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Online Poker News Archives - November 5, 2004

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Copyright 2004 Haymarket Publishing Services Ltd
Management Today

November 5, 2004

HEADLINE: Putting the Bling in UK gambling

    Shaken up by the advent of easy-access online betting, the gaming industry is now about to be swept along in a gold rush as the new Gambling Bill brings Las Vegas-style casinos to Britain's big cities. Who stands to win in this betting revolution? Nils Pratley reports.

    Elaine dela Cruz, a 25-year-old working in advertising sales for a magazine publisher, is part of the new breed of British gambler. Twice a week she plays online poker from her computer at home, generally entering mini-tournaments of 10 people at Each player puts up dollars 100 plus a dollars 10 rake for the house; the winner collects dollars 700, the second and third-place finishers get dollars 200 and dollars 100 respectively.

    Poker is a game that rewards skill over luck in the long term and dela Cruz is clearly a talented player. She calculates that in the past year she has made about pounds 12,000 on, enough to fund a lifestyle beyond her income.

    Her salary, she says, pays the everyday things in life, such as the mortgage and utility bills; her poker winnings fund the luxuries, like evenings out in London nightclubs, spa visits and even a recent shopping trip to New York. 'I have always known since I was young how to play poker and games derived from it, ' she explains. 'But I only started to get into it online after my boyfriend started playing for play money (virtual money offered by online sites for players to practise). I was the first to say, let's play for real money and up the stakes a little bit.

    'For me, it is definitely a hobby and a way to get extra cash. It's about affording a few luxuries and being able to go out when I want. That's why I do it. In the job I am doing at the moment, there is no way I could afford a trip to New York, for example.'

    If dela Cruz is a rare example of a successful gambler, such successes help to explain why, in the face of much government and media concern about addiction, gambling in Britain is an extraordinary growth story.

    Moreover, it may be only in its infancy. The government's Gambling Bill, now being debated by parliament, is likely to be the trigger for the next stage of
expansion: the creation of Las Vegas-style casinos in most major cities across the country.

    As investments, they look a decent bet, given the speed at which internet gambling has taken off. Ladbrokes, for example, a relative late-comer to the online world, now has 1.2 million registered customers, about 250,000 of whom it classes as active. John O'Reilly, its managing director of e-gaming and telephone betting, reckons patrons split roughly equally three ways: traditional sports betters; players of casino games such as roulette; and poker players.

    Within the latter category, he points to a surprising source of players.

    'Students generally don't have enough money and have time on their hands.
They used to get jobs behind a bar; now they sit down at a computer playing online poker. The new breed of successful poker player is in his or her late teens, has got a good mathematical brain and is quick-witted.'

    IG Index, the financial spread-betting firm, also reports increasing diversity among its punters. Its clients are still predominantly City types, such as the ex-dealer who reputedly made pounds 500,000 in a six-month period this year by trading oil via futures and options. But one of its most successful gamblers is a greengrocer who has shown an unerring ability to trade commodities, such as the price of orange juice and timber.

    Commodities seem to have replaced stocks as the gamble of choice for financial betters. 'Share prices going from pounds 4 to pounds 20 in a few days have disappeared,' says IG's senior quoting dealer Will Armitage, 'but what has not gone away is the desire to make quick money.'

    For companies such as these, the British appetite for sophisticated gambling is good business. O'Reilly's division reported a 45% rise in gross win - effectively, gross profit before operating costs - to pounds 44.7 million within Ladbrokes' latest set of interim results.

    Given that, according to O'Reilly, the capital employed within the division is a mere pounds 20 million or so, it already ranks as a lucrative investment.

    Yet the revolution in the bookies' shops is equally dramatic. Anybody who has visited one in the past year will have noticed the arrival of machines that the bookies call fixed-odds betting terminals (FOBTs). These offer a range of casino games, but roulette accounts for about 90% of their turnover. In the past few years, the big five bookies - Ladbrokes, William Hill, Coral, Stanley Racing and the state-owned Tote - have installed about 15,000 such machines in their shops and it is estimated that about pounds 290 million a week is being wagered through them by the British public.

    The figure is slightly misleading, because much of the stake money is returned to the punter and then recycled through the machine several times.

    Even so, roulette, as played in high street shops, can claim to be Britain's most popular gambling product - pounds 290 million is more than three times the average weekly National Lottery ticket sales of pounds 88 million.

    To many, gambling on roulette seems pure madness, a guaranteed way for most people to lose money. The house's advantage is in-built and staring the punter in the face - that horrible green zero. But, says O'Reilly, the fact that roulette is pure luck is the base of its appeal. Unlike betting on horses, for example, the average punter need not fear that he suffers from lack of inside information or experience. 'It's the psychology of getting lucky. In games like roulette there is no need for skill and judgment. Everybody's equal.'

    The National Lottery itself, where the odds are far inferior to those on the roulette wheel, has broadened the appeal of games of pure chance, he believes.
'We were always a nation of gamblers, but I think the National Lottery has made it acceptable to be a gambler because the government is promoting it.'

    The Lottery looks like a mere warm-up for the government's next piece of liberalisation, the Gambling Bill. Andrew McIntosh, the minister for gambling, says it 'will move gambling conclusively into the mainstream of the leisure industry'. Critics say it will increase the number of gambling addicts in Britain from 300,000 to 700,000.

    The bill covers the full range of gambling, from internet sites to betting exchanges, but the most explosive element involves casinos. A study by Goldman Sachs estimated that some pounds 6 billion could be invested in casinos in Britain and that the number of premises could more than double to 280-300.

    Many of the protections of the old 1968 Gambling Act - deeply resented for decades by the casinos as nannyish - will be repealed under the new bill. Casino operators will be allowed to advertise for the first time and punters will no longer be obliged to become members at least 24 hours before they enter the premises. In theory, access will be easy as entering a pub.

    The biggest change of all will be the arrival in Britain of slot machines offering huge prizes. These are the so-called category-A machines, with potentially unlimited prizes, that populate the big Las Vegas casinos.

    Indeed, they are the economic foundation of those operations: forget any idea that Vegas is chiefly about high-rollers in dinner jackets playing blackjack and baccarat; jackpot slot machines account for about half the turnover of the big gambling palaces in Vegas. Many of them have at least 2,000 such machines, each clunking away around the clock.

    Category-A machines look a bit like old-fashioned one-armed bandits, or AWPs
- amusement with prizes, as the industry calls them. The difference lies in the possibility that the next turn of the wheel could produce a huge win, says Russell Hoyle, chief executive of Leisure Link, one of Britain's biggest manufacturers and distributors of gaming machines.

    'They are much more about putting money in, turning the wheel quickly and trying to win substantial amounts of money. They are also genuinely random. An AWP in the UK at the moment is random to within 10,000 turns, which means that it has the ability to compensate for heavy losses. A category-A jackpot machine has been tested to be random within one million turns, which means statistically that a player has the same opportunity as any other to win the jackpot.'

    Category-A machines can also be linked together via 'progressive jackpots', whereby a few cents from each turn of the wheel is skimmed off into a separate prize pool that can grow to astonishing size. One player in Vegas last year collected dollars 37.5 million from such a jackpot.

    The other key point about these machines is that they offer significantly better odds than one-armed bandits. In Vegas, category-A machines tend to be programmed to return more than 90% of the cash inserted into them, a ratio designed to keep the player playing. The machine wins in the long run, of course, but the payout is a better deal than the sub-80% ratio on current AWPs in Britain.

    Category-A machines are regarded as so central to the shape of the casino industry in Britain that they have generated more debate and lobbying effort than any other aspect of the Gambling Bill. There are two key issues: which casinos should be allowed to offer them; and how many is appropriate?

    On one side, the current UK operators - led by Gala, Rank and Stanley - have argued that category-As should be allowed in all casinos, regardless of size.
That certainly seemed to be the idea of Sir Alan Budd, whose review of the gambling laws paved the way for the bill.

    Culture secretary Tessa Jowell, however, has rejected the idea as too much, too soon. She wants category-A machines to be be restricted to casinos of over 5,000 sq m - what the bill calls regional casinos. Most existing casinos in Britain fall below that size threshold and would be classified as 'large'
casinos; these will be restricted to offering category-B machines with much smaller jackpots.

    The big boys - the operators of the regional casinos yet to be built - look set to be allowed to operate up to 1,250 category-A machines in each casino, which in theory should be enough to ensure that their premises stand comparison with those in Vegas.

    Jowell's reasoning is that limiting the distribution of jackpot machines will allow a controlled assessment of the impact on gambling addiction in Britain.

    To cynics, this view owes much to the government's wish to placate the anti-gambling lobby and sceptical elements of the media.

    Established British casino operators think an unfair playing field will be created, and Leisure Link's Hoyle has sympathy with them. 'This is delivering the UK gambling market to international operators and I don't know why any government would want to do that, particularly as for the last 40 years it has had a highly responsible, crime-free industry that employs 100,000 people,' he says. 'The international operators have got it game, set and match.'

    Certainly, the overseas entrants seem already to have embarked on a land grab. Sol Kerzner's South African group Kerzner International aims to build on land next to the Millennium Dome in London and at similar sites in Glasgow and Manchester. The Las Vegas company behind Caesar's Palace plans to create a pounds 320 million gambling complex next door to the new Wembley Stadium.

    The Gambling Bill has also attracted the biggest beast in the jungle, MGM Mirage of the US, a dollars 6.5 billion company that owns eight - roughly half - of the huge gambling hotels on the strip in Vegas, including the Mirage, Bellagio, New York New York and MGM Grand. The company does not do things in small measures: 18 original paintings by the modern master hang on the walls of its Picasso restaurant in the Bellagio.

    MGM Mirage has already signed a series of deals to build casinos: with the Olympia conference centre in London; with Newcastle United, to construct a casino next to the football ground; with British Land, to build next to the Meadowhall shopping centre in Sheffield; and with property group Peel Holdings in Liverpool, Manchester, Salford and Glasgow.

    'This is not pie-in-the-sky,' says Lloyd Nathan, the group's managing director for Europe and a Brit who has spent most of his career in the US. 'We have real money on the table already and hope to be a sizeable investor if this bill goes through and if the future tax regime proves workable. We are looking at opportunities daily.'

    He estimates MGM Mirage's planned project costs to date at dollars 2 billion and that 30,000 jobs, split between direct employment and construction jobs, will be created. Such numbers tend to impress governments, although Nathan is keen to avoid the charge from the British operators that a slick lobbying campaign from the Vegas invaders has won the day. 'UK-based operators have said that this is anti-competitive and discriminates against domestic operators in favour of international operators. I struggle to see the logic,' he says.

    He talks of MGM Mirage as a good corporate citizen, recruiting staff from disadvantaged social backgrounds and trying to take casinos up-market.

    Gordon Ramsay, he suggests, will be in demand as a restaurateur to the new casinos-cum-leisure complexes. 'We'd hope in this country to appeal to everybody from 18 to 80, male and female, and provide both non-gambling and gambling entertainment.'

    A note of caution is needed, though, argues Chris Guyvor, managing director of Quintus, an industry adviser to several gambling operators. The revolution will not be instant and there will be major uncertainties even if the Gambling Bill becomes law. 'This is not deregulation or liberalisation; it is re-regulation of outdated laws. I don't think it's a free-for-all. Look where the Government is coming from politically: it wants to guarantee there will be no increase in problem gambling as a result of this bill, so it is going in for armour-plating.'

    The Government's big fear, he says, is that it repeats the disastrous gambling experiment in Australia, where pubs and bars were given enormous lattitude to install slot machines and problem gambling exploded.

    Certainly, the rise of roulette via bookies' FOBTs seemed to create panic at Jowell's department. The Government contemplated legal action, but seemed to be deterred by the industry's argument that FOBTs were not actually gaming machines, which are not permitted in betting shops. FOBTs, said the bookies, were vehicles for placing bets on an event taking place elsewhere, given that the spin of the wheel happens on a central computer. Jowell settled for a voluntary code limiting the bookies to four machines per shop. Her revenge seems to be the substantial reversal of the deregulatory spirit of the draft bill, particularly with regard to category-A machines.

    'It is a complete misnomer to look at the UK market as the next Vegas,' says Guyvor. 'There will still be restrictions of numbers of machines; there will still be considerable planning hurdles, and we do not know how local authorities are going to react; and it also rains in the UK. Over a 10-year period, we might have 30 resort casinos. We will not see a proliferation.'

    The biggest unknown is the tax regime. All the big US operators make the point that a marginal tax rate of 40% of gaming profits, which currently applies to casinos earning over pounds 4.5 million a year, would make their plans uneconomic. The British Casino Association is lobbying for 15%, still above the rates of 8% and 9% seen in Nevada and New Jersey, but the Treasury has yet to drop any clear hints on what it would regard as acceptable.

    The Treasury, then, is sitting on the nuts, as they say in poker. But chancellor Gordon Brown probably already knew that: arguably, his abolition of the unpopular duty on bets in 2001, replacing it with a tax on bookies' gross profits, has been the single biggest driver of increased gambling in Britain.
Certainly, it seems to have been a big factor behind the popularity of roulette machines, which have been a major contributor to the fourfold leap in betting industry turnover since 2001 to pounds 29.1 billion, according to Customs & Excise figures.

    Will Brown now press the button for the next gambling revolution? Nobody knows for sure, but the idea of increased revenues and huge inward investment

sounds like the type of gamble that appeals to governments.
             Total      Annual
            stakes      growth
1999         7.5bn
2000         7.4bn         -1%
2001         8.8bn         18%
2002        16.6bn         90%
2003        29.1bn         75%
Source: Customs & Excise Annual Report 2004 (excludes casinos, bingo and slot machines)


    The desire to take great risks in anticipation of even greater potential reward is inherent in both inveterate gamblers and successful business people, as many a racehorse-owning entrepreneur would testify. But the link between bookies and the boardroom is rarely as direct as in the case of clothes retailer Next, whose directors recently took a multi-million pound punt on their own future share price.

    The company's directors and top managers are staking a total of pounds 1.5 million of their own money, a further pounds 2 million coming from special bonuses paid for the purpose of placing the bet. The money has been invested in warrants issued by Goldman Sachs, and could result in the 20 senior staff at Next sharing a pounds 13 million pot at the end of July 2008. This maximum payout will be achieved only if shares reach pounds 24.50, but they must average more than pounds 20 for three months for the warrant-holders to receive any return on their investment.

    This unconventional way of rewarding performance seems to have the blessing of major shareholders and the Association of British Insurers, and its simplicity and cost-effectiveness in comparison with alternatives like share options may well appeal to other boards.

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