Australia s Gaming Industry - A Case Study of Liberalization -

Transcription

1 2002 Monetary Authority of Macau Australia s Gaming Industry - A Case Study of Liberalization - A. Alves Abstract Macao SAR has recently experienced an important shift in policy towards its leading economic sector, casino gaming. According to the new guidelines, competition is going to be promoted, as the market instead of being monopolized by one operator is about to be shared by three gaming companies. Since liberalization in gaming business has occurred in other economies, foreign experience would provide some clues for future development of Macao s gaming sector. Australia, in particular, has a long history of gaming development, and has competed with Macao for the so-called high rollers. This paper intends to study the major characteristics of Australia s gaming industry, namely, its importance in economic terms, technological support and its recent developments such as online gaming. It is hoped that this work could provide useful insights for local gaming policy makers

2 1. Introduction The gaming industry in Australia, a country with a population of about 19 million, is well known as innovative and technologically advanced. The marked development is understandable as 80% of the adult population regularly participates in some forms of gaming (Fiona 1999; Griffiths 1999b). Also important is that gaming expenditure per capita in Australia is estimated at USD200 (MOP1,600) per annum, significantly higher than those in the USA (USD86) and Hong Kong SAR (USD186) (Griffiths 1999b). Business development in the gaming industry has been engineered according to market opportunities, under competition and by the private sector. At the same time, business opportunities have been emerging, as the central and local governments have seen gaming as a way to boost revenue, and hence promoted diversification. Nowadays there are 13 casinos operating in Australia, being at least one in each state or territory. In addition, about 185,000 gaming machines exist in several non-casino locations, such as clubs and hotels. The lottery business has expanded to include lotto, 1 soccer pools 2 and instant scratch-its. The horse racing has also registered a notorious improvement, with innovation like night racing and satellite telecasting. Australia is possibly the first developed country that issues regulations regarding interactive gaming, namely gaming on Internet, which is a high-potential area for future business growth. 2. Industrial Structure The most remarkable characteristic of Australia s gaming sector is the high density of gaming machines and their wide distribution among different kinds of public areas. The number of gaming machines is around 185,000, representing almost one per Just like Mark Six in Hong Kong SAR, lotto is a game to choose numbers in anticipation that those numbers will be amongst the winning ones to be selected randomly. 2 A numbers game of chance where the winning numbers are based on the results of soccer matches in the United Kingdom or Australia

3 inhabitants. They are mainly located in clubs (61%), hotels (33%) and surprisingly to a lesser extent, casinos (6%). 3 Gaming machines account for the most important share of gaming revenue and taxation (around 50%) in Australia. Compared with the USA and Canada, gaming machine per capita in Australia is five times higher with a broader dispersion. According to a study by Marecon International Research, which is regarded as conservative, Australia owns almost 3% of total world gaming machines of several varieties. In terms of number of gaming machines, Australia ranks sixth after Japan, the US, the UK, Germany and Spain. In total over 7,000 business establishments provide gaming services throughout Australia, either as their primary activity (i.e. casino and wagering businesses) or secondary activity (i.e. clubs and hotels). Despite being small in scale, hospitality clubs, pubs, taverns, bars and totalisator agencies (horse racing) account for the majority of gaming businesses in the country. 3. Ownership A mix of public and private ownerships characterizes Australia s gaming industry. Casinos are regional monopolies. Gaming businesses, though not all under private ownership, have the majority under a private management. Other than Adelaide Casino, all the casinos are privately owned and listed in the stock exchange. Australian companies operate almost all the casinos, with US-based MGM Grand Hotel Casino in Darwin being the only exception. 3 Gaming machines in the state of Western Australia are only permitted in casinos

4 The gaming business growth has also been associated with a new trend of ownership. Holding shares of gaming companies, in particular, holding shares of casinos, has become more popular throughout the community. Some companies, previously unrelated to gaming, have acquired gaming assets and companies with existing gaming operations have expanded into other forms of gaming. 4. Profitability and Weight in the Economic Activity The value of before tax profits in the period, for the gaming sector as a whole, was about USD754 million (MOP6.1 billion). The most profitable businesses were gaming facilities in clubs and hotels, which registered a total profit of USD503 million (MOP4 billion), or an average profit of USD101,000 (MOP808,000) for every establishment. In contrast, the casinos reported an operating loss of nearly USD150 million (MOP 1.2 billion) an average of USD11 million (MOP89 million) per casino. During the same period, total value added (profits, wages and taxes) of gaming was estimated to be USD3.62 billion (MOP29.1 billion), which represented about 1.5% of GDP. Clubs accounted for the majority, at about 29%, of industry value added, followed by horse racing (23%), lotteries (23%), casinos (15%) and hotels (10%). The gaming taxes accounted about 51% of total value added, while wages and profits accounted for 49%. In other perspective, gaming businesses generated over USD5.5 billion (MOP44.5 billion) in net takings 4 and USD326.9 million (MOP2.6 billion) in commissions. 5 The 4 Net takings (or gross revenue) are total gaming income less prize money, or in other words, the net amount lost by gamblers. 5 Gaming commissions are the amount paid to agencies with horse racing wagering, lotteries, keno, lottotype games and to hotels and clubs with gaming machines (when the hotels/clubs do not own the machines)

5 largest source of net takings was from gaming machines, accounting for over 50% of total gaming gross revenue. 5. Employment In , over 20,500 people were employed in casinos (Intralot 2001). More than 13,000 of them were working at wagering and soccer pools and nearly 3,000 in lottery businesses. More than 70,000 people were employed in clubs, pubs, taverns and bars as a result of the operation of gaming. Overall, Australia s gaming industry probably employs about 1% of total workforce, which is larger than the shares of industries, such as mining and electricity, gas and water. 6. Taxation Revenue from Gaming Since the liberalization of gaming industry has in part been driven by revenue needs and limited tax base, a variety of taxes and fees are levied on gaming activities by central and local governments. Meanwhile, the government revenue from gaming, other than direct taxation and license fees, also comes from the industry s mandatory contributions to specific community programmes or funds, and the gaming profits distributed to the governments as shareholders. In central and local governments collected over USD1.9 billion (MOP15.5 billion) in taxation revenue from gaming. This represented about 12% of total taxation revenue

6 Table 1: Gambling Tax Revenue as a Percentage of Total Tax Revenue (Average of All States and Territories) Unit: % Note: Tax revenue includes licence fees and charges. Source: Productivity Commission Report While electronic gaming machines and keno accounted for about 47% of gaming taxes, casinos only generated 12% of the taxes. Table 2: Distribution of Gaming Tax Revenue (All States and Territories) wagering lotteries casino gaming other total and pools gaming machines gaming Unit: % share Note: Includes taxes, licence fees and other levies paid to the government by gambling operators. Source: Productivity Commission Report Government revenue from gaming averaged 34% of the money spent by consumers on gaming products in , though different games are taxed at different rates. The tax rates of various game types (including taxes, license fees and other charges) were 82% for lotteries/lotto, 34% for wagering, 30% for gaming machines and 21% for casinos. As a result, gaming tax rates are higher than those imposed on most other goods and services, except for alcoholic beverages, tobacco, luxury cars and petrol. The explanations for the high rates ( excess burden of taxes ) of gaming are normally stemmed from low price elasticity and the limited substitution between different forms of games

7 Unlike normal consumer goods, the prices of gaming are not readily apparent. Since consumers do not really understand the prices, they appear to be less responsive to price changes. Various studies conclude that demand for lotteries is most insensitive to prices, followed by demand for gaming machines. While casino and wagering demand is generally rather insensitive to prices, casino high rollers seem to have higher price elasticities. In fact, casinos in Australia pay a lower rate of tax (10%, which is about half of other gaming activities) on the revenue earned from high rollers. It is believed that lower tax rates can help attract high rollers to Australian casinos. Lower tax rates allow casinos to offer inducements to high rollers, such as free accommodation and other services, or discounting betting losses by a certain percentage, which effectively lowers the price of gaming. The lower taxes are therefore based on the assumption that high rollers are highly sensitive to prices. The governments, in a nutshell, believe that 10% of something is better than 20% of nothing. 7. The Changing Pattern of Gaming Two decades ago the main forms of gaming in Australia were betting on horse racing, lotteries and raffles. Since then liberalization has led to the proliferation of gaming products. The range of gaming products has expanded to include keno (an electronic form of bingo), casinos, scratch-tickets and gaming machines. The gross revenue (including lotteries, gaming machines, casino table games and keno) grew from USD650 million (MOP5.3 billion) in the early 1970s to over USD4.5 billion (MOP36 billion) in The legalization of gaming machines in hotels and clubs has created the major source of growth in the gaming industry. Gross revenue from gaming machines increased from

8 USD500 million (MOP4 billion) in , to USD3 billion (MOP24 billion) in This expansion gave a considerable boost to the profits of hotels and clubs with gaming facilities. Casino revenue also increased significantly over the period. Its gross revenue increased from below USD31 million (MOP250 million) in , to over USD1 billion (MOP8 billion) in , with each state or territory operating at least one casino. 8. Technological Advances The growth of Australian gaming industry has been made possible by new regulations for liberalization that have influenced the structure, profitability and the development of the industry. Another factor of growth is technological advancement. Australia is now at the forefront of technological innovation in world gaming business. According to the Productivity Commission Report of 1999, the technological advances have enabled: - Gaming suppliers to improve their services and increase the entertainment experience for consumers. For example, gaming machines are continually being updated with new graphics, feature games and linked jackpots to maintain consumer interest; - Much greater access to gaming products, or convenience gaming. Gaming machines are available in pubs and clubs throughout Australia, and the proliferation of interactive gaming products such as Internet gaming and telephone betting means that consumers no longer have to leave home to gamble. - Increase in the tempo of gaming, in order to promote continuous form of gaming. For example, customers only need to wait for a few seconds for each spin on a gaming

9 machine. The introduction of bill acceptors on gaming machines also avoids the need for players to leave their machines to get change. - A higher level of security for players and service providers. It includes the introduction of cameras in various areas and computer systems to monitor gaming machines. - Gaming providers to collect considerable details of their clients. For example many casinos and clubs provide gamblers with membership cards which when inserted into gaming machines can earn consumers free prizes or money. The cards simultaneously collect information about each consumer s expenditure pattern and level. Technological advances are bound to shape the gaming industry in the future and some developments have already become apparent. With the spread of broadband cable throughout Australia, gaming through Pay TV, as a new technological form of gaming, is starting to develop. Meanwhile, the most feasible technological change in the gaming world is associated with the growth of Internet gaming. The Internet gaming brings a range of interactive gaming products directly into the homes of consumers in a way that they can choose the gaming providers from a list beyond country borders, and hence competition would be promoted. 9. Online Gaming Nowadays in several aspects of daily life consumers can access to products interactively. Interactivity is enhanced via communication channels such as telephone, TV, computer terminal. It exists in banking, education, retail sales, and not surprisingly, is expected to expand into the area of gaming

10 Consumers can, possibly staying at their own home, with their own computers, gamble with the highest degree of convenience. Beyond that, Internet gaming tends to be available in a way that surpasses the physical borders of the countries. Recent research argues for the existence of big supply, as about 700 Internet sites are found to be operated by about 200 companies. Therefore, a ban on Internet-casino business in Australia could prove to be impractical. Australia would also risk making the industry underground or simply pushing the business overseas (Bell 1998). Recognizing that the activity can meet proper standards and generate tax revenues, the Australian government legalized online gaming in 1998 (Cukier 2000). It is regarded as a pioneer act, as Australia is the first industrialized country to legalize Internet gaming, together with New Zealand, Antigua, Costa Rica, Belize and the Dominican Republic (Bell 1998; Barret 2000). However, regulatory agencies should be assured that the companies are solvent, the games are fair and the winners can claim their loot. Players privacy should be rigorously protected; consumers have recourse to lodge complaints on any aspect of the service and the computer systems should meet tough standards for resistance against hackers. Currently, the games available on the Internet can be divided in two types: the gaming on a specific physical event and the virtual online gaming. The gaming on a specific physical event is more or less a new mechanism for placing wagers. It is usually seen in activities such as horse and dog races, football, cricket and tennis events that take place in a real playing field. Virtual online gaming includes software-generated games such as slot machines, blackjack, roulette and baccarat. This form of gaming exists only in the virtual arena the games are not played physically in a gaming room. The operator s server generates randomly the outcome of the event. Generally the software gives the gambler the options of playing in a practice mode (not for real money) or playing online (for real money). Prior to betting, a gambler must first register and establish an account with the gaming

11 service provider. The account is debited when a gambler places a bet, and credited when a gambler wins a bet. The account must be funded prior to betting. Funding of the account can be by transfer from credit card, cheque, money order, or direct bank transfer. The first group of Internet gaming sites was launched in They provided slow casino-type games with simple graphics. Since then, advances in Internet transmission speed, security and graphics have enabled the industry to boom. The development of Java-based software has allowed players to gamble directly from their web browsers without having to download large files onto their computers. The majority of Internet gaming providers are small companies, licensed by local governments often in the Caribbean or South America and largely unregulated. However, the place where a site is licensed typically differs from the location of the server that contains the computer programmes, which may be different again from the location of the ultimate owners of the sites. The computer servers and owners tend to be based in western countries, particularly North America. Australia s first Internet casino (Lasseters Online) was launched in April It took USD2.5 million (MOP20 million) to develop a range of casino games including roulette, blackjack, poker and slots in two years. Demand rose above target levels with the turnover in the first six months of operation surpassing USD6.7 million (MOP54 million). Last year over 12,000 players were registered; of which 82% were offshore players, originated from about 154 countries. Besides, the major benefits of Internet gaming are likely to go to recreational consumers, 6 and in the providers perspective, it means higher productivity and export potential, particularly if technology and regulations can provide competitive advantages. Indeed, 6 However, a survey regarding household use of information technology suggests that Australian consumers interest in Internet gaming was relatively low, with less than 4% of adults stating their interest in Internet gaming services. Another survey suggests that in only around 90,000 Australians or 0.6% of Australian adults gambled on the Internet (including casino games, sports betting and racing)

12 from the casino industry s point of view, the spread of Internet gaming could threaten the competitive position of physical casinos. Actually, in the absence of taxation, online offshore virtual casinos can provide substantially superior paybacks to gamblers. However, some argue that Internet gaming players are a different group of clients from those of typical gamblers in traditional forms of gaming. 7 Much of the lobbying for a ban on Internet gaming comes from the offline gaming industry (Barret et al. 2000). There are concerns about competition, community impacts and tax implications, which have generated effort to prevent new licenses for Internet gaming in Australia. Nevertheless, the ones who are against the ban in Australia, and are likely to win the battle argue that Australian sites are internationally recognized as being the most reputable and well regulated in the world (Camphuisen 2000; Cukier 2000). It would make sense for the Australian authorities to build on that reputation, rather to deny it and force players into the hands of questionable operations offshore, as well as to lose tax revenues to foreign gaming providers. 8 In sum, Internet and interactive gaming represents a new level of accessibility to gaming. Its full impact on the community and family life is still to a large extent unknown. Although the casino online industry has been developing at a slow pace, mainly because it is not as entertaining as their physical counterparts, the uncertainty about community impacts suggest a cautious approach to liberalization of online gaming. 7 Even so, data seems to present the contrary. Internet capable computers and interactivity have spread throughout the Australian society including via digital television. It is expected that the sociodemographic profile of Internet gamblers will closely match the characteristics of Australian adults. 8 However, even for gaming operations based outside the country, there are some ways to control domestically the online gaming, namely making unlicensed sites illegal or even blocking them

13 10. Conclusion The evolution of the gaming industry in Australia is of referential value to Macao, which is starting a process of liberalization in gaming, possibly inducing a market expansion. Australia started to legalize gaming activity in the 1930s. Initially gaming was associated with charitable and social purposes, with charitable organizations and state governments being the major operators. The scope of gaming regulation was broadened by the 1960s in view of the rise of private operators of wagering and gaming clubs. The government policy was then to fight against illegal gaming activities. Meanwhile, the industry was witnessed a certain degree of liberalization and competition notwithstanding the public ownership of lotteries and horse racing. In the following decades, the gaming activity, especially in the area of casinos, expanded at a fast pace with its focus shifting from social to economic considerations. In recessionary periods, the Australian government intended to make use of gaming to raise tax revenue and to promote economic growth. Today, casinos are operated in every state of the country. Some distinct features of the Australian system are worthwhile to be highlighted for the reference of local policymakers: First, gaming machine has the potential to develop into the core of gaming business. The number of gaming machines in Australia is around 185,000, and the machines are located in several kinds of places (61% in clubs, 33% in hotels and 6% in casinos). Indeed, in Australia the legalization of gaming machines in hotels and clubs has created the largest source of growth in the gaming industry. The gaming machines currently dominate the industry, accounting for about half the total revenue and taxation collected from all forms of gaming

14 Second, going-public can derive a bunch of benefits. The 13 casinos operating in Australia are mostly listed on the Australian Stock Exchange, allowing a wide spread of casino ownership in the community. Such a mode of ownership helps promote an open and transparent system, broaden financing sources of investment and provide crossindustry stimulus to innovation. Third, different tax rates can be applied to different groups of customers for business and revenue maximization. In Australia, a lower tax rate is used as an attraction to highly mobile, price-sensitive high rollers. A proper tax system, however, should be based on scientific evaluations on price elasticity of demand and specific market conditions. Fourth, gaming via IT devices is a non-negligible area of business. The Australian government legalized the operation of online gaming as early as With the establishment of broadband networks, gaming through Pay TV, as new technological form of gaming, is starting to develop. The most feasible technological change in the gaming world is associated with the growth of Internet gaming

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