Seasons, Hilton, InterContinental, Marriot International, and Starwood, have backed a Macao development project and will team up with Venetian to build a US$3.5 billion resort. The resort will eventually have 60,000 hotel rooms. Until Macao becomes a gaming/tourism/convention destination, casinos in Asia will continue to capture the short-haul short-duration gaming trips, while casinos in Las Vegas still have the lure and will enjoy the long-haul, extended trip market. In the minds of Asian players, Las Vegas still represents the ultimate gaming destination. A trip to Las Vegas is an experience that cannot be replaced by any other. The expansion of casinos in Asia (Macao in particular) will only whet the appetite of potential visitors to Las Vegas. That is, until Macao truly becomes Asia’s Las Vegas; a position that could take a decade or longer to establish. The anti-gambling campaign has had little impact on the overseas casinos that target Chinese who can obtain travel documents and have the ability or connections to bring money out of China, which still has limitations in place on foreign currency movement. Those high rollers remain the bread and butter of casinos in Australia, U.S., and other parts of Asia. THREATS AND OPPORTUNITIES Australian casinos have been replaced to a certain extent by Macao casinos among Chinese and Southeast Asian players since very few, if any, of the casinos in Australia can claim to be a ‘gaming destination’. Macao casinos and VIP room operators have also been very aggressive in recruiting high rollers. If it’s not for the total experience, but rather for the sake of gaming, Macao casinos could serve the same purpose in more convenient locations. Thus, Australian casinos have been more vulnerable to competition from Macao and other parts of Asia. Once the resort casinos in Singapore open in 2009, Australian casinos could be further impacted because Southeast Asians are a major market for both locations. 80 ■ Casino & Gaming International
For long-term sustainability and growth, Western casino operators will have to seize the golden opportunities of those open markets in Asia and build their casinos at the players’ source locations. Building casinos in Asia has several important strategic advantages. First, casinos in Asia generally have higher profit margins than those in the West. According to an industry source, a baccarat table in Macao, on average, can generate ten times the turnover of a baccarat table in Las Vegas. In some VIP rooms, baccarat tables allow a maximum bet of US$250,000, whereas in Las Vegas, a US$150,000 maximum bet is already extraordinary. Another source indicated that a relatively new casino in Macao is estimated to have the possibility of recuperating its initial capital investment in two years. Having a presence in Asia can also help Western casinos market their other locations by utilising their brand equity and marketing network. Having a portfolio of casinos in different locations could further balance any negative effects on Western markets of the gaming development in Asia. Overall, casinos in Asia are smaller in scale and do not have the entertaining atmosphere projected in Western, especially American style, casinos. The floor design, operations and management, and the total experience still have plenty of room for improvement. Another major challenge faced by several Asian countries in regards to casino legalisation is the important issue of regulation and control. In many of the developing or newly developed countries, their political and regulatory systems are not adequately structured to monitor such cash-intensive operations as casinos. These present tremendous opportunities for Western gaming operators and professionals to enter the market as investors, operators/management, and/or consultants. Other countries, such as Japan, Taiwan, and Thailand, will continue to discuss the legalisation of casinos in their respective jurisdictions. When one or more of these markets open up, further opportunities are presented.
CATHY HSU Cathy Hsu, PhD, is a professor in the School of Hotel and Tourism Management at The Hong Kong Polytechnic University. She is the editor of the books, Legalized Casino Gaming in the US: The Economic and Social Impact (published in 1999) and Casino Industry in Asia Pacific: Development, Operations, and Impact (to be published in November 2005), both by The Haworth Hospitality Press. She has over 100 refereed journal and proceedings publications, including many on gaming related issues.
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REGIONAL FOCUS: ASIA
GREEN TEA AND THE MILK OF PARADISE INTERVIEW WITH SUE JACOB
Recent months have seen executives in the casino business bombarded with news of South East Asia, principally the imminent prospect of Singapore getting a casino and the current development of the next ‘Vegas’: Macau. Concurrently, for the gaming exec’s who have been keeping an observant eye on the industry’s growth in Moscow, it will come as no surprise that the last three years have seen the number of casinos in the Russian capital almost double and the quantity of slots multiply 10-fold.
Sue Jacob is Director of Developments for a casino owning and operating the company called Xanadu. Xanadu has a casino in Kyrgyzstan in Central Asia and she has been closely associated with its development and operation. It opened on 1st October 2002 with 13 tables and 26 slots, and has a night club area with live entertainment. She lives in Bishkek, the country’s capital, where there are nine other casinos and she has looked after the Xanadu since its inception in the Hyatt Regency Hotel nearly three years ago. CGI asked Sue about her experience of the Bishkek scene on: CGI: Why was Bishkek chosen as a location for casino development – was there an element of adventurousness or were casinos enticed by the Kyrgysz Government at the time? I’ll let you judge that when I’ve told you some of my story! Having been in the ‘Stan’s’ for over three years now we have seen our casino Xanadu in Kyrgyzstan open and close for a variety of reasons. In 2004 certain members of Parliament, who, by the way, had a mutual interest in some of the other
casinos in this city, changed the law to specify that no casino can be in a building where the state has a financial interest. Funny how this amendment to the law affected only Xanadu! Its casino is located in the Hyatt hotel where the state does have a small share. Maybe I should have allowed a losing bet to be paid the night before! At that time the leading Deputy from this renegade group was a regular player and a bad loser! He often threatened that he would close us down if we didn’t let him either have a share of our business or at least a regular payout. “What of the protection for foreign investment,” I hear you ask. Frankly, it is quite difficult to have a law enforced in a country with very little regard for law. When, after eight months we were able to reopen, there were a few individuals who, as well as being humiliated by our ability to override their attempts to close us, considered themselves to be out of pocket. They turned to physical violence against our staff and in February this year we closed again for three days. Then, of course, in this month of March there was the ‘Pink Revolution’ in Kyrgyzstan which culminated in their President fleeing to Moscow. The uprising was quite unexpected and all we could do was close the doors and arm ourselves with chair legs to battle the hoards of looters who took to the streets for three days. CGI: Were casinos affected by the March 2005 coup and has business life since settled down? As I write this article there are two orders from the licensing ministry staring back at me from my desk. One states that we should close the casino on the 1st of July; the other, presumably because we ignored the first, states that we should close on 5th July. But I think you’ve guessed it by now, that too has been ignored, and we’re still open at the time of writing. At the end of this week Presidential elections were held, and again there was the possibility of the city dissolving into turmoil. This time we were prepared with a wee bit more equipment than chair legs!! As it happens, there was calm but
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REGIONAL FOCUS: ASIA
when the Constitution takes effect in the next couple of months, that’s when we really have to be vigilant. CGI: Would you say the independence of the Kyrgyz Government makes it more likely that business cooperation will produce a mutually acceptable regulatory regime for casino operations given time? You might ask why on earth would Xanadu be contemplating opening a second casino in Central Asia? Initially, it boiled down to the bottom line and having enjoyed a fast return on investment. Recently though, like Genghis Khan, Alexander the Great and the Czars of Russia, we are attracted by the future potential of this relatively untamed region. We are all aware that during the past decade countries adjoining the Caspian have seen tremendous growth due to black gold, Kazakhstan is expected to produce two million barrels of oil per day by 2010 and three million by 2015. Along with oil comes transportation corridors, and what better highway than the Silk Road stretching from China through Central Asia to the West. The potential growth for trade and investment is obvious not only in Kyrgyzstan, but also in the other States of Central Asia. We hope that the new Government of Kyrgyzstan will realise its own potential and create the sort of business climate where we can operate our business without fear or favour. Undeniably, Central Asia is a tough neighbourhood, with the production of drugs, corruption of the policing bodies and government officials, organised crime syndicates, and the threat of Islamic radicals. However, there is a revolution in progress that I believe will not be quelled. It is the people of the area who are demanding transformation both politically and economically. Having lived through the repressive Soviet regime only to be abused by autocratic leaders, they are now demanding transformation and the chance to be involved in the global economy. CGI: Is Europe playing a role in trying to create a stable business climate in general today? So far the European influence has not been strongly felt in Kyrgyzstan. It was due to the events of 2001 and the subsequent ‘War on Terrorism’ that brought the Americans here. They have brought a great deal of money and some influence to this State. But there is a long way to go before the transformation of the country from a Third World backwater into a modern progressive economy. It will happen, because the people are highly educated and hardworking. They want reform and are all set to get it. CGI: How does the law for operators stand at present; how would you compare the way things are in Bishkek to the way operators manage elsewhere in the region, CIS or Russia? Still a wild frontier? Don’t confuse instability and poverty with lack of institutional awareness. We operate within a set of laws that are reasonably favourable to our business and we are fully empowered to take legal action, even against the state, if we 84 ■ Casino & Gaming International
feel so abused as to render such action necessary. But in every such circumstance, there is always the possibility that rogue elements will hijack the legislation in a way that we have already experienced. We just hope that this will not be allowed to happen again. CGI: What is it about Kyrgyz culture that allows them to accept casinos – is gaming seen as an exceptional event or is it that gambling is considered a common or traditional pastime? The Kyrgyz people are good-natured and carefree people. They like to go out and enjoy themselves. Gambling in casinos is one means of doing this. Our casino caters mainly for the wealthier sector of the population, so we don’t have many of the poorer people passing through our doors. But there are a large number of Slots operations in the city and these are very popular. They have existed for a good many years and so I suppose you could say that they have become part of the local culture. They are certainly accepted, as are casinos, as a legitimate and enjoyable form of entertainment. CGI: How different have management and training methods and practices had to be in Kyrgysztan, compared to Britain, South Africa or Greece? Are there certain religious issues you have had to be sensitive about, or customs to take on board? Of course we have! Every environment where you find a casino is different and we have modified our management style and employment policies to match the local conditions. We still run our property as we would a regular international casino with live entertainment every night and staff who conduct the games within the framework of rules and regulations in which most first-class international casino work. I could go on at length about the customs and mores of this lovely country. Suffice to say that we train our staff technically in the same way as we would if we were located in any of the countries you mentioned. CGI: In your experience what key casino operators’ expectations have been realised in the area and what do you think are the prospects for expansion? It may take time for the rule of law, wealth distribution and infrastructure to develop. Nonetheless, the future looks positive for those willing to break new ground in this area. CGI: Do you have particularly memorable or dramatic moments that you will always remember from Bishkek? Too many! It is impossible to succeed without understanding the Asian culture. I have learnt to drink tea and talk of niceties before getting ‘down to business’. I have learnt to allow agreements to flow slowly so as not to insult the face (honour) of my new found friend, and I have learned to read what is implied in a conversation rather than what is said. “She’s gone bush!” I hear you say…you’re absolutely right! Green tea anybody?
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UK CASINO SCENE
CHANGING THE PERCEPTION OF A MODERNISING INDUSTRY BY PENNY COBHAM
The casino industry shared the belief with Government and other parts of the leisure sector that the 1968 legislation had been overtaken by advances in technology and social attitudes. We recognised that, to carry popular support, the new Act would need to be seen as modernisation and re-regulation, rather than as deregulation and liberalisation.
t is not just politicians who recognise that you don’t always get exactly what you want from negotiations and the British Casino Association (BCA) understood from the start that Sir Alan Budd’s report and recommendations were unlikely to be implemented in full. What we didn’t expect was the topsyturvy Parliamentary ride which then ensued, and I am sure we were not alone in this. It is perhaps a measure of the ignorance which still surrounds gambling, and particularly casinos, that the Gambling Bill, as it then was, created such strong but often unfounded views. Few other pieces of legislation can claim to have united both the Daily Mail and The Guardian in opposition or to have been subject to a Second Reading debate during a Standing Committee. But let’s leave all that to one side – the important thing is that, in the dying hours of the last Parliament, the Gambling Act was passed and, whatever its imperfections, the BCA welcomes it. The casino industry shared the belief with Government and other parts of the leisure sector that the 1968 legislation had been overtaken by advances in technology and social
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attitudes. We recognised that, to carry popular support, the new Act would need to be seen as modernisation and reregulation, rather than as deregulation and liberalisation. There needed to be a gradual roll-out of new casinos and new types of machines. All of us were only too keenly aware of the Australian experiment which gave casinos too much freedom too quickly, only to have it snatched back by a Government responding to public and media disquiet. Though some in Parliament might have thought it unlikely, the truth was British companies were, and still are, determined not to throw away a world-wide reputation for honesty, integrity and responsibility which has taken over 40 years to establish, for the sake of a headlong rush of expansion. Indeed, we argued that the introduction of the so-called Category A machines should be piloted within existing casinos where we know our customers and which are themselves the subject of a close relationship with the Gaming Board. However, some good ideas, as they say, fall on stony ground.
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UK CASINO SCENE
With the Act now in place, the challenge for the BCA is to help Officials, Ministers and the new Gambling Commission to implement its provisions as effectively and efficiently as possible. It won’t come fully into force until the end of 2007, and in a sense the whole sector will remain on probation as the findings of future prevalence studies into problem gambling are assessed. In the short term, we believe there are legitimate concerns that remain over the conversion of licences from the existing Magistrate approval process to those granted by Local Authorities. The issue is not the principle of Local Authorities taking over – this has worked well in Scotland for a number of years – but relates to the problems many operators are experiencing, under the Licensing Act 2003, in progressing applications for the variation of existing liquor Licences. This process has been costly (as much as £1,000.00 per application) and time consuming for operators (up to a day per application). We have made representations to the DCMS urging them to review the way in which the Liquor Licensing process has been handled in order that we can avoid such a cumbersome procedure under the terms of the Gambling Act. Moreover, we also need to ensure that the guidance which is issued to Local Authorities will produce a consistent approach across the country in regard to the issuing of casino licences once the Act becomes fully operational. The industry will work closely with the Gambling Commission and Local Government Association to assist in this, but this places an additional burden on Local Authorities and will require a degree of specialist knowledge which will take time to build up. The Government’s Advisory Panel will begin the process of considering suitable locations for the new casinos towards the end of this year. It is expected to make its recommendations to the Secretary of State in the Autumn of 2006. Its job will not be easy – assessing the potential locations of the seventeen licences will be a delicate and demanding process. The final location of the new casinos will be of considerable concern to existing casinos. The Government has indicated that it expects the criteria by which the Advisory Panel will make its recommendations will primarily
>> Politics is the art of the possible, and the BCA together, I suspect, with other parts of the sector have been reminded of this throughout the passage of the Act. Nobody got exactly what they wanted from it, but we did get the main prize, which was long overdue modernisation >>
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be concerned with social impact and regeneration. There will undoubtedly be regenerative benefits that can be extracted from a Regional Casino – the scale of operation combined with bingo and betting and the number of machines it can offer make this a sure bet. Doubts remain over the ability of Small and Large casinos to deliver meaningful regeneration. The economics simply don’t stack up to allow an operator to give anywhere near the sort of Section 106 agreement that, we understand, many Local Authorities are expecting. Indeed, a myth appears to have taken root during the passage of the Act that suggests all casinos are the nearest thing we have to a golden goose, able to provide poorer areas with an unending income stream that will forever be spent on worthy schemes. This is a dangerous thing for Local Authorities to believe and it is incumbent on the industry to ensure they are not being misled. That is not to say they can’t bring enormous benefits to a local area – they can – but not necessarily any more, say, than a large supermarket or cinema complex. What the new seventeen casinos can do, however, is put existing casinos out of business if they are located in close proximity. We have rehearsed our arguments until hoarse over the difficulties the existing estate would face if it was forever tethered to the past while new, less fettered, casinos opened up next door. We believe that the Act, in its final form, combined with
UK CASINO SCENE
the additional freedoms granted to existing casinos, addressed the majority of concerns the BCA raised during its passage. There is a brave new world emerging and the British industry will play its full part in it, generating jobs and a buoyant revenue stream for HM Treasury. All of this could be undone if mistakes are made over the location of the new Small and Large casinos. And by mistakes, we mean allowing the catchment area of a new breed of casino to overlap with the catchment area of an existing casino. UK operators are keenly aware of the need to retain our reputation for probity and honesty and we will make no apology for being critical of operators who put that reputation in jeopardy. We are judged as one and to the public and many in Parliament, perceived bad practice in one casino – whether new, old or internet based – will tarnish us all. That
>> There will undoubtedly be regenerative benefits that can be extracted from a Regional Casino – the scale of operation combined with bingo and betting and the number of machines it can offer make this a sure bet >>
is why we are watching with some considerable concern the growth in advertising for on-line casinos. The BCA is concerned that the over promotion of on-line gambling threatens to increase the number of people who may develop problems with their gambling, by offering uncontrolled enticements and incentives without any of the balancing measures provided in land based casinos. Apart from the damage this will cause to individuals who might develop problems it will also inflict undeserved reputational damage on the wider industry and conceivably the Act itself. It is clearly an issue the Government will need to consider before the Gambling Commission’s Code of Practice in this regard takes effect at the end of 2007. Politics is the art of the possible, and the BCA together, I suspect, with other parts of the sector have been reminded of this throughout the passage of the Act. Nobody got exactly what they wanted from it, but we did get the main prize, which was long overdue modernisation. And with it comes a strong and transparent new Gambling Commission with the power to respond to changing circumstances without recourse always to Ministers. The challenge for the industry is to demonstrate to the public and to politicians that we operate within the mainstream of leisure provision. The perception many people still have of casinos is based on a time and place that never was. The variety of entertainment our clubs offer, from bars, restaurants, nightclubs and live music demonstrates that casinos are not the intense gaming experience that many believe. However, knowing that ourselves is not enough, we need to let others know it too. The Government has changed the framework within which the industry operates and it is now up to the industry to change the way we are perceived.
PENNY COBHAM Penelope, Viscountess Cobham, chairs the British Casino Association and spearheaded the industry’s involvement in the Gambling Act 2005 as it moved through Parliament. Lady Cobham chairs the largest commercial radio station in the West Midlands, Heart FM, part of Chrysalis plc and is a business adviser to Ernst & Young. Penny Cobham is also Deputy Chairman of VisitBritain and Chairman of the Trustees of the Gulbenkian Prize for museums and galleries. She is the longest serving member of the Finance and Policy Committee of the Historic Houses Association (1985- ), having been instrumental in restoring and opening 18th century Hagley Hall between 1977 and 1994. Penny Cobham has worked as a special advisor on heritage and tourism in the Culture Department and has served on the boards of English Heritage, Historic Royal Palaces, British Waterways, the Countryside Agency and the V & A.
Casino & Gaming International ■ 89
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UK CASINO SCENE
WHAT WE NEED: A MEASURED, PROGRESSIVE SOLUTION BY ANDREW LOVE
We believe that the expansion [of the casino industry] could have been achieved safely, predictably, through the deregulation process and more permitted areas. Done in controlled three-year tranches, the industry could now be 50% bigger and the encroachment of undesirable trends such as increased problem gambling and criminal activity in particular money laundering could be easily reduced. That experience could have been used as the model to redraft the 1968 Act.
he Casino Operators’ Association (UK) was formed on 15 June 2001 and, as an introduction to its raison d’être, a press release at the time perhaps encapsulates it well: “A new Association for British casino operators has been formed. Named the “Casino Operators’ Association for the UK” - COA(UK) - the decision was taken by management from six companies representing three London and eight Provincial casinos. Others have indicated an interest and the initial membership represents a cross-section of casino styles and customers. The break from the British Casino Association has not been taken lightly. The situation has been crystallised by the soon-to-be-announced Report of the Gambling Review Body and the desire to have differing points of view fully represented during the forthcoming debate. There are no principal differences on many issues with the BCA, but the domination of that Association by the major plcs effectively overrides the full representation of differing views. COA(UK) seeks the best possible long-term view for the UK
T
>> Government has essentially set up a two tier casino industry, with the current industry set aside as the discarded bottom layer >>
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casino industry and its customers, and will join the debate with vigour based on a membership of great experience within the sector at all levels of the market.” Two years later the Association was saying: Soon we will see the DCMS view on the (macro) way forward for gambling in Britain providing the basis for final scrutiny of proposals which, for the casino industry, could greatly change the way it operates. It will align more with practices around the world but at the same time may risk the UK’s world-wide reputation for probity, fairness and firm control with style - British style. These are factors which reassure the gambler and nongambler alike and brings gamblers of the highest level to Britain, as well ensuring a secure home-based industry. Of course there must be change, but the thrust has not come from the electorate at large; they are aware of excesses in other jurisdictions and are content only providing “the down-side” is not replicated here. The notion that gambling controls should be swept away to provide personal freedoms and shake off the “NannyState” is laissez-faire nonsense, unless the greater good of society - players, industry, regulator and government - are also catered for. Permitting alcohol on the gaming floor is, in our view, such a gratuitous retrograde step. There is a lack of balance, fostered by a lack of understanding of the industry (despite the declared intention of the Budd Report) which needs to be scrutinised closely in the months ahead. Government has rightly rejected elements of the Review but there are still examples which must be resisted. The temptation is, because so much of the detail of the 1968 Gaming Act was inflexible by being on the face of the Act, a new Act could be so “macro” that the intention of parliament could be thwarted in the detail of its delegated implementation. The proposed Gambling Commission, of which the COA(UK) is a strong supporter, must have flexible delegated powers, but equally it must have firm riding instructions, primarily as a regulator with teeth not just to control the industry, but also to ensure other bodies conform to the requirements. For example, local licensing of casinos has been the successful province of licensing justices and is seen as fair, timely, non-political and free from taint. These are, sadly, not seen as attributes consistently reflected in Local Authorities but they are to be given the role. Unless controlled, one of the keystones of anti-proliferation could be lost. The removal of demand criteria, membership/24 hour
>> Can one seriously believe that foreign entrepreneurs, talking of half a billion pounds inward investment, are going about their business - or our business - without any nod or wink on the future tax regime? >>
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rule and permitted areas exacerbates the problem of proliferation; any replacement (such as minimum casino floor area) must be examined robustly to ensure relaxation does not result in a casino on every high street, or slot machine palaces on every corner with walk-in-off-the-street access. The proposed controlled introduction of casino slot machines relative to gaming tables (an 8:1 ratio) should be welcomed. The players want them, the problem potential is well known, and controlled expansion or reduction is easily implemented. The Gambling Industry Charitable Trust (GICT) is unsatisfactory because the Review dealt in financial terms, with problem gambling as a fall-out issue. Government cannot escape the whiff of hypocrisy if it reaps the taxation from expansion it encourages, yet off-loads the increased gambling problems on the industry. Threatening the industry with a levy if it does not volunteer £3million per year is not the partnership required between state and industry; the NHS for example has a role to play. Calls for £10million per year from industry smack of developing problem gambling as a growth industry for academe and social services. But British casinos have a low incidence, and the world is already awash with research, statistics and data. Yet we understand the GICT will concentrate on research for the first three years. The
UK CASINO SCENE
COA(UK) supports practical, hands-on operations such as the Gordon House Association. Funding of a restructured GICT should be through the Treasury from commensurate taxes and duties albeit not by hypothecation. Practicality of approach within the British gaming scene is the basis of the COA(UK) position. It if works, don’t fix it. If it doesn’t work abroad, or is inappropriate, don’t import it here. Let us grow an industry of which we already have cause to be proud in a measured, controlled, progressive way. Let us consider the DCMS proposals very carefully - there may not be another opportunity for another 35 years.” THE PAST PROCESS - A LOST OPPORTUNITY The two statements give an indication of how the consultations and deliberations were proceeding for the first two years or so following the Budd Report. Much more could have been achieved in the controlled expansion of the industry at that time if government was attuned to or receptive to the nature and needs of the industry. We believe that the expansion could have been achieved safely, predictably, through the deregulation process and more permitted areas. Done in controlled three-year tranches, the industry could now be 50% bigger and the encroachment of undesirable trends such as increased problem gambling and criminal activity in particular money
laundering could be easily reduced. That experience could have been used as the model to redraft the 1968 Act. It is obvious, however, that such an approach was not that envisaged by the plc element of the industry, in particular what they wanted was the big push. This is understandable if one takes a short-term view, in that the dominant factor on a plc is often the share price, a problem not faced by the owneroperator. The downside to such aggressive lobbying was, in fact, well trailed by the government with its warning to “concessions” under the deregulation process - “more concessions, more taxes”, but that was not heeded by the ardent fans for sweeping change. Nevertheless, the Gambling Bill made reasonable progress until reaching its draft form for inter-departmental comment. The confidently expected publication was delayed, and delayed. Consultation became derisory, unwanted inputs simply discarded culminating in major changes made without discussion. Government made the classic error of thinking that gaming is about money and not, despite their protestations, about people. There were, of course, other side issues to the argument, but extremely important ones. For example: The holding up of the Licensing Act as a model for the Gambling Act to increase public input. The cutting out of the Licensing Justices, a well-proven system with experienced people who actually took into account local views and had an understanding of the casino industry built up over many years; theirs is a reputation for fairness, even-handedness and probity that, sadly, many local authorities cannot match. THE CURRENT SITUATION Government has essentially set up a two tier casino industry, with the current industry set aside as the discarded bottom layer. It was extraordinary to witness an (on-going) assault on the current industry because “there are so many casinos, and they are in towns, therefore we cannot have any more urban proliferation”. However, there could be unlimited numbers of “Destination” casinos with unlimited casino machines, hitherto unproven in the country. This was diametrically opposed to the core claim that control of problem gambling and protection of the vulnerable was paramount. The general public, until then only moderately concerned, were alarmed to see the huge excesses that the new proposals would bring being placed in the hands of operators unproven and unused to operations in Britain. The outcry forced a reduction in the intended maximum number of casino slots (category A machines) in Regional Casinos, and the number of casinos to an initial eight of each category. Despite these reductions, the required throughput of players to ensure viability remained at a level which would require the nation to be schooled into casino play at an unprecedented level. The government, at the same time, pledged to “reduce” problem gambling, later changed to “control”. Whilst all this was occurring the COA (UK) was involved Casino & Gaming International ■ 93
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in lobbying against these issues. The Association was not against Regional Casinos per se but had put forward vigorously the gross lack of control the proposals would bring. Equally, we had highlighted gross waste of the current industry’s talent and experience in being able sensibly to marshal its knowledge of its customer base to enable it to monitor safely the introduction of more advanced and numerous machines. Even now the Government clings to half-truths and glaring inconsistencies: ■ Having decimated the UK plc casinos’ share prices, the Minister announced they “had taken nothing away” from the current industry and, in any case, it would be easy to borrow money to compete in the competition for Regional Casino licences. ■ While pledging to government control problem gambling, the government intend to allow walk-in-off-the-street gambling with no proof of age required as long as the player looks older than 18, and gambles at a level less than €2,000 buy-in/cash-out (the latter are Money Laundering requirements). This is unacceptable, especially at a time when anti-crime/money laundering regulation is being tightened further. There is only one way properly to control a casino and that is by proper ID on entry. Much has been made that people who only want a meal and drink in the casino restaurant and bar should not have to declare their ID on entry (or at any other time). But that is the crack in the wall; within the casino confines there are then people unknown to management, and ill-controlled access to gaming is another step closer. ■ The primary purpose of a casino is gambling, and whilst restaurants, bars etc can be profit centres, that alone is not sufficient reason to lower defences. There is nothing to stop a casino opening up a bar or restaurant outside the casino enclave for “non-members” if they want to cater for that trade, but COA(UK) Members, with their extensive experience are adamant that proper ID on entry to the casino, irrespective of what facilities a person may thereafter use, is the only way that access should be permitted in Britain. ■ This view was recognised by many in Parliament, as well as the public, problem gambling charities etc. Indeed, the Lords passed an amendment put forward by the COA(UK) to the Gambling Bill only to have it “traded-in” on the wash-up process to pass the Act. ■ While the EU Third Money Laundering Directive (3MLD) is likely to offer a choice of whether or not ID is required, the buy-in/cash-out alternative must be rejected by the UK and ID on entry remain mandatory. Only then can there be any hope of the industry retaining the probity and control for which it is justly proud. TAXATION This deserves a side heading of its own, as it has been studiously avoided by the government. Can one seriously believe that foreign entrepreneurs, talking of half a billion pounds inward investment, are going about their business or our business - without any nod or wink on the future tax 94 ■ Casino & Gaming International
regime? It is vital to the business model and most of them are based in regimes of special taxation benefits and concessions. The COA (UK) would be unsurprised if the new regime further undermines the existing operators by creating high rates for the current industry, low rates for the overseas entrants. SUMMARY It is difficult to summarise with confidence the position following the passing of the Gambling Act 2005. Not only is it so soon after the election, but the real bones of the Act are yet to be addressed. The transition from Gaming Board to Gambling Commission has only just started and yet its structure and performance are vital to the progress of the Act. In the meantime, COA (UK) Members’ response is to continue to run their casinos to the best of their ability, despite the gnawing sense that the Government’s implementation of the Act will cast them as second-class citizens in an industry whose probity they have upheld for many years.
ANDREW LOVE Andrew Love was appointed Deputy Chairman of The Ritz London in August 2004. He is also the Chief Executive of The Ritz Club, a position he has held since August 1998. Prior to joining The Ritz Club, Andrew was the Managing Director of the casino division of Ladbroke Group Plc, responsible for all overseas and UK development, having previously sold the business to Ladbroke. Throughout his career he has been heavily involved in the leisure industry. He has held several positions on the main board of leading casino and leisure groups including: City Clubs Limited, Leisure Investments Plc, Lebak Leisure Ltd, Suits Ltd, Coral Casinos [UK] Ltd, Mayfair Casinos Ltd and Pleasurama Ltd. Andrew’s knowledge and experience has enabled him to make a significant contribution to the gaming and hospitality industry. A qualified Chartered Accountant since 1965, he is also Chairman of the Casino Operator’s Association, the independent owners association who have been involved in lobbying the government on the new casino bills. He is Junior Warden of his Livery Company, The Worshipful Company of Coachmakers & Coach Harness Makers; Joint Master of the Alderham Harriers and Member of the M.C.C. Andrew is a tireless and generous fundraiser and is a member of several charitable committees, including CancerBacup.
UK GAMBLING ACT
ENTERING A CRITICAL PHASE: DECISION TIME AHEAD
BY JULIAN HARRIS
On 7 April 2005, the Gambling Bill obtained Royal Assent. This was a momentous day for the British casino industry. The process for gambling law reform began in 1999 with the announcement of the Gambling Review. Since then, we have had the Gambling Review Report – “The Budd Report”, the Government’s Response – “A Safe Bet for Success”, the publication of a draft Gambling Bill, two Joint Scrutiny Committee Reports, two Government Responses to those Reports, numerous other Government Policy Statements, a Daily Mail campaign to “Kill the Bill”, several Government uturns and the tortuous passage of the Bill through the Houses of Parliament culminating in some last minute concessions to the existing British casino industry.
any of us have looked on in frustration as our elected representatives have debated the Gambling Bill in the House of Commons many without any proper understanding of the key issues, as Government has shifted policy without any consultation with the industry and as “regional” or “super” casinos have been kicked around as a political football. There are those within the existing British casino industry, and amongst prospective new operators, who supported the Gambling Bill, and those who did not, although their positions were interchangeable depending upon Government Policy at the relevant time. That is all history. We now have the Gambling Act 2005 which brings with it a greater degree of certainty than the industry has had for many years. We no longer have to speculate whether there will be an Act and, if so, what it will say. There are still many imponderables, such as the rate of taxation, where new casinos will be located and the nature of the Gambling Commission Guidance to local authorities, but we are entering a critical phase and what happens over the next 6 months or so will leave a lasting impression on the industry.
M
REGIONAL, LARGE AND SMALL CASINOS Size Limits The Secretary of State is required to make regulations by reference to which any casino may be classified as regional, large or small. She may define those casinos by reference to the number of gaming tables, the floor area for table gaming or indeed any other matter at her discretion. The Government’s present policy, and it is important to remember that it does not appear in the Act, is that the requirements for each of regional, large and small casinos (see table 1). Limits on Numbers The Act provides that no more than 1 casino premises licence Casino & Gaming International ■ 95
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Government is minded to await the results of at least two prevalence studies (six years), after the implementation of the new regime, before considering significant alteration to the gaming machine entitlements of all types of casino. The Government decision to limit category A machines to regional casinos was a controversial one, and was as popular with prospective regional casino operators as it was unpopular with prospective small and large casino operators. The result is that regional casinos will enjoy a significant competitive advantage over large, small and existing casinos. That is not to say that all gaming machines within a regional casino will have unlimited stakes and prizes. This is a common misconception. The reality is that regional casinos will have a mix of machines with a range of stake and prize levels to suit customer taste.
may have effect at any time in respect of regional casinos, 8 in respect of large casinos and 8 in respect of small casinos. Critically, however, the Secretary of State may by order substitute a new maximum number of casino premises licences. Such an order shall not however be made unless a draft has been laid before and approved by resolution of each House of Parliament. The Government said in a policy statement issued in December 2004 that no earlier than three years after the award of the first premises licence, the Government will ask the Gambling Commission whether the introduction of the new types of casinos has lead to an increase in problem gambling or is increasing that risk. The Government will also want to assess what the regeneration and other economic outcomes have been. If the Government then decides to propose that more casinos may be licensed then the order will need to be approved by Parliament. I return to this issue later.
Comparison with Existing Casinos Regional casinos will, obviously, be a very different animal from existing casinos not least because of their size. But how will large and small casinos compare with the existing casinos? Following last minute concessions won by the existing casino industry the differences will not be as great as was previously envisaged. ■ Existing casinos are almost exclusively smaller than the new large and small casinos. Of the 138 existing casinos in Great Britain, only eleven have table gaming areas of over 500 m2. However, there will be no size restrictions on existing casinos and Government has indicated (“Casinos: Statement of National Policy” dated 16 December 2004) that existing casinos will be able to be transferred to new owners and new premises if their current premises for some reason become available, so long as they remain within their existing licensing area.
Gaming Machine Entitlements Section 236 of the Gambling Act 2005 requires the Secretary of State to make regulations defining the four classes of gaming machines – categories A to D – by reference to criteria such as maximum stakes and prizes. The Government’s current intentions regarding the categorisation of classes, and again none of this appears in the Act (see table 2). The rationale underlying the Government’s policy in respect of category A gaming machines is that such machines are new to Great Britain and there is no reliable evidence as to the impact of these machines. Government believes that there are risks and that it is right to proceed cautiously with effective and rigorous monitoring of their impact. The
Table 2
Table 1
Category
Min table gaming area
Min additional gambling area
Min non gambling area
Min total customer area
Min number of gaming tables
Category of gaming machines permitted
Machine: table ratio
Small
500 m2
0
250 m2
750 m2
1
B.C.D
2:1 (max 80)
Large
1000 m2
0
500 m2
1500 m2
1
B.C.D
5:1 (max 150)
Regional
1000 m2
2500 m2
1500 m2
5000 m2
40
A,B,C,D
25:1 (max 1,250)
Category
Maximum stake
Maximum prize
A
Unlimited
Unlimited
Regional casinos
1,250
B1
£2
£4,000
All casinos
20 in 1968 Act casinos; 80 in small casinos; 150 in large casinos
B2
£100 per game; £15 per chip
£500
As above plus premises licensed for betting
4
B3
£1
£500
As above plus Bingo clubs and adult gaming centres
4
B4
£1
£250
As above plus Registered clubs and miners’ welfare institutes
3
C
50p
£25
As above plus premises licensed for alcohol
2, but may apply for more to local authority
D
10p (30p when non-exchangeable prizes)
£5 (cash or non-cash)
As above plus family entertainment centres and travelling fairs.
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Location(s)
Maximum number per premises
UK GAMBLING ACT
■ The abolition of the 24 hour rule and the lifting of the ban on advertising will apply equally to new and existing casinos. Existing casinos will therefore be able to attract greater numbers of customers than presently, thereby creating a demand for larger premises. The restriction on live entertainment has already been lifted, but most existing casinos will require greater space to exploit this new freedom. ■ One of the late concessions was that the gaming machine entitlement for existing casinos would be increased as would the maximum stake and prize limits. Existing casinos will be entitled to have 20 (currently ten) gaming machines with a maximum stake of £2 (currently 50p) and a maximum prize of £4,000 (currently £2,000), compared to small casinos and large casinos which may have up to 80 and 150 such gaming machines respectively. These changes are likely to be implemented in October 2005. ■ At first glance, “small” casinos will have a far greater number of gaming machines than existing casinos. But remember, a small casino will only be entitled to 80 gaming machines if it has 40 gaming tables available for use. Will operators of small casinos be prepared to make 40 gaming tables available for use, with the attendant staff costs, to secure that entitlement, or will the reality be that few small casinos will have the full entitlement? Our view is that most small casinos will have closer to 20 or 30 gaming tables and 40-60 gaming machines. The difference between existing casinos and small casinos will therefore be less stark. ■ But that is not the end of the story. When is a gaming machine not a gaming machine? According to Sections 235 (h) and (i) of the Gambling Act, terminals which are linked to live table games in a casino and terminals for playing real games of chance, for example where there is a mechanised roulette wheel, will not fall within the definition of a gaming machine. In the case of the former terminals, there are no proposed limits on numbers and, in the case of the latter, the limit will be 40. ■ Existing casinos will not be able to offer betting, but small casinos will be able to do so; large casinos will be able to offer both bingo and betting. We do not see that this offers the new small casinos a major competitive advantage over existing casinos. All in all, therefore, the difference between existing and, certainly small casinos, will not be as great as the existing casino industry feared as recently as December 2004. ONLY ONE REGIONAL CASINO? The Gambling Act has had more twists and turns than a soap opera and we may not have probably not finished yet. We believe that it is quite conceivable that we will see an
increase in the number of regional casinos from 1 to at least 4, or possibly 8, within the next 6 months or so for the reasons set out below. History of Legislation The history of the legislation would suggest that the Government has never been in favour of a limit on the number of regional casinos, never mind a limit of 1. The Gambling Act was the product of a lengthy and exhaustive consultation process and enjoyed cross party support on most of the issues for most of the time. It was not until very late in the day, without consultation and in response to political pressures that any limit was imposed. As recently as June 2004, evidence was given to the Joint Scrutiny Committee by the Government that it did not have an optimum number of casinos in mind and that this should be left to the market to determine. This approach was entirely consistent with the recommendations of the Gambling Review Body. The Gambling Review Body concluded that its proposals made “resort” casinos - as they were then called – a legal possibility that the development of such casinos, whether in Blackpool or elsewhere, was a matter of commercial judgement. It was also consistent with “A Safe Bet for Success”:“The creation of resort casinos is not a specific policy objective of these changes. The extent to which schemes of this kind are promoted and taken forward will be primarily a matter for the private sector subject to local authority approval. The Government will naturally be watching any such developments with interest, and will wish to ensure that any wider public policy considerations, for example, in relation to tourism or regional economic development, are properly taken into account. But we see no case for granting preferred or pilot status to any particular developer or area”. The imposition of a limit of 8 on 16 November 2004 was plainly a political decision, taken primarily in response to hysterical and ill-informed press speculation and opposition from back bench labour MPs in the run up to a General Election. The explanation given by Richard Caborn to the Gambling Bill Standing Committee was that:“We have taken careful note of concerns raised during the Bill’s second reading debate about the casino proposals. There was a large measure of support for the view that the licensing controls proposed in the Bill, working alongside the planning system, would not on their own be strong enough to guard against the proliferation of a kind of gambling facility hitherto untested in this country, or the location of regional casinos in unsuitable areas. The Government regards the regional casino framework,
>> If there is only one regional casino, it follows that regional casino licence will not be granted in two out England, Scotland and Wales until 2010 at the very This seems grossly unfair and unlikely to happen for of political reasons >>
a of earliest. all sorts
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which was much strengthened by pre-legislation scrutiny as robust and comprehensive. However, we are happy to provide additional reassurance to those who would prefer a more cautious approach”. Once a limit on the number of regionals had been imposed, a limit on the number of large and small casinos was inevitable. On 16 December 2004, the Government issued a statement of national policy relating to casinos imposing a limit on the number of regional, large and small casinos of 8 each. Then in April 2005, the Government ran out of time to get the Gambling Bill through and the opposition parties were in a strong position. A further compromise was negotiated and the limit on the number of regional casinos was reduced to 1. Secretary of State’s comments in the House of Commons It is evident from the comments made by the Secretary of State, Tessa Jowell, in the House of Commons on 7 April that the Government is seriously considering an increase in the number of regional casino licences. At column 1624 of Hansard, the Secretary of State (Tessa Jowell) said: “The opposition had previously supported 8 such casinos, though reduced the number to 4, and now insist on 1. On the basis of the Government’s original proposition agreed in Committee, some seven local authorities will miss out on the potential benefits for regeneration in the first stage. We believe that regional casinos should be tested, primarily for any impact that they might have, because of the different nature of the regime, on problem gambling, but also for their power to regenerate rundown towns and cities. As the Honourable Member for Malden and East Chelmsford (Mr Whittingdale) is aware, we reserve the right to ask Parliament again what number of regional casinos is necessary to test their impact.” At column 1625, Mr Don Foster for the Liberal Democrats responded: “We were keen for the number to be reduced, and were given an assurance. Now, following further deliberations, another is being proposed. We are more than happy to support the trial of just one super casino. The Secretary of State said that the Government reserved the right to increase the number later. I hope that the Secretary of State will reassure us that it is not a hint that as soon as we return after the election there would be any such moves”. In addressing this issue, the Secretary of State’s response suggested that this was exactly what she had in mind: “It is important that the industry remains supportive of this Bill and has confidence in it. The decision to reduce from 8 to 1 the number of regional casinos in the first stage means probably the loss of £600m of inward investment to some of those parts of the country where that inward investment is most needed, and the loss of probably in excess of 40,000 jobs. No Government can bind the next Parliament but it will be for the next Parliament to decide 98 ■ Casino & Gaming International
whether, in the light of demand and consistent with the precautionary principle, that number should be increased”. One is not sufficient to assess impact One pilot regional casino is not, in our view, sufficient properly to assess the impact in the range of areas and types of location that might be suitable for regional casinos. More recently, Richard Caborn, Minister for Gambling, confirmed the Government’s position, when he said:“We do not rule out the possibility of asking Parliament at some future point to consider changing the numbers……….. many people argue that to achieve the type of project involved in large regional casinos, there ought to be more than 1 of them. We shall implement the Act on the basis of there being one, but I believe that at some stage we need more than 1, to allow the impact right across the United Kingdom to be reasonably assessed”. England, Scotland or Wales? If there is only one regional casino, it follows that a regional casino licence will not be granted in two out of England, Scotland and Wales until 2010 at the very earliest. This seems grossly unfair and unlikely to happen for all sorts of political reasons. Blackpool? Plainly, a good case can be made for granting the first regional casino licence to Blackpool. It is not, however, the foregone conclusion which many newspapers and MPs would have you believe: far from it. Blackpool will face fierce competition from, to name but a few, Wembley, Greenwich, East Manchester, Glasgow, Coventry, Birmingham and Newcastle. As this becomes clear to many MPs, and as pressure rises in their own constituencies for the regeneration and tourism benefits flowing from regional casinos, and from local authorities, they may become more amenable to an increase in the limit. Loss of inward investment As the Secretary of State commented in the House of Commons, the decision to reduce from 8 to 1 the number of regional casinos “means probably the loss of 600m of inward investment to some of those parts of the country where that inward investment is most needed, and the loss of probably in excess of 40,000 jobs”. THE ADVISORY PANEL ON NEW CASINO LOCATIONS The Secretary of State will appoint an independent Advisory Panel to advise her on the areas in which the new casinos should be located. We understand that the Panel will collectively have knowledge and expertise in a range of matters including planning, securing regeneration, tourism and addressing the social impacts of gambling. The Panel members must be able to demonstrate independence from any potential interested parties and must have an appreciation of the need for impartiality.
UK GAMBLING ACT
The Advisory Panel will be asked to identify areas for the new casinos based on the following criteria:■ A good range of types of areas. ■ A good geographical spread of areas across Britain. ■ Areas in need of economic development and regeneration and likely to benefit in regeneration terms from a casino. These criteria are designed to ensure that the subsequent assessment of the impact of the new casinos will be on the basis of a broad range of information and experience. The Advisory Panel will recommend up to 8 areas for large and small casinos and one area for a regional casino. The Secretary of State will then consider the Panel’s recommendations and, after consulting the Scottish Executive and the Welsh Assembly Government, decide which areas are to be designated. Government do not expect the Advisory Panel to complete its work before the end of 2006. COMPETITION FOR NEW PREMISES LICENCES Under the new regime, casino premises licences will be granted by the local licensing authority, or in Scotland the local licensing board. A local licensing authority will, however, only be able to award a casino premises licence if one has been identified for its area. Realistically, therefore, no new casino premises licences will be granted before 2007. It will be a two stage process. The first stage will be a regulatory test to ensure that all casino proposals satisfy the regulatory premises licensing requirements in the Act. The second stage will be triggered where there are more applications for casino premises licences than the local licensing authority is permitted to grant. We do not think that we are going too far out on a limb to predict that the second stage will be triggered in the case of all 17 licences. The second stage of the process will be a competition held by the local authority. We do not yet know the rules of the competition, as DCMS have not yet consulted with the local Government Association. It is envisaged that the local authority will set out its priorities and concerns in a set of objective key considerations and it will then invite operators to submit entries to the competition. These priorities and concerns are likely to reflect important local issues such as employment and regeneration potential, the design of the proposed development, financial commitments by the developer to local projects and the range of facilities which will be available. The eventual winner of the competition will be eligible for a full premises licence once he has obtained planning permission and the casino has been built. Success in the competition will not guarantee planning permission. He will also need a casino operating licence. An application for a new premises licence may only be made by a person who holds a casino operating licence or has made an application for a casino operating licence, which has not yet been determined. It would therefore be sensible for a prospective competitor for one of the new casino licences to apply for a casino operating licence at the earliest opportunity, if he is not already licensed under the existing regime. The fact that an operator holds a casino operating licence can only assist his chances of success in the competition.
We cannot speculate as to who will make the successful applications. Existing casino operators will almost certainly apply for all of the small and large casino licences and possibly the regional casino licence: competition will be fierce. Existing casino operators will be well placed to make these applications as they have considerable experience of operating in this market, may already have identified suitable premises, or own existing casinos which may be converted into small or large casinos and, of course, they are already licensed. A number of the licences may go to new entrants to the market offering a new style product and, possibly, with a strong connection to the local area. THE GAMING ACT 1968 The new Act will be brought into effect in stages, to be decided by the Secretary of State in due course. So far as casinos are concerned, the new licensing regime is still some way in the future and will follow the establishment of the new Gambling Commission. For the time being, the licensing regime of the 1968 Gaming Act remains in force, enabling further applications for new licences to be made or for expansion of existing premises. Considering the uncertainty as to where the new casino licences will be located, the fact that the issue of those licences will not be before 2007 and the ferocity of competition which there will be for the initial 17 gaming licences, it makes sense to apply for gaming licences under the existing regime and that is what operators and prospective operators are doing. It is my understanding that a substantial number of applications for Certificates of Consent have been made and, certainly, that accords with the experience of my own firm. Although the demand criterion still applies, there has never been a better time to make an application for a gaming licence.
JULIAN HARRIS Recognised as a leading expert in national and international gambling and licensing law, Julian is highly regarded by both operators and regulators throughout the world. He and John Hagan are the founder partners of Harris Hagan, the first UK law firm specialising in legal services to the gambling and leisure industries and they are at the forefront of those advising UK and international operators alike on the opportunities presented by the UK Government’s major reform of gambling law. Julian is a Trustee of the International Association of Gaming Attorneys. With over 20 years experience of gambling law Julian has advised some of the world's largest gaming and entertainment industry corporations, including trade associations: the British Casino Association and the Casino Operators’ Association of the UK. Julian came to specialise in this area representing the Gaming Board for Great Britain (the UK regulator) for five years early in his career.
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INTERNATIONAL LEGAL
RESOLVING THE REMOTE GAMING CLASH BETWEEN THE US AND ANTIGUA BY JOE KELLY
Internet gambling is now over a $7 billion a year industry with over 1,700 gaming operators based in at least 76 jurisdictions.i There have been attempts, such as that of the Swiss Institute of Comparative Law, to encourage regulators to adopt international standards and rules for Internet gambling. One major problem is that certain jurisdictions, such as Denmark, the Netherlands, the U.S., and Hong Kong, want to prohibit cross-border Internet gambling for different reasons.
introduced without success, largely because of the question of exemptions for U.S. interstate interactive horseracing and Internet state lotteries. The federal government, through the U.S. Justice Department, claims that all interstate Internet gambling is illegal and has pressured advertisers, credit card companies, interactive poker companies issuing IPO’s and banks and sporadically has taken legal action against offshore gaming operators. Antigua and Barbuda (Antigua) is a former British colony and in 2001 was one of the first countries to enact comprehensive Internet gambling regulations. These regulations were enacted largely to comply with suggestions by British and U.S. treasury officials that stringent measures were necessary to minimise “suspicious transactions” and money laundering. Antigua’s website, www.antigua gaming.gov.ag, lists the Internet regulations which consist of 19 parts with detailed requirements for owners and “key
hould the World Trade Organisation (WTO) have ruled against the United States, it would not only impact U.S. policy but possibly that of the European Community which is still trying to finalise the parameters of the Gambelli decision. Moreover, Hong Kong, which had passed legislation in 2002 prohibiting Internet gambling, except for the Jockey Club which has a betting monopoly, might have been pressured to reconsider its probationary policy had Antigua emerged victorious in its WTO litigation against the United States.ii The WTO litigation between Antigua and the United States is especially significant since at least 50 percent of the market consists of U.S. customers. In every session of Congress since 1995, anti-Internet gambling bills have been
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person” licensing, age verification, responsible gaming and player protection, complaint procedures against operators and provisions for the minimisation of suspicious transactions. The revised regulations were partly due to the realisation that more stringent laws were needed as a result of the trial of Jay Cohen in the United States. In this widely publicised case, United States v. Jay Cohen, the federal government in New York, alleging a violation of the Wire Act, 18 U.S.C. § 1084, indicted 21 persons including Cohen and his two partners who operated a licensed Antigua sports book. Cohen alone returned to the U.S. and demanded a jury trial. The judge had earlier determined that the bets were “accepted” in New Yorkiii and excluded proposed testimony by Antiguan authorities that Internet gambling was licensed, regulated, and legal in Antigua. The jury found Cohen guilty and he was sentenced to 21 months imprisonment which was affirmed on appeal.iv Subsequent to the 21 indictments, the U.S. government rarely took measures against offshore gaming operators. Instead, the federal and some state governments pressured credit card companies and banks not to honor offshore gaming financial transactions. Consequently, Antigua claimed that because of U.S. policy and Antigua’s strict regulatory scheme, only 28 of its 119 operators remained in Antigua and the number of online employees declined from around 3,000 to under 500.v The decline, however, was partly due to a three percent tax enacted at the time of the 2001 regulations. In March 2003, Antigua sought relief before the WTO. After months of abortive negotiations with the U.S., Antigua filed a complaint in June 2003 before the WTO Dispute Settlement Body alleging that U.S. policies preventing credit card companies and banks from honouring Antigua online gaming transactions were a violation of the General Agreement on Trade in Services (GATS). It was the first WTO dispute concerning electronic commerce, only the fourth concerning trade in services, and the first dispute to discuss whether public order/public policy would be a
valid defence to a restrictive practice.vi When Antigua and the U.S. could not agree on panelists, the WTO director general appointed in August 2003 a British Q.C., a Thai, and an Indian representative. Lengthy briefs were filed by both parties, and there was extensive oral argument. Various jurisdictions such as the European Communities, Japan, Canada, and Mexico, also made third-party submissions supporting Antigua’s contention that GATS had jurisdiction in the dispute. A Final Report (Panel) consisting of 287 pages plus annexes/appendices was issued on 24th March 2004, but it was not made public until 10th November 2004, partly in hopes that Antigua and the U.S. would be able to compromise their dispute. The first issue decided in the Panel Report was whether GATS had jurisdiction. The Panel had little difficulty concluding that GATS applied to gaming since it was a measure “affecting trade in services” and that during the GATS negotiations in the mid 1990s, the U.S. could have excluded gambling from its GATS commitments, but “has not done so.” Furthermore, while the U.S. did exclude sporting, the “ordinary meaning of ‘sporting’ does not include gambling.”vii The second major issue was whether the United States prohibited all Cross-Border Gambling. The difficulty for Antigua was that it was impossible to pinpoint a specific law prohibiting cross-border Internet gambling, especially since every anti-Internet gambling bill in Congress had failed to be enacted into law. Instead Antigua listed 105 measures (federal and state), plus three judicial cases,viii as well as federal and state pressure on financial intermediaries and advertisers. The Panel discussed in detail the U.S. legal framework and concluded that three federal laws, together with laws of four states, viz., Louisiana, Massachusetts, South Dakota, and Utah, totally prohibited remote gambling. The Wire Act, 18 U.S.C. § 1084, was passed by Congress in 1961 to prevent use of sports betting by telephone by professional bookmakers. The Anti-Gambling Business Act, 18 U.S.C. § 1955, and the Travel Act, 18 U.S.C. § 1952,
>> But was it a victory? Antigua may have won every battle but lost the war. It makes one think of the famous quote, “Other than that Mrs. Lincoln, how did you enjoy the play?” The matter may not go away. Internet gaming operators have hopes that U.S. adherence to the Central America Free Trade Agreement (CAFTA) might open the door to interactive Costa Rican gaming operators to accepting wagers from U.S. customers >>
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were the other relevant federal laws. Unlike the Wire Act, the Anti-Gambling Act and the Travel Act required, inter alia, a violation of state law as a condition to a federal conviction. The Panel examined 14 state laws, but concluded that only those of Louisiana, Massachusetts, South Dakota, and Utah violated GATS. The Panel concluded: We have found above that the Wire Act, the Travel Act (when read together with the relevant states laws) and the Illegal Gambling Business Act (when read together with the relevant state laws) are inconsistent with US obligations under … the GATS by virtue of specific commitments the United States has undertaken in its GATS Schedule. Accordingly, we will now examine whether these laws can be justified under Article XIV [protect public order].”ix Article XIV would allow prohibition if it were necessary to “’protect public morals’ or ‘maintain public order.’” In order to define public order, the Panel examined past prohibition of importation of lottery tickets, including an example dating to the League of Nations.x The Panel also examined instances of prohibition based on public order which it considered was analogous to “public policy.”xi Specifically, the Panel concluded that the U.S. could make a public order/public policy defence based on fraud, special health risks, underage gambling problems, and money laundering, but there was no evidence of any connection between remote gambling and organised crime. The Panel, however, found that the United States did not consult in good faith with Antigua. As stated above, we conclude that the interests protected by the Wire Act, the Travel Act (when read together with the relevant state laws) and the Illegal Gambling Business Act (when read together with the relevant state laws) protect very important societal interests in the United States. We also conclude that the Wire Act, the Travel Act … and the Illegal Gambling Business Act … contribute to the realization of the ends pursued by those laws in the United States. On the other hand, as stated above in paragraph 6.495, we also find that the measures in question have a significant impact on trade. In this regard, we find that, while the United States has legitimate specific concerns with respect to money laundering, fraud, health and underage gambling that are specific to the remote supply of gambling and betting services, which suggests that the measures in questions are ‘necessary’ within the meaning of Article XIV(a), the United States has declined Antigua’s invitation to engage in bilateral and/or multilateral consultations and/or negotiations to determine whether there is a way of addressing its concerns in a WTO-consistent manner.xii One complicated issue that concerned the Panel was whether or not the United States had legalised interstate interactive gaming through an amendment in 2000 to the Interstate Horseracing Act. In the opinion of most experts, the amendment legalised Internet interstate horserace betting if it was legal in both the state of the bettor and the licensing state. Antigua had claimed that this amounted to an exemption and “less favorable treatment.” The United States maintained that the amendment did not legalise interstate interactive horseracing and that entities that provided 104 ■ Casino & Gaming International
interstate horserace betting, such as Youbet, had stated in its annual report (2002) that there was “’the risk’ of criminal proceedings and penalties brought by the government, and the United States agrees with that risk assessment.”xiii The United States, predictably, appealed the decision and the European Communities, Japan, and Taiwan also filed third-party submissions. After briefing and oral argument, the Appellate Body (Body) of the WTO rendered its decision on April 7, 2005.xiv The Report summarised the U.S. objections (pp. 6-15, 25-30), Antigua’s objections (pp. 15-24), and thirdparty submissions (pp. 30-34). The first major conclusion was the affirmation of the Panel’s decision that the three federal laws, viz., the Wire Act, the Travel Act, and the AntiGambling Business Act, were sufficient to establish a prima facie case of a GATS violation, especially since Antigua showed letters from the Attorney General’s Office and a report of the U.S. General Accounting Office that “Internet gambling violates the three federal statutes.”xv The Report concluded that that Panel “erred in examining” U.S. state laws concerning relevancy to a violation of GATS. The Appellate Body upheld the Panel’s decision that the U.S. had made specific gambling service commitments pursuant to GATS, but the Body’s conclusion was based on different reasons. The Body was critical of the Panel’s reliance on dictionary definitions of “sporting,” concluded the meaning of “other recreational services (except sporting) [was] ambiguous,”xvi but after reviewing scheduling guidelines and other material, other recreational services (except sporting) “must be read as including within the scope of its commitment services … gambling and betting services.”xvii Consequently, the Body also affirmed the Panel finding that a prohibition on the remote supply of gambling services was a GATS violation.xviii The Body also affirmed the Panel conclusion that the three federal laws “encompass measures equivalent to a zero quota”xix and were inconsistent with the GATS obligations of the U.S. The Body affirmed the Panel determination that the three federal laws were measures necessary for protecting public morals and the maintenance of public order.xx The Body, in its most important conclusion, determined that the Panel conclusion that prior consultation with Antigua was necessary was erroneous “because consultations are by definition a process, the results of which are uncertain and therefore not capable of comparison with the measures at issue in this case.”xxi The only remaining problem for the U.S. was whether its remote gambling laws constituted an arbitrary or unjustifiable discrimination, specifically interstate interactive horseracing and the failure by the U.S. to prosecute three suppliers of interactive horseracing.xxii The Body reversed the Panel determination that the U.S. was discriminatory toward horserace betting suppliers because “enforcement agents may refrain from prosecution in many instances for reasons unrelated to discriminatory intent and without discriminating effect.”xxiii The Board did affirm the Panel finding that the Interstate Horseracing Act might exempt “only domestic suppliers of remote betting services for horseracing” from the three
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federal laws and that the U.S. “has not demonstrated that— in the light of the existence of the IHA—the Wire Act, the Travel Act, and the IGBA are applied consistently” with GATS requirements.xxiv It would seem that the U.S. might have two choices: amend the Wire Act so as to include foreign horserace access or ban all interactive interstate horseracing. Antigua and proponents of legal online gambling can take comfort in the final recommendation of the Body. The Appellate Body recommends that the Dispute Settlement Body request the United States to bring its measures, found in this Report and in the Panel Report as modified by this Report to be inconsistent with the General Agreement on Trade in Services, into conformity with its obligations under that Agreement.xxv A more cynical analysis would be why should the U.S. do so notwithstanding the loss of most arguments when they still won the war. The immediate reaction of the U.S. loss on many arguments was fear and anger. Senator Orrin Hatch, a widely respected Utah conservative, was upset “especially in light of a recent ruling that said the U.S. and states like Utah may not outlaw Internet gambling. If the WTO system is to work in benefiting all involved, we can’t be forced to bow to the wishes of some obscure island nation and allow our citizens to gamble over the Internet…. It is difficult enough to keep kids away from the lure of easy money. We simply cannot allow other countries to circumvent U.S. and Utah state gambling laws.”xxvi A Utah newspaper also expressed dismay at the ruling. One headline stated, “Get Utah out of WTO.”xxvii Another story stated: The World Trade Organization ruled Thursday that the United States cannot block other countries from offering Internet gambling to U.S. residents, even if they live in states like Utah and Hawaii where gambling is illegal. And under terms of an international trade agreement, Utah could now find itself legally defenseless to stop Internet gaming within its borders. “This WTO ruling opens a box of Pandoras, but it is not surprising given the scope of the WTO’s invasion into domestic spheres of policy making,” said Lori Wallach, director of Public Citizens Global Trade Watch.xxviii On 31st May 2005, 29 state attorneys general informed the U.S. Trade Representative they were dissatisfied with both the ruling and federal representation of state interests. Online proponents also claimed victory, e.g., “Online Gambling Welcomes Ruling.”xxix But was it a victory? Antigua may have won every battle but lost the war. It makes one think of the famous quote, “Other than that Mrs. Lincoln, how did you enjoy the play?” The matter may not go away. Internet gaming operators have hopes that U.S. adherence to the Central America Free Trade Agreement (CAFTA) might open the door to interactive Costa Rican gaming operators to accepting wagers from U.S. customers.xxx i
The author is indebted to Michael Tew for this observation. His work “E-Gaming: A Giant Beyond Our Borders” (Bear Stearns, 2002) is cited throughout the WTO Report. ”Fair, Honest, and Safe: Cross Border Gambling within the ‘European Union” ARGO, March 2005 at 14;some authorities estimate the market to be as high as $14 billion p.a. The author in indebted to Laura Dubin of gamingvc for assistance in this article
see “Jockey Club Stands Firm on Web Bets Monopoly,” The Standard (China), November 15, 2004, and “Online Horse Betting Curb Stays Despite WTO Ruling,” The Standard (China), April 21, 2005. iii Most countries, such as the U.K. Alderney and the Isle of Man, would say that the bets were accepted at the location of the operator—Antigua. iv United States v. Cohen, 260 F.3d 68 (2nd Cir. 2001), writ of cert. denied Cohen v. United States, 536 U.S. 922 (2002). v “United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services,” Report of the WTO Panel, WT/DS285R, November 10, 2004, at par. 3.5. vi Id. at par. 6.206, 6.447. vii Id. at par. 3.28, 3.37, 6.61. viii U.S. v. Cohen, 260 F.3d 68 (2nd Cir. 2001), cert. denied 536 U.S. 922 (2002), finding Cohen guilty of accepting a sports bet in Antigua which was a violation of the Wire Act; U.S. v. Truesdale, 152 F.3d 443 (5th Cir. 1998), which reversed a conviction of a Texas bookmaker accepting wagers from Jamaica on a technicality but, in dicta, questioning whether any offshore licensed operator might be in violation of the Anti-Gambling Business Act, 18 U.S.C. § 1955; Vacco v. World Interactive Gaming Corp., 714 N.Y.S. 2d 844 (1999), a New York trial court decision which is basically a securities fraud case, but which upheld, in dicta, a gambling conviction pursuant to various federal and New York state laws. ix “United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services,” Report of the WTO Panel, WT/DS285R, November 10, 2004, at par. 6.454. x Id. at par. 6.472. xi Id. at par. 6.467. Public policy is very difficult to explain. In Richardson v. Mellish (1824) 2 Bing 229, 252, Burroughs J. stated “I, for one, protest against arguing too strongly upon public policy;—it is a very unruly horse, and when once you get astride it you never know where it will carry you. It may lead you from the sound law. It is never argued at all but when other points fail.” xii “United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services,” Report of the WTO Panel, WT/DS285R, November 10, 2004, at par. 6.533. xiii Id. at par. 3.236. The assertion by the United States is not taken seriously by any state government or licensed Internet horse racing entity. xiv “United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services,” Report of the Appellate Body, April 7, 2005. xv Id. at par. 147. xvi Id. at par. 195. xvii Id. at par. 208. xviii Id. at par. 238. xix Id. at par.264, 265. xx Id. at par.299. xxi Id. at par.317. xxii Id. at par.348, 352. xxiii Id. at par.356. xxiv Id. at par.365, 369. Curiously, the most recent Kyl Anti-Internet Gambling Bill, expected to be introduced this summer, contains no exemption for the interactive interstate horseracing or includes state lotteries. xxv Id. at par.374. xxvi “Hatch: Utah Must Be Allowed to Ban Net Gambling,” States News Service, April 13, 2005. xxvii Deseret Morning News (Utah), May 6, 2005. xxviii Deseret Morning News (Utah), April 8, 2005. xxix Financial Times, April 12, 2005. xxx Jerry Spangler “Online Gaming May Recruit Costa Rica in its U.S. Push” Desertnews.com, June 30, 2005 ii
JOSEPH M. KELLY Joseph M. Kelly, Ph.D., J.D., is a consultant with Catania Consulting Group and a Professor of Business Law at SUNY College at Buffalo. He is licensed to practice law in Illinois, Nevada, and Wisconsin. He is also coeditor of Gaming Law Review. Dr. Kelly has been a speaker on gaming topics throughout the world, including Berlin, Barcelona, Madrid, Cannes, Edinburgh, New Delhi, Australia, Costa Rica, South Africa, and Switzerland. He has written extensively on British, German, Native American, West Indian, and Internet gambling law. His law review publications have been cited as authority by federal district and appellate courts, as well as state appellate and supreme courts, e.g., Confederated Tribes v. Johnson, 958 P.2d 260 (Wash. 1998). Dr. Kelly’s article on Internet gambling law has been cited in the chapters on Internet gambling by The Gambling Review Report, which was presented to Parliament by the Secretary of State of Culture Media and Sport in July 2001. He co-authored Antigua’s interactive gambling regulations and had been a consultant for Antigua in Washington D.C.
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CASINOS AND PROBLEM GAMBLING: WHAT DO WE KNOW AND WHAT SHOULD WE DO? BY PETER COLLINS
All the evidence we have suggests that most people who gamble like most people who drink alcohol do so in such a way as to enhance their enjoyment of life and without causing themselves significant harm… It is [therefore] a matter for political judgment to decide to what extent restricting freedom of choice for the majority who gamble harmlessly is justified in the hope of protecting a minority who might otherwise gamble excessively.
othing threatens the profitability of casino companies and the popularity (and tax revenues) of the governments which authorise them more than public perceptions that casinos cause widespread problem gambling. It is also true that, in practice, organisations whose business is the minimisation of harm caused by excessive gambling need the support and co-operation of both government and the industry if they are to be effective. Consequently we all need to know as much as possible about problem gambling on the basis of honest and intelligent research. Unfortunately, we know relatively little about problem gambling, especially about its causes, and both pro-
N
gamblers and anti-gamblers tend to claim that much more is known than is actually the case. Defenders of commercial gambling in the industry tend to minimise the incidence of problem gambling and the harm that it causes. They also tend to attribute problem gambling to causal factors which reside in the gambler rather than in the availability of particular types of gambling – except when the type of gambling concerned is that offered by competitors. These claims are made with especial enthusiasm by operators who have a commercial interest in persuading governments to adopt liberal policies in respect of the form of gambling service which they sell – while remaining staunchly prohibitionist with respect to their competitors’ products. Anti-gamblers are usually motivated by ideological commitment and they tend to exaggerate both the incidence of problem gambling and the harm that it causes. They also tend to attribute the causes of problem gambling to the availability of particular kinds of gambling opportunities rather than to features of the individual gambler’s personality which would make them a problem gambler regardless of the availability of legal gambling. Anti-gamblers are motivated by the fact that they really believe that gambling is damaging to the moral rather than the mental health of society, e.g. because it undermines the principle that prosperity ought to be the result of, and the reward for hard work. SO WHAT CAN WE SAY WITH REASONABLE CONFIDENCE? All the evidence we have suggests that most people who gamble like most people who drink alcohol do so in such a
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way as to enhance their enjoyment of life and without causing themselves significant harm. A minority, however, gamble so much that it causes substantial harm to themselves and their families and seem to find it unusually difficult to stop or to control their gambling. In a minority of these cases the harm caused by severe compulsive gambling is as devastating as that caused by alcoholism and other addictions. It is a matter for political judgment to decide to what extent restricting freedom of choice for the majority who gamble harmlessly is justified in the hope of protecting a minority who might otherwise gamble excessively. However, prohibition and restriction of opportunities to gamble do not eliminate the incidence of problem gambling. It is not known whether or to what extent they reduce it. It is plausible to think that some people have a psychological or biological propensity to become problem gamblers but that that propensity is more likely to be elicited by certain kinds of legal and regulatory frameworks than others. Evidence suggests that the risk of developing a gambling problem increase if gambling opportunities: ■ Are continuous ■ Offer frequent prizes ■ Offer what are perceived to be high prizes ■ Allow large sums to be staked ■ Are located in venues where people are likely to gamble on impulse No form of gambling is risk-free but casino games are riskier than betting on sporting and other events and betting on events is riskier than buying weekly lottery tickets. Casino games are safest if they are offered at a single venue which people must make a conscious decision in advance to visit rather than simply dropping in on. They are less safe in high street venues close to where people live and work. They are least safe in venues such as supermarkets and bars where people go for other purposes and may be more readily tempted to gamble on impulse. The introduction of casinos, however, does not necessarily lead to an increase in problem gambling. A study by Dr Rachel A Volberg of the introduction of casinos in Montana, North Dakota, Oregon and Washington State compared problem gambling rates before and after the introduction of casinos. She found that in Montana and North Dakota the incidence of problem and pathological gambling as measured by the South Oaks Gambling Screen increased substantially. In Montana, which had the larger increase, problem gambling grew from 2.2% of the adult
population to 3.2%, and pathological gambling from 0.7% to 1.6%. However, in Oregon numbers for problem and pathological gamblers declined – in Oregon from 3.3% to 2.3% for problem gamblers and from 1.4% to 0.9% for pathological gamblers. The critical variable, according to Volberg was whether the introduction of casinos was accompanied by the provision of services for problem gamblers including programmes to enhance public awareness about gambling and its dangers.
>> Economically irrational behaviour, (aka “fecklessness”) is something to which individuals are predisposed by nature and nurture and, as such, is not caused by the presence of opportunities to be irrational but may be triggered by them. If this is so, one would expect the number of potential problem gamblers in any given population to be relatively stable >>
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Volberg’s finding that the introduction of casinos does not necessarily lead to an increase in problem gambling is replicated in the study which she undertook with Dr Max Abbott into the incidence of problem gambling in New Zealand before and after the introduction of casinos where problem gambling services were extensive and where problem gambling numbers decreased. This finding is also confirmed by studies undertaken by Professors Peter Collins and Graham Barr in South Africa. They found that, between 2001 and 2003 during which time there was a considerable increase in the availability of legal casinos in South Africa, the number of problem gamblers amongst those who engaged regularly in some form of gambling other than the lottery remained constant. (There were, in 2001, 186 such respondents out of 5800 with access to the new forms of gambling – large casinos and the National Lottery - who answered more than a third of the Gambler’s Anonymous 20 questions in the affirmative. In 2003 there were 187 out of 5816.)
A possible explanation of this counter-intuitive phenomenon would be the following. Problem gambling means gambling away significantly more money than you can afford to lose. This is a species of economically irrational behaviour along with e.g. compulsive shopping and credit card abuse. Economically irrational behaviour, (aka “fecklessness”) is something to which individuals are predisposed by nature and nurture and, as such, is not caused by the presence of opportunities to be irrational but may be triggered by them. If this is so, one would expect the number of potential problem gamblers in any given population to be relatively stable. As a matter of fact there is a surprising degree of convergence in the estimates of numbers of problem gamblers in the adult population in studies conducted around the world. These estimates show about five percent of the adult population to have had a moderate problem with gambling at some point in their life and about one percent to have had a severe problem. This hypothesis may soon receive support from neurophysiologists and other cognitive scientists who expect reasonably soon to be able to identify the differences in brain activity between excessive or problem gamblers and sensible or healthy gamblers. This is the principal line of research being pursued by Prof Don Ross at the University of Alabama at Birmingham and his colleagues in the USA, South Africa and the UK. The theory which underpins this asserts that: ■ the disposition to become a problem gambler is developed (whether through genetic endowment or through early learning) prior to the availability of any particular type of gambling ■ it is a disposition which leads to poor impulse control ■ people with poor control of their impulses are like to exhibit problematic (self-damaging) behaviour if the temptation to gamble impulsively is regularly put in their way. This would be consistent with the fact that research, such as Alex Blaczsynski’s in Australia, into so-called responsible gambling features, which slow games down, require regular warnings about the extent of losses, place obstacles in the way of acquiring money to gamble etc, is inconclusive. Most features seem to pose the danger that they simply annoy non-problem gamblers without deterring problem gamblers and in the process give regulators the illusion that they are taking tough measures when in fact what they are doing is ineffectual. On the other hand, it is true by definition that people who set themselves sensible limits to their losses before they start to gamble and then stick to them will not get into trouble. There would, therefore, seem to be merit in enabling, encouraging or requiring players to set limits to their losses before they start playing as this will inhibit them from chasing losses. One of the most popular strategies for seeking to minimise problem gambling is having a system which enables players to ban or exclude themselves from gambling venues. There are considerable but not insuperable difficulties of implementation with such systems. There is little evidence as yet about the effectiveness of such schemes which seem Casino & Gaming International ■ 109
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likely to be a way of reinforcing the resolve of those who are strongly motivated to solve their gambling problem anyway. From all this it is not unreasonable to expect that authorising new gambling opportunities need not result in an increase in problem gambling if ■ they are accompanied by the provision of good public awareness and public education programmes ■ the gambling opportunities are located in venues which minimise the temptation which they pose to people to gamble on impulse, i.e. before they go gambling people must be compelled to make conscious decisions about how much time and money they can afford to spend ■ big prize machine gambling is confined to large regional casinos and is accompanied by appropriate measures for raising awareness about problem gambling the number of problem gamblers will not increase ■ gamblers are given a facility for pre-setting limits to their losses and encouraged or required to make use of it. In the UK, with the passage of the new act which for the first time requires both the industry and the regulators to address problem gambling issues, the urgent need is for a public awareness campaign which will make people aware that: ■ gambling is for most people harmless entertainment but for some it is the source of very serious problems ■ gambling outcomes are determined by statistics which ensure the odds always favour the House
■ there are all sorts of superstitions and fallacies which lead people to get into trouble ■ there are strategies for avoiding getting into trouble such as setting limits in advance and sticking to them the signs of being in trouble are regularly losing more ■ than intended, being deceitful about the sources of gambling funds, trying to stop and failing etc ■ if you do get into trouble expert, confidential help is available free of charge There is also, of course, a need for more, good research. PETER COLLINS Peter Collins is Professor of Public Policy Studies and Director of the Centre for the Study of Gambling at the University of Salford. He is the author of the book “Gambling and The Public Interest” (Praeger books, 2003). He is Executive Director of the South African National Responsible Gambling Programme and was part-time CEO of GamCare in 2004. He was an expert advisor to the Joint Scrutiny Committee of the UK Parliament examining the new UK Gambling Bill.
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