Three Casinos, Three Paths

Executives of three of the first major land-based casino firms to launch online operations addressed the Global Interactive Gaming Summit and Expo last week in Toronto. The experience in land-based gaming was about all that the three executives had in common, however, as their companies are taking sharply different approaches to regulation, target markets and even the nature of the casino games that they are offering online.

Two of the companies are emphasizing the Asian market, and some of their insights from that market may have surprised operators of sites geared to the Western world.

"If [Stanley Ho is] operating under the Taliban in Afghanistan or if he's operating in the most regulated environment doesn't matter." -Peter Kjaer DrHo888.com

Asia - Privacy and Table Games

For example, one often discussed, partial solution to problems in verifying jurisdiction and age of an online gambler is to require him or her to send, by snail mail or fax, a copy of his or her passport or birth certificate. But such efforts at documentation won't fly in Asia, according to Andrew MacDonald, chief executive officer of PBL Gaming Operations (Vanuatu) Ltd.

PBL is a large Australian media and entertainment company, controlled by Kerry Packer, an internationally known high-rolling gambler. PBL has owned Crown Casino in Melbourne since 1999. Crown is one of the largest casinos in the world, outside the United States.

On Jan. 3, 2002, PBL launched CrownGames.com from Vanuatu, an island nation in the South Pacific 2,250 kilometers (1,400 miles) northeast of Sydney, Australia. The site runs on proprietary software developed by another PBL subsidiary.

"Our customer base within Asia is saying, 'I don't want to give you a lot of details,'" MacDonald said. "So if you set up a regulatory model that says 'We prescribe a whole series of information that's required,' at least within Asia the market's just going to walk away."

The Asian gambler is likely to think, MacDonald said, that "If I'm being forced to fax details through on my passport, give you credit card details, give you a whole series of other details to provide validation or verification, I'll go and play on Casino-on-Net or Golden Palace."

Crown Casino has six offices in Asia and a database of players, MacDonald said. The online CrownGames can access that information for its verification needs.

"Having the regulatory seal of approval isn't as big as what I thought it might be." - Andrew MacDonald PBL Gaming Operations (Vanuatu) Ltd.

Another characteristic that distinguishes Asian gamblers from Western, particularly U.S., gamblers is a preference for table games, said Peter Kjaer, head of DrHo888.com. Since the mid 1980s, Las Vegas casinos have made more money from slot machines than from table games. Slot revenue now runs about 80 percent of the total gaming revenue there.

But Stanley Ho's 12 casinos in Macau, a peninsula near Hong Kong in southeast China, get 96 to 97 percent of their revenue from table games, Kjaer, who is Ho's son-in-law, said. "The Asians don't like machines; they prefer the real cards, the real dice, the real ball."

So when Ho decided to offer online gaming, he said, "we wanted to bring the real casino experience to the Internet."

The result, launched in February 2001, amounts to a television studio in St. John's, Antigua, where the site, originally called DrHo.com, is licensed. There, the dealers--attractive young Asian women clad in bikinis--spin the roulette wheel and deal the cards for baccarat. Using Flash technology, the video is streamed to the player's browser.

Kjaer explained that the original software, which required a 70mb download, was far too cumbersome. "It was very big, and ahead of its time," he said. It was designed with the idea that everyone would have a high-speed Internet connection by 2001.

On many players' computers, the software simply didn't work. So the company worked with Boss Media to develop DrHoLite.com, a site that offers more traditional online casino fare, that is, electronic simulation of games like slots and roulette with play based on a random number generator.

"We found that when Chinese players went from the live casino to the RNG casino, they started betting at a factor of about one-tenth of the money they would bet on the live games," Kjaer said. Last December, the company shut down the live casino while it worked with a London firm called Casino Reality to develop a new system for video from the live site.

The live site was re-launched in January as DrHo888.com, and the Chinese players who returned to the live action began increasing their bets, Kjaer said. But some players still prefer the RNG games, he said, because they like the speed. Although they bet much less on the electronic games, they play more games than on the slower, live site.

Daniel Poser of Casino Reality told IGN that the key to the system developed for the Dr. Ho live site is to offer "superb video quality with no delay."

"You can't have any buffering, because of the trust issues," he said. "You need to know the thing is live and you're not seeing a movie of someone spinning a wheel or dealing cards."

"The early entrepreneurs were attracted by the lack of regulations in this space and the fact that they could do almost what they wanted. We had to approach from a different paradigm." -Tobin Prior Sun International Online

The Degree of Regulation

When the online operation was being planned, Kjaer said, Portugal was in the process of handing over control of Macau to China. Neither government wanted to discuss Internet gaming, so his company looked overseas for a venue where costs would be low. He said they didn't care about whether the site was based in a highly regulated jurisdiction.

"What we said was," Kjaer said, "'Stanley Ho's 80 years old; he's got more money than God. And he's now putting himself on the Internet. If he's operating under the Taliban in Afghanistan or if he's operating in the most regulated environment doesn't matter."

Ho couldn't afford to have one of his online players complain that they were cheated, Kjaer said, because his reputation would be ruined in a culture where "face is everything."

"So we simply went with the idea that it's his reputation and that's what we have to protect and that's what we're living on."

PBL's land-based Crown Casino operates in the highly regulated environment of Australia. PBL's Internet casino, CrownGames, is governed by the regulations of Vanuatu, which the company says follow the stringent standards that Australia set for online gaming. But PBL's MacDonald said the imprimatur of regulators may not be so important to players.

"Having the regulatory seal of approval isn't as big as what I thought it might be," MacDonald said. "Once the consumer has interacted with you for a period of time, they gain that level of trust. As long as they (the sites) pay, the customer has that level of trust. That level of trust is also generated by the amount of advertising that's out there."

But for the third major land-based casino firm represented at the Summit session, regulation is everything. Tobin Prior, chief executive officer of Sun International Online, said that when his company began working on its Internet casino in 1999, "what we first set about addressing was all the concerns that regulators have."

Sun International Online is part of Sun International Hotels Ltd., a Bahamian company whose flagship property is Atlantis, a large resort on Paradise Island in The Bahamas. (The company announced Tuesday that it will soon change its corporate name to Kerzner International Ltd.)

In September, Sun received one of the first three licenses for online casinos to be issued by the Isle of Man, a self-governing, dependent territory of the British Crown. The Isle of Man's regulations for online casinos are the most stringent in the world.

Sun launched its CasinoAtlantis.com on Dec. 31, 2001, operating on Boss Media gaming software. It' the only one of the online casino licensees on the Isle of Man to be operating.

In February, Station Casinos, the dominant operator of casinos in the Las Vegas "locals" market, announced that it would pay $5 million for a 50 percent stake in CasinoAtlantis.com. That deal is pending Isle of Man regulatory approval and is expected to close in the third quarter.

Prior said that regulators in the jurisdictions where Sun operates land-based casinos are concerned about a host of issues in online gaming--such as underage gaming, money laundering, data protection, dispute resolution, certification of game logic, financial problems such as credit card fraud, prohibited jurisdictions, advertising and marketing.

"Our whole approach," he said, "was to say, 'Well, if we can address each one of these (issues) in turn and come up with a real practical solution that meets with the approval of regulators who regulate our existing business, then we can enter the space. If we could plug each of these gaps we could basically develop a new model for gaming on the Internet.'

"The early entrepreneurs were attracted by the lack of regulations in this space and the fact that they could do almost what they wanted. We had to approach from a different paradigm."

After two years of meeting with land-based regulators and developing procedures, Sun decided it had to test everything in a live environment. For six months last year, it ran a site called Ambassador Casino. Prior said there was no branding or reference to the parent company. Ambassador operated as a beta site, and then was closed.

'A New Industry'

"We believe that we pioneered a new form of online casino and effectively started a new industry," Prior said. "There are marked differences between the traditional online industry and the characteristics of the industry that we now operate in and the kind of constraints under which we operate.

"The new industry is a highly regulated industry. There are very, very hard requirements in terms of age verification and identity verification. A very hard focus is placed on jurisdictional compliance and the implications of that. Issues such as money laundering and many other highly regulated areas of commerce are applied rigorously to this new industry.

"There are unprecedented levels of player protection that were not evident in the old industry. Corporations and individuals are put through rigorous probity checks in terms of their fitness to operate in this industry. There are deposit requirements; we have a £2 million (US$2.9 million) deposit for player protection that is there in case we should default on paying any of our players or the company should go bankrupt. That's a fairly big implication for a small business in terms of cash flow."

Complying with stringent regulations takes time and costs money, Prior said. And for a jurisdiction like the Isle of Man, which requires its licensees to block bets from residents of countries where online gaming is not clearly legal, it means a loss of business opportunity.

"It's also a much more limited commercial opportunity," Tobin conceded as he displayed a slide of a map showing big areas of the globe colored red, areas from which CasinoAtlantis.com will not take bets. "It just happens to include about four of the major five e-commerce economies in the world, including the biggest one. So we've probably got a potential market of a maximum of one fifth of the total market the traditional (online) industry is exploiting."

CrownGames does not take bets from the United States. At the Dr. Ho sites, Kjaer said, the only countries that are blocked are those with a high rate of credit card fraud.

Prior said that the "new industry" of highly regulated sites has to educate players about the benefits they derive from selecting such sites over the sites of the "old industry." He predicted that both the old and new industry will grow.

"I think they'll continue to develop and grow side by side, because a lot of this new industry is prohibited from competing in a major, major sector of the market," he said. "As long as that market is evolving and growing, there's a space for the traditional guys to focus on those markets."

Long-term, he said, the industry will become more regulated and the growth potential of the new industry will exceed that of the old.

Pushing the Brand, Targeting the High Roller

While CrownGames doesn't take regulatory issues lightly, it's counting more on its brand name to make it stand out amidst the clutter. And it's targeting a niche that few other sites pursue as diligently: the Asian high roller.

MacDonald acknowledged that CrownGames is a late arrival to Internet gaming. What it found, he said, was competition that is "fierce and largely undifferentiated."

"'Flashy and trashy' is how we characterize the current offerings on the Internet," he said. "Everything basically looks the same." Most of the software is similar, he said, and so is the advertising. The promotions are all hard-sell, emphasizing free cash and telling players they'll win more often.

Brand awareness is very low, MacDonald said, especially in Asia. His researchers asked Chinese respondents if they had ever heard of certain online casinos. None scored higher than 15 or 16 percent.

Even a name they made up, Star Casino Online, scored at that level, as high as Casino-on-Net and Golden Palace.

CrownGames is positioning itself as "an extension of a premium, world-class, land-based casino," MacDonald said. The Crown Casino in Melbourne contains the shops of high-end retailers like Tiffany and Versace. Online, CrownGames is trying to promote the same image by, for example, running ads that show a Rolex watch.

"Premium brands are driven by conspicuous consumption," MacDonald said. "That's an important issue in Asia, where having a Rolex--not the knockoff but the real thing--is important. Wearing a Hermes tie is important."

CrownGames is backing up its desired image with high betting limits.

"Most other sites will take a $2,000 bet on baccarat," MacDonald said. "We started with a US$10,000 bet (limit) on baccarat. We'll move to a $50,000 bet (limit) within three weeks. That's establishing relevance for that customer base."

For the very elite among the premium players in the Crown database, how's this for personalized service? A representative from one of Crown's Asian offices will visit the player in his home or office, give him a laptop, download the software for CrownGames onto the laptop, and leave the player with the laptop all set up and ready for betting.