For Jupiters, Online Gambling Starts to Scale

15 February 2002

Jupiters Ltd., the Australian casino company, reported results for the six months ended Dec. 31, 2001 Tuesday, and they make interesting reading.

Net profit fell AU$6.2 million, or by 14.6 percent, to AU$36.2 million, due to a one-time AU$10 million provision for a disputed tax liability related to rental income at its Brisbane casino and a net gain of AU$2.7 million from above- theoretical win rates on commission premium play. Excluding these items, net profit for the six months ended Dec. 31 rose 30.2 percent to AU$43.5 million, an increase of AU$10.1 million. Rob Hines, the company's managing director and chief executive, said Jupiters expects at least 10 percent profit growth in the current year. Last year's profit was A$67 million.

Centrebet Driving Growth

One reason for Mr. Hines's optimism is Centrebet, Jupiters' online betting service. Centrebet's first-half revenue rose 48 percent. Mr. Hines told Australian reporters that he expects Centrebet's growth to continue, "particularly with the World Cup in June."

That is reassuring news for Jupiters shareholders because the company' casinos haven't been performing particularly well. The Australian gaming market is saturated; moreover, Australian tourism has been adversely impacted by the collapse of Ansett Airlines and the Sept. 11 terror attacks.

These adverse local market conditions are reflected in Jupiters' first half results. Table game revenue fell 4.2 percent. Hotel occupancy rates were lower than expected and hotel revenue was flat, at AU$63.7 million. Machine revenue in Brisbane, the nearby Gold Coast, and the northern coastal city of Townsville declined 4.3 percent, due to delays in installing 890 new poker machines, competition from clubs and pubs, and regulatory changes that bar players from using currency larger than AU$20.

Mr. Hines is taking action. The company's new Gold Coast high roller facility, Club Conrad, opened in September 2001 and, the company says, "set a standard of excellence in the Australian premium player market and is stimulating further growth in this segment of the company's business." On Feb. 11, 2002, Jupiters broke ground for its Gold Coast Convention and Exhibition Centre, which is scheduled for completion in mid 2004. Mr. Hines expects his new machines will be installed by the end of this financial year; he hopes they will reverse the decline in machine revenues.

A Saturated Australian Casino Market

Maybe, but Australia has perhaps the highest ratio of gaming machines to population of any country in the world. To the north, Macau just awarded licenses to Steve Wynn and Sheldon Adelson's The Venetian, bringing the prospect of Las Vegas operators in Pacific Asia closer (CCA News, February 11, 2002). Competition isn't going to go away, for Jupiters, for Crown, for any Australian casino/hotel resort.

Opportunities Outside Australia

The inescapable conclusion is that Jupiters' growth opportunities lie outside Australia. The company knows. In November 2001 it commenced a three-month trial of its popular keno game in 30 United Kingdom betting shops owned by Stanley Leisure plc, and the company says the trial is progressing well. Revenue from keno increased by 20 percent in the six months ended Dec. 31, 2001, to AU$49.7 million.

Opportunities Online

But the biggest potential international market is the Internet, which Jupiters has moved rapidly to exploit. In April 2000 the company announced plans for an online casino using Cryptologic software. Australia's ban on Internet gambling intervened, but, fortunately for Jupiters shareholders, the company had had the foresight to acquire a licensed Australian sports bookmaker, Centrebet, in November 1998, well before the ban went into effect.

Online betting is the brightest spot in Jupiters' international picture. Centrebet holds one of three sports betting licenses issued by the Northern Territory Racing Commission. It offers betting on sports events throughout the world 24 hours a day 365 days a year.

Centrebet now serves 100,000 clients in 60 countries. The Australian gaming market may be fully supplied, but the online market is global and it is not fully supplied. Centrebet gives Jupiters a way to grow internationally without having to buy or build casinos in other countries, which can, as the United Kingdom's London Clubs' disastrous investment in the Aladdin in Las Vegas shows, be a dangerously unprofitable thing to do.

Jupiters' acquisition of Centrebet is starting to look like one of those company-transforming strategic moves business schools teach and CEOs dream about. Unlike most dot-com investments made in 1998, Centrebet's profits have grown, at a compound annual rate of more than 60 percent since Jupiters acquired it. At that rate, Mr. Hines said in November 2001 that Centrebet will be bigger than the rest of Jupiters in 10 years.

Online Gambling Starts To Scale

Bigger and global in ways no bricks and mortar casino can ever be—and, perhaps most importantly, a business that scales. The incremental cost of adding the next 100,000 accounts to Centrebet's client base will not be nearly as great as the cost of adding the first 100,000. Building a casino in Macau is one way to reach Pacific Asian players but it is an expensive way. Centrebet is reaching bettors all over the world at a fraction of the Macau entry cost and it is doing so profitably: Centrebet EBITDA for the six months ended Dec. 31, 2001 was $6.3 million.

Jupiters launched a German-language Centrebet site last year and plans to launch a Spanish-language site in 2002. There are other language communities, some of them large, like Chinese, some affluent, like Japanese, and many smaller ones that if served by a brand associated in consumers' minds with honest and reliable service can be highly profitable niches. Centrebet fits that description. In its successful implementation of an online betting strategy Jupiters has found a way to insulate itself from the competitive pressures of Australia's over-supplied gambling market. In the process it has assured its shareholders of a profitable future.