Consumptive Control?

6 May 2008

For those I-gaming operators looking with hope to the Chinese market as a source of future growth, Edmund Ho Hau-wah's recent decision to cap the number of casino gaming licenses does not augur well. While the issuing of casino licenses might appear to have little relevance to online operators, the decision by Macau's chief executive is the latest in a series of developments that suggest Chinese authorities still harbor concerns about gambling in general.

There have been six years of rapid gambling growth in the special administrative region, following the ending of Stanley Ho Hung-sun's long-standing monopoly. Mr. Ho Hau-wah's decision not to award more casino concessions and to curb increases in gaming tables and slot machines is almost certain to have been made with the influence of the authorities in Beijing.

There are indications that Beijing has concerns about Macau’s reliance on gambling as a source of revenue, the pressure the casinos put on the island’s resources and infrastructure, as well as their social impact. In a prepared statement, Mr. Ho Hau-wah said the number of licensed casino operators will remain the same -- "for a period of time" -- but that the government would not approve new applications for land use filed by gaming companies.

Speaking at the Bet-Markets conference at the end of March, I put forward Macau as my selection in the session on "jewel jurisdictions" for sports betting operators. The reason for my choice was that Macau’s sports betting concession comes up for renewal in 2009.

At present there is just one legal operator, Sociedade de Lotarias e Apostas Mútuas de Macau, which offers football betting, including an online service, under the Macauslot brand. There was a suggestion that the authorities might be seeking to expand this sector of the industry by offering concessions to more than one operator. If multiple concessions were offered, then specialist sports betting firms could work in partnership with the existing casinos to develop betting services.

The immediate conclusion to be taken from the announcement on casino licenses: The government's decision makes the opening of Macau’s sports betting sector to new operators less likely.

Moreover, the decision is a further example of China’s desire not to let gambling expand too quickly and to keep control of gambling’s impact on society.

A similar pattern of events was seen recently in the authorities’ handling of video lottery terminals. The roll-out of the terminals on the mainland began in 2005, and by the end of 2007 there were over 22,000 terminals in almost 1,000 video lottery terminal halls. Terminal-generated revenue has grown rapidly; in 2007, terminals contributed more than one-fifth of total Welfare Lottery revenue.

But the Chinese authorities have been concerned by the success and popularity of the terminals. In January 2008 the most popular games -- a multi-line slot and certain poker-style games -- were removed from the terminals while the permitted opening hours for the gaming halls were shortened.

Around the same time the government announced a ban on the sale of lottery tickets online. The reason given was that the authorities were trying to drive out illegal operators, but it is thought that the central government wanted to regain more control of lottery operation from regional governments.

All three examples -- Macau’s casinos, mainland video lottery terminals and online lottery sales -- give the impression of the government’s unease about any form of gambling that proves popular and a desire to rein in any product that grows too quickly. Against this background of events, it seems unlikely that Chinese officialdom will embrace a regulated online gambling industry. Such a regulated industry would provide welcome tax revenues but, from the government’s perspective, would come at the expense of relinquishing a certain measure of control.

In general, there is an inconsistency inherent in China’s orientation toward gambling. Video lottery terminals, for instance, were an authorized form of gambling but then became subject to operational restrictions when they performed well. However, the government regularly highlights how many funds have been raised for social and welfare causes by the state lotteries, to which the terminals contribute.

The lotteries remain an important source of revenue for Beijing, and it is in the process of creating comprehensive regulation for the lottery games. But sudden changes to the operational playing field, like halting online lottery sales, make it a very difficult sector in which to operate.

These difficulties are highlighted in an April newsletter from Betex, the London-based lottery management group, which states: "With no definitive indication as to when the ban on online sales will be lifted or a fixed-odds football betting product will be introduced, we have streamlined our retail operation in Guangzhou to two flagship shops."

The newsletter goes on to say that China’s lottery sector remains "a highly attractive one" but that "deregulation and change is taking longer than anticipated." This sentiment was echoed by Ladbrokes Chief Executive Christopher Bell when he reviewed his company’s operations in Asia for 2007. He described progress in China as "deliberate but slow."

At present, operators looking at China are certainly confronted by mixed messages, which muddy their already-ambiguous propsects in the country. While new gaming products like video lottery terminals are given tentative approval, there is no guarantee that a future decision will not be revoked because of the authorities’ determination to keep control of gaming.

Before any decision about sports betting concessions in Macau, there will be the reintroduction of horse racing in mainland China, which was announced in January. How the government handles the issue of any associated betting or lottery games on the racing might provide greater insight into the long-term prospects for gambling in China.

Lorien is a research analyst with Global Betting and Gaming Consultants, and currently resides on the Isle of Man. Prior to this, he spent three years at a leading United Kingdom gambling firm, providing regulatory and market research for its various international e-gaming ventures.