The casino industry, and the established gambling industry in general, face threats from new sources.
Gambling is no ordinary industry. Nowhere can anyone with simply the will and the capital to do so offer an open opportunity to the public to play games of chance for money.
To enter the gambling business, investors typically have to cross very high barriers to entry set by regulation. They will need to acquire a special licence and, much harder perhaps, a prescribed suitable venue to play the games. They will also have to satisfy strict instructions as to what particular games of chance and prizes they can offer.
The reason why societies intervene in the gambling market has much to do with a religious, essentially paternalistic, objection to gambling, or rather perhaps a visceral objection to the sometimes large gambling losses that may be suffered by particular gamblers they know or have heard about. The best practical argument for tolerating and legalising gambling services is that what inevitably follows prohibition or the imposition of onerous taxes: illegal gambling, which is even worse for the community.
This argument applies also to how society can best manage all of what are broadly regarded as the popular “vices”. Driving consumption underground is not good public policy.
Furthermore, if enthusiastic gamblers are prevented from gambling near where they live they will travel to jurisdictions near and far to do so. The opportunity to tax the activity for useful local purposes – perhaps to reduce the burden of other taxes or to provide employment at home rather than elsewhere – may well win the political arguments for and against licensing gambling.
The opportunity to tax gambling activity as an alternative to imposing other taxes, may well win the political arguments for and against licensing gambling. The prospect of employment at nearby casinos or race tracks, rather than far away, will be an additional argument for local or provincial authorities to license gambling venues.
The history of casinos in SA
The history of the large entertainment casinos in SA with their banks of slot machines and a variety of table games that attract many players, provides a good case study of the practical and political forces at work when dispensations for gambling are imposed or relieved. Casinos were illegal in SA before the so called “homelands” were allowed to license them. The customers would travel from SA to gamble and for other pleasures or vices not legally available closer to home. The homeland authorities would tax these activities and relieve the SA taxpayer of some of their burdens. In SA, consequently, there had also grown up a large, illegal, unregulated and untaxed, local casino industry.
With the re-unification of a democratic SA and the demise of the homeland authorities, it was sensibly decided to legitimise the casino industry in SA, to place it under the authority of the respective provinces and most important, to strictly limit the number of casino licenses nationally and by the province. Only up to forty casino licences in all could be issued and provinces were able to license their operation within the urban areas close to their potential customers. The distant, previously homeland casinos, while they retained their licenses, lost their competitiveness. Why travel further than to a convenient casino close to home?
The success of these newly established SA urban casinos in attracting custom soon became apparent. Their success in attracting a larger share of the household budgets for gambling became immediately and painfully obvious to the horse racing clubs and their dependents on the tracks and farms. Horse racing had benefitted from something close to a legal gambling monopoly in SA. The revenues from gambling on horses, shared with the private bookmakers and with the provinces as taxes, had helped support a thriving, labour intensive, industry. Horses are not easily groomed by robots. Casinos too provide employment and income earning opportunities for local business to supply their needs.
But the gains of the owners, workers, suppliers and the players at the new SA casinos, at the expense, in part, of the racing clubs and their extended network, help illustrate an important point.
The different gambling offers compete with each other for a fairly predictable share of domestic household disposable incomes, in SA equivalent to between one and one and a half per cent of disposable income on average, though the share does vary by province and by city. The demand for gambling services can also be shown to depend in part on the disposable incomes of households and also on the traveling time taken to access gambling venues. Both the poor and the rich tend to spend a lower than average proportion of their incomes on gambling than the middle income earners.
The role played by the archetypal foreign travelling high roller in the typical casino, outside of the special cases of Las Vegas and more lately Macau (casinos are still illegal in mainland China), has been shown to be minimally important to the large urban casino in South Africa and elsewhere. The SA casino business caters to a local customer base. Online gambling opportunities may be about to change all this – if allowed to do so.
But while the casinos compete with each other and with the tote, the lottery and the private bookmakers, the limits to entry have proved valuable to the licensed casino operators.
For these reasons, a partial casino monopoly in one urban area can prove so valuable – and something the operators are prepared to pay for (in cash or kind).
A turn around the Cape
On this basis the Western Cape Government in the late 1990s was persuaded to grant an exclusive 10 year right to operate only one casino within the Cape Town metropolitan region (as well as on the basis of a more decentralised economic development that would come with allocating a limited number of new licenses outside of the city).
The exclusive license was then determined by way of a competition, a beauty contest between different potential operators who were asked to compete for the licence by offering a variety of additional benefits to the province as well as the new casino itself in exchange for this exclusivity. Sun International and its partners won a closely contested bidding process with an offer of a themed casino in Goodwood plus other benefits to the province of a major financial and organisational contribution to help found the Cape Town International Convention Centre.
This exclusivity agreement has run its course and the province could exercise a further opportunity to extend the exclusivity agreement for upfront benefits in cash and kind in the broad public interest. Sun International, with a well established and well preserved casino complex in operation, would be in an especially strong position to compete financially for a new exclusive license and to offer significant benefits to the province and its citizens for a renewed exclusivity agreement.
Unlike its potential competitors it would largely save the cost of building a new casino. Yet judging by recent public commentary or rather the absence of it, the province seems inclined to forgo these potential benefits and seems inclined to allow the transfer of one of the rural casino licenses to the city.
The people of the province, as far as I am aware, have not been widely consulted on or informed about such a choice – of two casinos or one (with all the upfront payments in cash and kind that might be offered for continued exclusivity). It is a choice deserving of very serious consideration by the citizens of the Province and its elected representatives.
The upshot of any decision to permit two casinos would be likely to divide the market roughly between the two operators as well as to reduce the market for casino-like services in one of the rural areas, with the indirect knock-on effects on local employees and suppliers the loss of casino business would bring. Unless the total casino market in the Western Cape would grow significantly in response to an additional casino offering in Cape Town (an unlikely outcome) there would not be meaningfully more tax revenues for the province to collect nor any additional employment or ongoing economic activity. The rural area losing its casino would suffer obvious economic losses. The established Cape Town operator might well offer, in its bid for renewed exclusivity, additional benefits to the city or province in exchange for an extension of exclusivity.
Any additional hotel or entertainment facilities that might accompany any additional casino cannot be regarded as among the additional benefits provided by a new urban casino in Cape Town. There is no shortage of hotels, restaurants or entertainment amenities in Cape Town. Such additional entertainment facilities would very likely displace activity in restaurants and entertainment venues generally.
New threats
There is however a more serious threat to legitimate gambling interests in SA. It comes in the form of still more competition for the gambling rand from the proliferation of limited payout slot machines and electronic bingo terminals (EBTs) that are slot machines in practice. The latter offer an additional competitive advantage to the gambler in that they can promise effectively unlimited pay outs, unlike the limited payout slot machines previously licensed. Limiting pay outs restricts the competition of conventional casino-based slot machines for gambling revenue with casinos, the tote and the National Lottery. Unlimited, or less limited payouts, have an attraction to many casino or horse racing gamblers whose objective is the big win, even when the odds of doing so are very long shots.
The slot machines, masquerading as bingo machines, overcome this disadvantage of limited pay outs and may well become increasingly ubiquitous and competitive against the established providers.
A still bigger threat to established gambling enterprises is surely the online gambling opportunities that modern technology makes available. The cost of providing a gambling opportunity on the internet or participating in one, from home anywhere in the world, is close to zero. The offering therefore is infinitely scalable. By comparison running a casino or a racing club is a very costly enterprise because they employ people and require a physical structure and presence.
Lower costs of production of any good or service usually means lower prices as firms compete for a larger market share with better terms – and in the case of gambling this might well mean better terms or bigger potential prizes for the serious gambler.
This provides online gambling with a great competitive advantage over conventional gambling providers. The online sites that can attract many customers from all over the world, at very low cost, are likely to offer the better odds or the most commanding big payouts – especially if internet gambling pays very little tax!
The value of any casino or racing club is therefore under threat of the potential proliferation of EBTs and legal access to internet gambling. The threat from new technology and the great uncertainty about what the gambling landscape in SA will look like over the foreseeable future is currently influencing the value attached to Casinos and their licenses in SA. Therefore the case for establishing an additional casino in Cape Town, or the price the established casino might pay to keep it out, must now be subject to unusual uncertainty.
It is in the interests of the wider community that as much certainty as possible about the gambling landscape be created. The objective should be to maximise as far as possible the domestic SA public interest in the gambling industry for taxpayers, employers or employees and investors in addition to those of gamblers themselves. The possible migration to a highly competitive SA gambling industry dominated by offshore providers, with the interest of the serious gambler in effect treated as paramount, should surely not be allowed to happen by default, but only rather after careful consideration of its full economic and social consequences .