The Global Gamble

the-bellagio

The first month of 2016 is in the can. Lemmy, Bowie, and Glenn Frey have all exited stage left, the Middle East remains a mess, oil is less than $30 a barrel, the Chinese economy is serious cause for concern, and the see-sawing financial markets are giving doomsayers a field day.

How will the economic turmoil affect the gambling market? It all sounds rather grim but is it really that bad? In times of difficulties they say that: ‘industries that sin… win.’ This week, we’ve got the betting barometer out to test the pressure. Is it time to stack up the chips and play hard or visit the cashier and collect?

The Big Picture

The Big Picture

Context is king. Before we probe the highs and lows of the gaming industry’s current financial fortunes, we need to get an overall picture of the global economy, as it stands at the start of 2016. According to the European Central Bank and the International Monetary Fund, caution and confidence both apply in equal measures.

On One Hand

Europe is facing downward pressure due to a slowdown in emerging market economies like China. In the US, interest rates have been raised for the first time in ten years and regulation is finally bringing an end to ultra-loose monetary policy. The IMF has warned that the challenges facing the global economy must be ‘carefully managed to avoid disaster’. There are still huge imbalances in the system. It is something of a house of cards.

On the Other Hand

Underlying economic data is not weak. There is nothing like the amount of leverage in the system as there was when the last crash landed in 2008 – 2009. We’re not facing immediate financial Armageddon.

Economist Nouriel Roubini, who famously and accurately predicted the 2008 crash, thinks the global market is in a ‘new abnormal’: a situation where ‘the traditional connection between the money supply and prices has collapsed because banks are hoarding the additional supply of money in the form of excess reserves, rather than lending it.’

Paraphrasing the noise, it seems that the global markets are flying on a single engine, desperately trying to avoid any pockets of turbulence. With some careful navigation, and a steady pilot at the controls, the economy can continue to cruise – just at a much lower altitude.

The following graphic was compiled by Merrill Lynch who asked a group of fund managers what phase of the economic cycle they thought global economy was in:

Economic Cycle

On Land: The Betting Picture

To get a clear picture of the financial situation on the casino floor, we need to look at the data for both of the world’s biggest gambling destinations: Macau and Las Vegas.

MACAU

In Macau, the action has taken a tumble with revenue growth turning negative in the casinos. In 2013, a ten year betting boom started to turn into a losing streak; gamblers are staying away. To get some perspective, you have to remember that Macau is at least seven times bigger than Las Vegas, with an industry worth nearly $50 billion.

Anti-corruption legislation, a smoking ban, and the slowdown of the Chinese economy have seen gaming revenue drop by around 34% in 2014. It was announced last week that MGM China Holdings Ltd are looking to amend the terms of a $3 billion loan, due to “the declining fortunes of Macau’s gambling houses.” It follows Melco Crown Entertainment Ltd’s similar move, relating to a $1.49 billion loan, two months earlier. These big players are basically struggling to keep up with their loan repayments.

LAS VEGAS

nevada

In Las Vegas, the odds are starting to move in the house’s favour. The city – famous for on-stage celebrity revivals – is enjoying its own come back. The 2008 downturn decimated Las Vegas but some canny forward thinking (which we will come on to later) has seen a return in visitors and an upwards spike of revenue.

Nevada casinos reported a 3% combined revenue rise to $24.6 billion, in the 12 months ending in June 2015. Although an increase on 2014, the figures are still some way short of the pre-recession peak of $25 billion in 2007.

So… why has Las Vegas seen an upward trend as Macau continues to go bust? The short and simple answer is diversification.

Flex. Respond. Adapt. Innovate. Diversify…

The critical difference between the fortunes of Las Vegas and Macau is down to what each destination has to offer. Clearly, both are places where you can play baccarat, blackjack, craps, roulette and every casino game known to man. Gambling is common to both (doh!).

However, Las Vegas also enjoys a hard fought reputation as party town number 1. It even has a hardcore hedonistic catchphrase: ‘What happens in Las Vegas, stays in Las Vegas.’ It’s foundations may have been built on betting but it’s future could be all about family, fun, and frivolous pursuits.

The upward trend in the Las Vegas accounts is mainly down to non-gaming revenue. Restaurants, clubs, shows, pool parties, and shopping are the activities that draw in the crowds. Gambling – as a percentage of total revenue – is now at an historic low, according to figures on the Nevada Gaming Abstract financial report.

“It’s a sign of the changing market,” says David Schwartz, from the Las Vegas-based Center for Gaming Research, “Food is growing and gaming as a percentage is shrinking. What I’m hearing from people is they spend more on food and entertainment than gambling. This is what the visitors seem to want.”

Caviar and champagne

In Macau, it’s a different story. Despite warnings, the industry has failed to diversify and there is none of the glitz and glam that Las Vegas is renowned for. With scandal weary whales staying away, and (unaffordable for most) $250 minimum bets at the non-VIP baccarat tables, Macau is suffering.

Some developers are getting on board. Wynn Macau is investing in a 15,000 seat arena and Sheldon Adelson is bringing Las Vegas style attractions to cater for China’s burgeoning middle class. At the end of January 2016, it was announced that legendary house music brand Pacha was opening a 3,000-capacity club, as part of the Studio City resort.

Forecasters anticipate that the mighty Macau will ride out the storm and adjust its offering to cater for a wider demographic. It’s one (massive) potential threat is China. Should the Asian giant ever grant permission for casinos to be built on the mainland, Macau could be obliterated. It needs to establish itself as an all encompassing global tourist destination to guarantee its survival

Online: The Betting Picture

The wax and wane of the online gambling market continues. In Russia, authorities are considering unlocking the doors to more than 20 million online poker players. In several US states, including Nevada, Delaware and New Jersey, online poker is either already, or shortly to be, regulated, licensed and taxed online.

However, it’s election year in the US: a difficult time to get legislation passed. Also, the taxation revenues generated by New Jersey’s online poker licensing have laid rest to the idea that monies coming in from online gambling can be an all encompassing financial panacea. It is – however – income that requires no sacrifice elsewhere.

Globally, online gambling continues to stay innovative – quickly achieving ‘best practice’ related to platform.

Poker rooms, for example, all follow basically the same format with relevant branding. Until a new platform gets traction, the modus operandi is ‘improve’ not innovate.

Mobile

Mobile casino platforms are predicted to continue growing this year. With more and more people using their tablets and handhelds to enjoy some time at the casino. The technology is completely dependent on the supporting infrastructure. As 4G rolls out, more and more people will take their recreation online. As mobile devices become increasingly sophisticated, so they absorb more use.

Mobile Gaming

The five buzzwords at the head of this page will be the key to any online gambling organisation’s future success. According to Deutsche Bank: “Our view remains that the European online gaming sector will consolidate in the near term as falling industry growth rates in the UK/Europe, rising marketing costs, increased gaming taxes and rising competition makes scale a increasing necessity to compete more effectively.”

Social

Social gaming, via platforms like Facebook, where people compete against each other is a continuing growth area. Although constantly mired in class actions concerning ‘allegedly using illegal gambling mechanics’, the cases are usually dismissed. Social casino games are some the top revenue generating apps. Real money, skill-based, games will open up business opportunities for agile businesses.

The transition from a desktop-based betting experience to an ‘on-the-move’, social gaming experience is already happening. It’s just a matter of time.

Innovation and New Tech

Game Controller

Virtual reality is set to be the breakthrough tech in 2016. There are already several online gambling software companies lining up with compatible products. Like the mobile market, the success of the software will depend on the affordability, effectiveness, and accessibility of the hardware and technology.

In Conclusion 

2016 is likely to be a year of steady, but slower, growth. Social gaming will be a key growth driver with virtual reality fluttering on the sidelines. Land based casinos will continue to diversify their offering to appeal to a broader audience and lure in millennials with income to spare.

Regulation battles will continue to deliver both winners and losers. New territories will open up opportunities for established players. Diversification will also be a factor for online operators. Amaya and Playtech are both actively acquiring with this is mind.

The big operators will need to watch their marketing spend, as a ratio of their average earnings before interest and tax. It’s getting higher for most businesses. Smaller entities – in some cases paying 15% tax, as part of a regulated business, on top of up to 25% marketing spend – will be swallowed up by bigger corporations.

Watch this space. All bets are on!

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