September 2017 – Features
How Big is Too Big?: The Unwieldy Corporate Structure
By Chris Sieroty
Running a modern casino company is about more than just hiring dealers and bartenders, or choosing the latest slot machines for the gaming floor.
Today’s publicly traded casino companies are multibillion-dollar businesses with complex organizational structures. Gone are the days when a typical corporate structure was a CEO overseeing a general manager of a single property on the Las Vegas Strip or in Reno.
There are few single casino operators or smaller companies, with just a handful of properties left in the gaming business.
Recent acquisitions by Boyd Gaming Group, Red Rock Casinos, parent of Station Casinos, and Eldorado Resorts’ merger with Isle of Capri are examples of more industry consolidation.
Now a casino company CEO has multiple vice presidents reporting on the profitability of each hotel within its portfolio.
These companies, in some cases, have moved away from operating their own clubs and restaurants, finding greater profits in lease and revenue-sharing agreements with celebrity chefs or well-known club brands like Hakkasan.
Casino companies also have shifted some local responsibilities for slot machine buys or leases, marketing, purchasing, reservations and compliance away from individual properties into a central location, as a way to save on employee costs or to increase operating efficiency.
For example, MGM National Harbor in Prince George’s County, Maryland, and Caesars in Atlantic City still have compliance departments on property, but their staffs are smaller and more of the supervision of daily reports is done from a central location in Las Vegas. Marketing of those properties and reservations could also be handled from Las Vegas.
So, what are the advantages or disadvantages to centralizing some operations rather than allowing the individual properties to make their own decisions?
Marcus Prater, executive director of the Association of Gaming Equipment Manufacturers (AGEM), says for the largest slot machine companies, having a centralized structure allows for high-level corporate consistency and direction while allowing staff in those local markets to focus on the needs of the customer.
“And of course, the manufacturing side of the slot machine business is very specialized, and therefore demands that it typically takes place in a single location, or in the case of a company like Aristocrat, a combination of Australia and Las Vegas,” Prater says.
Analysts believe success is measured by how the chief executive runs the company.
“Depending on the CEO of a given company, views vary widely on the advantage or disadvantage of a large corporate structure,” says Steven Gallaway, managing partner of Global Market Advisors.
“A large corporate structure is not necessarily bad, providing it is properly managed, with members having specific job duties with appropriate oversight.”
In addition and equally as important, Gallaway says, properties “must always be given enough autonomy to ensure that they are able to operate their facilities in a fashion that allows them to cater to the local dynamics of their given market.”
Bo Bernhard, executive director of the International Gaming Institute at the University of Nevada, Las Vegas, believes the advantages are the efficiencies and consistencies that result from centralizing operations.
“Rather than a scattershot approach to marketing, for instance, a fully developed and consistently branded marketing message, with several tiers and properties, can be put into place,” Bernhard says.
And as these larger-scale companies increasingly face global competition for the travel, tourism and gaming dollars, their much larger-scale customer databases allow them to compete more rigorously in an international marketplace.
Caesars and MGM
Currently, Caesars Entertainment owns and operates more than 50 properties while MGM owns 27 properties worldwide. MGM continues to build new regional casinos, with a $950 million resort in downtown Springfield, Massachusetts, scheduled to open next year.
Gallaway says he would judge whether a gaming company is too large “more on their stock prices and ongoing performance.” He adds that Caesars appears to be making good headway as it emerges from bankruptcy.
Caesars CEO and President Mark Frissora says he expects the company to emerge from bankruptcy in early October.
Caesars’ current operating structure includes Caesars Entertainment Corp. and Caesars Acquisition Co. Caesars Entertainment currently owns Caesars Acquisition, which includes U.S. and international properties the company owns and manages, and Caesars Entertainment Resort Properties.
Caesars Acquisition is partial owner of Caesars Growth Partners, which is partial owner of Caesars Interactive Entertainment and six casinos.
That complicated corporate structure will two split into two companies as part of its reorganization—a real-estate investment trust and an operating unit.
As for the slot machine and table game business, Prater says he isn’t sure that centralization made it easier to sell or lease products, “but certainly when it comes to marketing, branding and trade show functions, having headquarters drive the overall direction creates consistency in markets around the world.
“Typically, local offices are focused on selling and service,” Prater says. “During my time at Bally back in the day, all of our marketing direction originated from Las Vegas, and the local offices followed along while prioritizing their efforts to benefit the customer and ensure the games had the best chance to succeed.”
Bernhard says the advent of these publicly traded companies “led to a revolution in the way that these companies were funded, which in turn allowed them access to capital that allowed for bigger and nicer facilities to be built.
“Today, the nicest, most expensive buildings in the world, arguably, are the massive multibillion-dollar integrated resorts. Generations ago, they were cathedrals!”
For example, MGM owns 10 properties in Las Vegas, including Aria, Bellagio and the Mirage, while Caesars owns nine properties.
“Of course, there are always regulatory concerns whenever we see increasing consolidation,” Bernhard says.
“Questions in the antitrust sphere, for instance, can and have arisen on the Las Vegas Strip, with four major players and a handful of smaller operators.”
On a more micro level, Bernhard says, “workers on the floor might worry that if they are fired from a job with one major company, they are eliminated from working for so many properties—and may not have the same kinds of options that a more diversified labor market might provide.”
Casinos Seek Third-Party Operators
Gone are the days when casino bosses controlled everything on their properties.
The idea of leasing out retail, club, sports book or restaurant space to a third-party operator is now commonplace in the resort industry.
Analysts credit casino companies with being willing to surrender some control in most cases in return for a greater reward when a specialist with drawing power operates clubs, restaurants or other amenities that are as much of a draw as the casino.
The Cosmopolitan of Las Vegas wasn’t the first to seek out celebrity chefs, but the resort, which opened in December 2010, made the business decision to attract chefs who didn’t already have restaurants in Las Vegas.
Despite the restaurant business being risky, there is always someone willing to bankroll the next Jose Andres or Wolfgang Puck. Deals with celebrity chefs or well-known brands make financial sense in good times and recessions for both parties.
The idea of using third-party operators isn’t new.
For years, casino sports books have been run independently, with operators paying rent and a percentage of the profits to the house. Casino operators like that setup because it allows a third party with special expertise to set the odds, accept the wagers and take all the risk.
“Sports books, like baccarat, are subject to large monthly swings in win and loss,” Gallaway says. “The larger the number of sports books owned and operated by an individual, the easier it is to reduce the risk of these swings in revenue.”
Gallaway says as the revenue levels of sports books are minimal in comparison to the gaming operators, many companies find it easier to outsource the operations of such an entity to a third party.
William Hill and CG Technology are two bookmakers that operate race and sports books in Nevada.
“This way, the operator doesn’t have to focus on a small revenue-generating asset with large monthly swings, but is able to still benefit from the ancillary gaming and non-gaming revenue that is generated by players making the wagers at a sports book,” Gallaway say.
But Gallaway adds it will be interesting to see if or how this approach changes from land-based operators as the reality of sports betting in other states and online sports betting come closer to reality.
With the U.S. Supreme Court agreeing to hear New Jersey’s case to legalize sports betting despite the federal ban, “the implications could be significant and be highly beneficial to the overall gaming industry,” he says.
The Professional and Amateur Sports Protection Act (PASPA) of 1992 prohibits sports betting in all states except Nevada, with partial exemptions for Delaware, Montana and Oregon.
Not all sports books are run by third-party companies. Wynn Resorts, Station Casinos, MGM and Caesars still operate books in-house.
June 2017- Features
Betting on Brazil: The political battle to create a legal, regulated gaming market
By Chris Sieroty
The popularity of Jogo do Bicho—the animal gambling game—is proof, some analysts and gaming executives say, of how successful Brazil’s gambling industry could be.
The problem is that with very few exemptions, gambling, including slot machines and Jogo do Bicho, has been illegal under federal law since the early 1940s. However, over the last two decades, lawmakers have been trying to legalize one form of gambling or another, as well as creating a regulatory framework that would lift the ban completely.
Those efforts have drawn interest from some of the world’s largest gaming companies.
“Brazil certainly has the potential to be a market of interest, but it is entirely dependent on the type and terms of any new legislation,” says Alan Feldman, executive vice president of MGM Resorts International. “We continue to monitor activity there as the process continues.”
Las Vegas Sands Chairman Sheldon Adelson recently made a trip to Brazil to meet with President Michael Temer and several key officials to discuss building an integrated resort in Rio de Janeiro.
Adelson’s visit last month has been considered a sign that a law legalizing gambling could be approved imminently. The O Globo newspaper reported that Adelson met last month with the mayor of Rio de Janeiro to discuss tourism and his proposed $8 billion casino project.
Adelson has long called Brazil “a very good opportunity.”
MGM Resorts, Las Vegas Sands, William Hill, Ladbrokes Coral, Betsson and NetEnt have all expressed an interest in expanding into Brazil should the gaming industry be legalized.
“The industry has stated that it’s comfortable with the market,” says Michael Soll, co-founder and president of The Innovation Group. “They are cautiously optimistic that Brazil could work.”
Both Brazil’s lower House and Senate—the National Congress—have been debating separate proposals that would legalize different forms of gambling, including sports betting.
Devil’s in the Details
Under SB 186/2014, authored by Senator Ciro Nogueria Lima Fiho in 2014, both land-based and online casinos would be legalized. Other forms of gambling including slot parlors, bingo halls, sports betting and Jogo do Bicho would be legal.
An amended version of the bill was debated last year and even approved by the Special Committee for National Development, but was sent back to the Senate’s Constitution, Justice and Citizenship Committee in December for further debate.
The bill would have authorized land-based casinos, sports betting, bingo halls and internet gambling, completely overhauling Brazil’s gambling market. The game of Jogo do Bicho would also emerge from the underground and gain legal status.
Those legislative developments got analysts believing lawmakers would have the bill on the full Senate floor by the end of 2016 for a final vote.
However, a final vote didn’t occur, which means the bill remains in the Senate.
It’s not just one bill that Brazilian lawmakers are considering.
In the House, also known as the Chamber of Deputies, lawmakers have been discussing their own proposal to legalize gambling, but analysts say there is little chance of approving a bill with a larger role for the government to oversee the market.
The bill includes proposals to force foreign companies to take on local partners and restrictions on how many casinos one company can own. Both bills aim to modernize the industry by authorizing up to 35 land-based casinos.
Even online betting has been discussed. But online wagering may remain illegal out of concern for fueling gambling addiction in Brazil, according to an analyst.
Despite their caution of online gaming, Alberto Peredne, executive vice president of Abrabinces in Sao Paulo, says online gaming and sports betting are on the legislative agenda.
“We believe that casinos have more appeal to the government and congressmen due to the amount of money to be invested and the number of jobs created by the casino industry, which is far more attractive than a virtual company,” Peredne says.
But it is still under discussion, he says, with “some heavy players visiting Brasilia these days.”
Peredne said even the Ministry of Finance has been working on privatizing the state-owned instant-win games, LOTEX, as part of the government’s efforts to privatize state-owned assets. He expected up to 51 percent of LOTEX to be sold off by the end of 2017.
Brazil’s Ministry of Finance is also preparing to present the National Congress with a sports betting bill, but few details have been released.
“I have heard that they expect to pass gambling legislation in June, but I don’t know how much I believe that,” says Steve Gallaway, managing partner with Global Market Advisors.
Gallaway says any guess as to when Brazil would legalize integrated resorts would be just that—a guess.
“I wouldn’t be surprised if it happens in two months or if it happens in five years or 10 years,” Gallaway says.
Soll agrees, saying, there is not a “predictable timeframe for passage of a gambling bill.”
Although the bill has support in both houses of the National Congress, it has been met with opposition from Brazil’s influential Catholic clergy and lawmakers who fear the legalization of gambling, including integrated resorts or sports betting, could worsen the country’s current economic situation.
Gambling, even bingo, has been compared to drugs in terms of harmfulness to Brazilian society.
The Catholic Church in Brazil has lobbied lawmakers to reject gambling’s legalization to prevent moral and family damage in the country.
But that strong opposition may be overcome by a need to create jobs and tax revenue as the government considers alternatives to plug a budget deficit that is expected to be 10 percent of gross domestic product.
Brazil has been going through a deep recession. The country’s growth rate has decelerated steadily since the beginning of this decade, from an average annual growth of 4.5 percent between 2006 and 2010 to 2.1 percent between 2011 and 2014, according to the World Bank.
Brazil’s GDP in 2015 was minus 3.8 percent, followed by minus 3.6 percent last year.
It’s gotten worse. GDP started the year at 0.5 percent. The International Monetary Fund (IMF) believes the economy will grow by 1.7 percent this year.
So, legalizing gambling has been considered a way to boost Brazil’s struggling economy.
The population of Brazilians unemployed is now equal to London and Rio de Janeiro combined, at more than 14 million, the Brazilian Institute for Geography and Statistics reported.
Gambling was outlawed in 1941 as part of Brazil’s Criminal Contravention Act. Five years later, then-President Eurico Dutra issued a decree closing all existing casinos.
In the 1990s, bingo was reintroduced under the so-called “Pele Law” to fund sports activities, but was outlawed by the Supreme Court in 2007 over reports of money laundering.
Supporters believe legalization of gambling in Brazil, including local markets, would be enticing to international companies to invest in the country and generate badly needed tax revenue.
Peredne says it would be improbable that everything would be approved at once.
“If this happens, we will be grateful,” Peredne says. “Which business will be the first to start operations is the question. It is evident that where large casinos are established, bingo and other small gaming places aren’t welcome.”
Fiho’s bill would establish a regulatory framework for the operation and taxation of casinos. Soll says there are also anti-money laundering measures being built into the legislation.
“There is still a lot of support for the bill even with the political distractions,” Soll says. “The whole government has been focused on cleaning up the political problems.”
Brazil continues to emerge slowly from its devastating recession, but recent nationwide strikes in opposition to reforms have made the issue of legalizing gambling a difficult one for Social Democratic Party President Michael Temer.
Temer has said the country will move forward with the reforms his administration started, the Rio Times reported.
In Congress, lawmakers are expected to approve easier labor rules and stricter limits to pension spending commitments. Temer has argued the reforms will benefit workers and will have a positive impact on attracting business to Brazil.
Peredne understands, with Brazil’s current tough economic climate, the government’s attraction to the gaming industry and the investments, jobs and tax revenue it could generate. He says that legalizing gaming would “reduce crime (and) create new forms of leisure and entertainment.”
“The whole package is very attractive, and what really matters to the government is revenue,” he says.
Illegal gambling in Brazil is already a big thing.
According to the Brazilian Legal Gaming Institute (the Instituto de Jogo Legal, or IJL), some Real $20 billion (US$6.4 billion) is generated from illegal gambling annually.
The Jogo do Bicho market, where players pick numbers by choosing coinciding animals, was estimated to be worth US$3.8 billion (R$12 billion). Brazil’s legal gaming market includes state-run lotteries, poker and betting on horse racing.
But without brick-and-motor casinos in Brazil, analysts estimate that around 200,000 residents travel to neighboring Uruguay to gamble at local casinos.
“It is probably the best-known casino market,” Soll says. “It is driven by high-end business. It is a very popular destination that will survive Brazil legalizing gambling.”
Conrad Punta del Este Resort and Casino earns 70 percent of its revenues from Brazilian tourists.
“Uruguay remains as one of the preferred routes for Brazilian gamblers for reasons like low accommodation prices, not far from Brazil… and language,” Peredne says.
The IJL estimates Brazil loses about US$2 billion (R$6 billion) annually in gambling taxes to illegal gaming and to residents travelling to Uruguay.
Betting in Uruguay state-owned casinos grew by 6.5 percent last year, according to Javier Cha, head of the Uruguayan Casino Control Board.
Cha says around UYU$212 million (US$5.9 billion) was gambled in state casinos, but that figure does not include the larger casinos in Uruguay such as the Conrad in Punta del Este, the Casino Parque Hotel nor the Hotel Casino Carrasco, which are both located in Montevideo.
Cha says the fact that the casinos had reported growth close to the level of inflation was an achievement due to the slowing down of the local economy.
Brazil: The New Frontier
With a population of 207.8 million, according to the World Bank, Brazil could be the world’s largest regulated gambling market.
“We like to call Brazil ‘the last frontier’ to the gaming industry because the country has the opportunity of facing this business based on a leisure and entertainment point of view (like) what has never been seen before,” Peredne says.
Peredne says this is why this country is so attractive to the gaming industry.
If Congress can agree on legislation this year, it would need to be signed by Temer.
But not every Brazilian will be able to afford to gamble at a casino. That’s why analysts argue that an illegal market for online gaming and sports betting will remain even in a regulated market.
Soll explains that should Brazil legalize casinos, you can “look to take out 50 percent of the population” who can’t afford to gamble from that potential market.
Soll argues that even with just 5 percent of the wealthiest Brazilians visiting casinos, that “is still millions of people.”
Both Soll and Gallaway believe a legal gambling market will benefit from domestic tourism.
“Realistically, developers will likely design the casinos for the domestic market,” Gallaway says. “At the end of the day, while tourism will generate levels of win, the majority of the win will come from the domestic market.”
Temer’s government, however, has made a big push to promote international tourism. But to attract gamblers from China, the United States or even the European Union they’ll have to loosen restrictions on obtaining a visa.
“Even as an American, we need to get a visa,” Gallaway says. “For integrated resorts to impact tourism, the government needs to ease its tourist visa policies.”
May 2017 – Features
The Next Steps: Now that Japan has finally legalized casino gaming, what will be the process and who will be permitted to bid?
By Chris Sieroty
When Japanese lawmakers passed the Integrated Resort Promotion Bill in December, U.S. casino operators began to develop their plans to compete for licenses in what could become a very lucrative gaming market.
And because of the potential Japan offers casino operators, some analysts believe it could become the most expensive gambling market in the world.
But how much are Caesars Entertainment Corp., Las Vegas Sands Corp., MGM Resorts International and Wynn Resorts Ltd. willing to spend to enter a sizable and lucrative domestic market with a population of 125 million?
Las Vegas Sands says a new integrated resort in Japan could cost between $6 billion and $10 billion, about three times more than it spent on building its new French-themed Parisian resort in Macau.
“We’re excited by the recent legislative breakthrough in Japan to permit casino gaming within integrated resorts,” Las Vegas Sands Chairman Sheldon Adelson recently told gaming analysts on a conference call.
“The law is being formulated by, I think, the interparty committee that was formed before the first law was passed,” Adelson said. “They have one year to submit an implementation law that will determine the who, what, why, when, where and how of how they are going to establish the integrated resort with the casino bill.”
MGM Resorts says it could also spend $10 billion for a new casino in Japan, quadruple the cost of its MGM Cotai resort that is scheduled to open this year.
Wynn Resorts hasn’t placed a cost on a resort, though CEO Steve Wynn says the opportunity is “thoroughly delicious.”
Wynn Resorts spent more than $4 billion to open the Palace in Macau last August.
“Wynn, Las Vegas Sands and MGM are all well positioned to bid on a gaming license in Japan,” says Alex Bumazhny, senior director, corporate ratings with Fitch Ratings. “All have healthy balance sheets relative to U.S. peers and a track record of developing large-scale resorts.”
Bumazhny gives the nod to Las Vegas Sands, saying they stand out as the “best positioned given their investment-grade balance sheet and broader experience in Asia, including the development of Marina Bay Sands in Singapore.”
Yet, these Las Vegas casino operators are going to face competition from other gaming companies, too, including Genting Group, Hard Rock International and Melco Crown Entertainment, who are also prepared to spend billions of dollars to build integrated resorts in Japan.
Macau casino operator Galaxy Entertainment Group Ltd. has joined with Societe des Bains de Mer, the operator of the Monaco casinos, hoping the partnership will beat their rivals to win a license when Japan opens its gambling market.
Galaxy and SBM will jointly develop and run entertainment businesses including casinos and hotels in Japan and the Asia-Pacific region, the companies said in a statement.
The announcement by Galaxy and SBM came about five months after the Upper House of the Diet (Parliament) in Japan approved the “Bill Promoting Implementation of Specified Integrated Resort Areas,” or the Integrated Resorts (IR) Promotion Bill, paving the way for the future introduction of integrated resorts in the country.
“Galaxy’s success in Asia will certainly be a valuable enhancement to SBM’s portfolio,” says Jean-Luc Biamonti, CEO of SBM.
SBM is majority-owned by the Mediterranean principality, and since 2005, it is 5 percent-owned by Galaxy. The Monaco firm said it hopes the partnership will help it grow in Asia.
Grant Govertsen, a research analyst at Union Gaming in Macau, doesn’t believe this partnership would necessarily impact how Galaxy’s peers view the Japan opportunity, or that it will cause Galaxy’s peers to change their approach.
“Ultimately, a local Japanese partner will prove more meaningful than a foreign partner,” Govertsen says. “That said, I don’t think there is any downside for Galaxy to bring SBM on board.”
With the passage of the integrated resorts bill, Biamonti said both companies look forward to the possibility of collaborative efforts to design, develop and operate an IR in Japan that would offer the best of what both GEG and SBM have to offer.
Rules & Regs
The Japanese legislature is now drafting a second law, due by December, on how to regulate the industry.
Japanese Prime Minister Shinzo Abe is targeting the third quarter as the deadline for the bill’s submission, allowing the government to then promote the benefits of casinos—jobs and economic growth—to a skeptical public.
According to media reports, Abe expects the legislation to include strict regulations as well as measures to deal with concerns about problem gambling and money laundering.
In a recent survey by public broadcaster NHK, only 12 percent of respondents favored removing the ban, with 44 percent opposed and the rest unsure.
So, will lawmakers actually make their December deadline?
“Based on what we’re hearing, the government is very serious about getting the gaming bill across the finish line, so it does, indeed, feel like it will be wrapped up later this year,” Govertsen says.
“That said, we are hopeful that the government will come up with a bill that truly will encourage the scale of development that will result in world-class IR development.”
Govertsen adds that to achieve high levels of investment, lawmakers will need to approve local access to casinos and keep the tax rate reasonable.
Bumazhny believes the promotion bill passed last year was the “highest hurdle.”
“Our sense is that the implementation bill will closely mimic the gaming laws in Singapore, where there are capacity constraints and some restrictions on gambling by locals,” Bumazhny says. “Of course, as in any legislative process, there are uncertainties.”
Analysts believe that Japan will likely pick locations and operators in 2019.
Steve Gallaway, managing partner with Global Market Advisors, says the second law will not start the RFP process, but will “likely identify the structure for local authorities to participate in the process.”
Gallaway expects Osaka, Yokohama and Tokyo as leading contenders for a large facility, with other regional prefectures bidding for smaller regional licenses, such as Sasebo and Hokkaido.
The structure of the market will be determined in the second casino bill, he says.
The first casino resort could potentially be online as early as 2023.
Before the licensing process begins, it’s expected resort operators, including MGM, Wynn or Hard Rock, would have to form consortia with prospective hosts and domestic companies.
Galaxy is also said to be negotiating with national and local governments as well as real estate, construction and transportation companies.
But Galaxy wasn’t expected to insist on a stake over 50 percent in any partnership.
Galaxy declined to detail the size of any investment in Japan, but its net cash of $2.1 billion would allow it to begin a project without waiting for financing.
Just two casinos in major Japanese cities, Tokyo or Osaka, could generate over $10 billion in annual gaming revenue, increasing to $30 billion if 10 further casinos outside metropolitan areas are approved, according to a report by brokerage CLSA.
The reason everyone is willing to spend billions when it comes to Japan is because of the revenue numbers CLSA is projecting.
Other analysts believe companies are willing to spend billions due to a large, comparatively wealthy population that has shown a high proclivity to gamble.
Moreover, the number of licenses issued is likely to be very limited.
“Ultimately, Japan is an attractive market because it is deep in terms of population. It is also a wealthy market, and there is a demonstrated proclivity to gamble,” Govertsen says.
He says the fact that pachinko is a $30 billion market “suggests the opportunity set for IRs is quite meaningful.”
Analysts at Japanese brokerage Nomura believe when all is said and done, there are likely to be just two to three licenses issued.
“I don’t think anyone knows for sure,” Gallaway says. “However, knowing that Japan is using Singapore as a model, bidders can be assured that the government will employ a similar process to maximize the benefits of the integrated resort.”
Osaka appears to top Gallaway’s list of favorite sites.
“Having seen the Osaka site, and knowing that the local prefecture supports its development into an IR, Osaka would appear to have a strong chance of being able to develop an IR and it would be very successful,” he says.
“It wouldn’t have any impact on local neighborhoods. The local government wants it.”
The expected site in Osaka is a vacant lot adjacent to Universal Studios that has access to the airport, and potential to offer direct ferry service to the airport as well.
In the meantime, some companies are willing to spend $6 billion or search for Japanese partners trying to get an edge over casino operators like Sands, MGM and Wynn.
“In my opinion, a company won’t get a license without a local partner,” Gallaway says. “It would be frivolous for a company to put forth a bid without one.”
Gallaway says those partnerships are about creating “local equity and local relationships.”
The most recent market in Asia to legalize casinos was Singapore, which approved the introduction of two casino hotels about a decade ago.
With casino revenue of about $3.5 billion last year, Singapore ranks as the second-biggest market in Asia behind Macau.
Gambling revenue in the Chinese territory of Macau was $28 billion last year.
“Even though hopeful passage through the upper house would still leave the first IR opening date a good five years out, it would be a shot in the arm for sentiment on gaming names, which are already enjoying a tailwind on Macau’s recovery,” Govertsen said in a research report shortly after the first bill was passed.
Uncertainties remain. The first casinos are still about seven years away. Newer industry players like South Korea and the Philippines have built resorts of their own.
China itself is under a cloud, as its double-digit growth slows and authorities in Beijing continue to tighten control over outflows of money from the country.
The vote came as Japan looks for new sources of economic growth.
Tourism is an emerging sector, where the economy has traditionally been geared toward exporting manufactured goods rather than attracting visitors.
More than 20 million foreign tourists visited Japan in 2016, triple the number from a decade ago.
Abe hopes casinos will ignite broader economic growth in Japan and make up for dwindling competitiveness in other industries, some of which like consumer electronics are now dominated by China and South Korea.
“Regardless of the economic stagnation, there is considerable pent-up demand in Japan for casino gaming as evident by the robust $30 billion pachinko industry,” Bumazhny says.
“Where there is little question casinos in Japan will be very profitable, bigger unknowns that will impact the degree of profitability will be how tight the implementation bill will be in terms of capacity and operating constraints, and the ability to tap into the broader Asian region, China in particular.”
Not So Fast
The end of the prohibition on casinos does not mean that anyone could build a Wynn Las Vegas or even a Flamingo in Japan. At first, licenses will be granted to build integrated resorts, which include casinos with hotels, conference centers, entertainment complexes and shopping malls.
Regulations governing the bidding and licensing process, as well as the gaming regulations themselves, will be detailed in a separate law.
Some forms of gambling are already legal in Japan. The country allows betting on horse, bicycle and boat racing and it runs a national lottery.
Pachinko, a derivative of pinball played in parlors nationwide, has a gambling element that is technically illegal but is tolerated by politicians and law enforcement.
“In Japan, there are tens of thousands of these machines,” Gallaway says.
Japan has been debating whether to legalize casinos since at least 1999. A bill similar to the one that passed in December made progress in Parliament three years ago, but was never voted on. Some lawmakers balked at the potential social problems caused by casinos.
Komeito, a Buddhist political party that has been a junior partner in the governing coalition, has been opposed to legalizing gambling.
“There is nothing we’ve seen in Japan that currently deals with problem gambling,” Gallaway says. “Problem gambling is an issue there today, due to the lack of responsible gambling awareness at the pachinko parlors.”
Gallaway notes that international companies have responsible gaming programs, and are well situated to implement them in a new market.
If Japan is looking to model its market on Singapore, Gallaway says they have a very robust problem gambling program because of Las Vegas Sands and Genting Group.
Currently, politicians in Japan are finalizing a bill to address gambling addiction as the country continues to move forward to welcoming its first legal casinos.
The bill by the country’s two ruling parties—the Liberal Democratic Party (LDP) and Komeito—includes rules for capping individual bets and strict rules on advertising.
The parties are even considering restricting admission to integrated resorts. It was not known if the restrictions would be similar to those in Singapore, where local residents have to pay S$100 to enter, or a S$2,000 annual membership fee.
“Entrance fees could significantly impact the revenue potential for IRs,” Gallaway says. “Furthermore, there is no evidence that these do anything to curb problem gambling. In fact, some have argued that entrance fees can increase problem gambling as players may choose to bet more to increase their effective odds, when including the impact of the entrance fee.”
Nippon Ishin no Kai, a right-leaning party with a base of support in Osaka, submitted a problem gambling bill to the upper house of the Diet in February.
In an attempt to address strong public opposition to casinos, the bill identified the need for policies to deal with crime, suicide, poverty, debts and other problems that occur as a result of problem gambling.
It also stipulated the need for the government to establish a basic program to deal with problem gambling that will be subject to revision at least once every five years, according to the Japan Times.
The newspaper also reported that municipalities would have to map out plans for combating problem gambling that also would be reviewed every five years.
Debate over several problem gambling measures is expected to continue during the current Diet session that ends in June.
Since 2014, Abe’s party, the Liberal Democrats, has strengthened its hold on parliament.
It has become less reliant on Komeito, and found a new ally on the casino issue in Nippon Ishin. Nippon Ishin is the nation’s third-largest political party.
As Abe seeks to create a casino industry, an eight-member panel discussing the framework for possible regulations is considering whether to use a permit system that would cover the types of games allowed in the casino and their rule. The panel is also considering casino entrance restrictions and a system of taxes going to national and local governments.
Japan was also expected to create a licensing structure similar to Nevada, with a licensing system that includes background checks into academic and criminal records, debts, relationships and other personal aspects of casino employees.
Everyone involved in the process expects Japan to implement a licensing regime and open its market to gaming, but the question is how many of the world’s largest gaming companies will actually get to take part in the newest casino market.