When "The Magic Pudding" Meets A Death By A Thousand Cuts

A critical overview of Australian casino regulatory policy

This piece was originally published at Inside Asian Gaming in two parts. Part one can be found here and part two can be found here. The full piece is republished below, with permission.

“The Magic Pudding” is a classic of Australian children’s literature. Unfortunately for Australian casino gamblers, their nation’s various state governments have treated them like that book’s titular character – a source of sustenance that infinitely regrows itself back to wholeness after a slice is extracted. In the aftermath of a period of enthusiastic expansion, followed by a sudden crackdown from the source of tourism that said expansion was targeted towards, the Australian casino industry has become ensnared in scandals and pounced upon by regulators who seem to be animated by a vindictive crypto-prohibitionism. Whether these events trigger a reconsideration of Australian casino policy still remains to be seen, but I suspect such reconsideration is unlikely to occur. In the first section of this article, I shall give a broad overview of how Australia’s casino industry is regulated and what motivates Australian governments to impose this manner of regulation. In the second section of this article, I shall describe how the industry expanded in the last decade, primarily in response to the rise of Macau and the lure of Chinese gambling tourists. In the third section, I shall detail how Australian casinos’ gambles on China went sour and, in-part as a consequence, how Australia’s casino sector suddenly became a lightning rod for both criticism and regulatory crackdowns. I will conclude with some comments about the industry’s future prospects as well as the potential (or lack thereof) for regulatory reform.

Part 1
The core pattern that characterizes the Australian casino industry is that of government-enforced geographic monopoly over the “locals” table games markets. A quick look at Australia’s casinos and where they are located makes it clear – casinos are typically very distant from each other and each casino is the sole provider of table games for its location. Only three exceptions exist – South-East Queensland and Tasmania, where both casinos are owned by the same firm (Star Entertainment and the Federal Group respectively), and Sydney, where Crown Resorts only competes in the VIP tables segment of the market, and mass-market gambling is exclusive to Star Entertainment. VIPs – interstate and international players – have the money to fly to different destinations in order to gamble, and thus form a competitive market segment, but the locals market is always a monopoly within a large geographic radius. Due to this monopoly, which is imposed by the states through the licensing system, the locals market provides the casino with the greatest profit margins. These monopoly-enlarged profits are then used by the casino to build and sustain lavish VIP facilities (such as opulent private salons, complimentary top-shelf beverages and destination luxury hotels) with the capacity to attract low-margin-yet-highly-lucrative interstate and international gamblers.

To put it in concise technical terms, geographic separation between casinos is used to cultivate and extract monopoly rents which are then used to cross-subsidize the VIP market in order to maximize gross gambling revenue (and therefore government revenue). To put it in simple terms, the locals are screwed over in order to fund the kind of gambling experience that attracts whales.

This government-imposed pattern has no relationship to the AML, CTF or KYC obligations casinos are (justifiably) faced with. Nor does this pattern serve to mitigate problem gambling; whilst apologists for this style of casino regulation would claim that the artificially high prices and restricted availability of table games caused by the Australian model might claim that these things reduce the prevalence of problem gambling and that the taxes levied on Gross Gambling Revenue are all about funding treatment for problem gamblers, these claims are proven demonstrably false by the gambling economics literature. It is rational rather than pathological gamblers whom are more likely to be deterred from gambling by artificially high prices, as problem gamblers have highly price-inelastic demand. In addition, GGR taxation goes far beyond what would be necessary to fund treating problem gamblers, and is deeply unsuited to being used to “internalize” any externality caused by problem gambling since only problem gamblers generate problem gambling and the negative externalities of problem gambling are not imposed piece-by-piece with each spin of the roulette wheel. Indeed, to the extent that problem gambling’s harm is a function of the amount problem gamblers lose, artificially expensive gambling increases rather than decreases the social costs of problem gambling. The interests served by Australia’s regime of casino regulation are the interests of the government (tax revenue primarily), and certainly not those of gamblers (good gambles at reasonable prices with good service).

Part 2
The rise of Macau represented a pivotal turning point for the casino industry across the world, and Australia was no exception. Whilst only one Australian firm – Crown Resorts – was able to enter the Macau market, the other large players in Australian casinos also responded to the promise of being able to peel off lucrative Chinese baccarat junkets. New-Zealand-based SkyCity (a firm that, in its home market, has the same state-ensured monopolies Australian casinos have), which once operated properties in both Adelaide and Darwin, sold their Darwin property and expanded their Adelaide casino with additions including new casino space (both main floor and VIP), new restaurants, and a destination luxury hotel with an opulent villa and VVIP gambling salons with panoramic views. The Star Sydney entirely rebuilt its VIP gambling facilities. The Star Gold Coast did similarly, greatly expanded their main casino floor and VIP facilities in the process and added an all-suite luxury hotel tower (of which an entire floor was dedicated to VVIP gambling salons). The Star Brisbane was greenlit by the Queensland State Government, represented an immense upgrade to the lacklustre Treasury Hotel & Casino, and featured not just a wrap-around sky deck but an entire floor of decadent VVIP gambling salons immediately beneath it.

Crown placed the biggest wager on the expected inflow of Chinese gambling tourists to Australia. Whilst they also entered the Macau market directly (though a joint venture with Laurence Ho named Melco-Crown Entertainment), they expanded their Melbourne property’s VIP facilities, purchased Perth’s Burswood Casino from Genting, proceeded to redevelop it into Crown Perth and expand it with Crown Towers Perth (which included not only several absurdly opulent villa accommodations but also half a floor of VVIP salons), and developed Crown Sydney. Crown Sydney is an anomaly among Australian casinos, as it is prohibited from offering mass-market gambling entirely (The Star Sydney retains a monopoly over that segment) and only competes in the VIP segment of the market. Due to the competitiveness of the VIP segment, the profit margins are low, and consequently James Packer (who was still the Chairman of Crown Resorts during Crown Sydney’s development and construction) described the projected economic prospects of Crown Sydney as “tough.” Unfortunately for Packer, it was about to get tougher.

Again, it must be emphasized that Australia’s state governments were all for this expansion and greenlit it at every stage. They wanted the money from Chinese gamblers, and were well aware that this meant having to tolerate junket play (which they did, for years). They were also well aware that these junkets were suspected of links to organized crime, and that the junkets themselves were grey-market operations. It is hard to avoid the suspicion that Australia’s state governments were complicit and perhaps even intentionally turning a blind eye to what was happening in those VVIP rooms.

Part 3
As stated previously, casino regulation is driven not by economic efficiency concerns, but by the self-interest of policymakers. Policymakers want casinos to provide tax revenue and jobs, but to avoid being political liabilities (this is the primary reason why problem gambling is a problem to the government). The cost-benefit analysis began to change when Crown Resorts’ Chinese sales team was imprisoned for illegal promotion of gambling back in 2016, and soon thereafter Crown left the Macau market and the Chinese government began to crack down on citizens’ gambling visits to Australia (unsurprisingly, the Chinese Communist Party would much prefer its citizens to gamble in Macau). Expectations of an abundant supply of Chinese whales were substantially deflated, even though some limited “whaling” was still able to proceed.

The projected benefits went down, but when current affairs program 60 Minutes broadcast a report on Crown’s junket links (in 2019), Australia’s casino industry started to attract even more controversy. Further journalism on the subject followed. Crown took out full-page newspaper advertisements to contest the allegations made, but that did little to soothe the public’s worries about the casino industry as a whole (not just Crown) and speculation that the regulators were sleeping-on-the-job, actively collaborating with the firms they were supposed to regulate, and/or turning a blind eye to serious violations of the law. Casinos have always been controversial even in nations with generally liberal political cultures, but these media reports only amplified the controversy and, consequently, political discontent.

This triggered a regulatory crackdown. A critical thing to note is that all such crackdowns are, in part, performative exercises in public relations; they don’t merely exist to actually do something, but to show the public that something is being done, and thus soothe public discontent. As such, high-profile Royal Commissions were set up, casino licenses were suspended, large fines were imposed, and plenty of regulations with no rational relationship to money laundering by international baccarat junkets were instituted, such as mandatory pre-committed time limits and loss limits for all slot machine players, and an increase in the time each slot machine ‘spin’ takes (thus slowing down the game). Not only did many of these measures have nothing to do with AML, they ended up indirectly punishing the casino’s patrons by resulting in more expensive gambling (for example, the Mahogany Room in Melbourne no longer has $50 blackjack tables, and all blackjack games in there now hit on a soft 17). In other words, the penalty for Crown’s misconduct is being paid by Crown’s patrons (and the same can be said for Star). These measures were clearly driven by politics at least as much as by legal and economic concerns. One cannot help but suspect, too, that some of these new regulations represent a stealth-prohibitionism – an attempt to regulate the Australian casino industry out of existence.

Conclusion
It is true that Crown, Star and SkyCity all engaged in serious misconduct. Yet, and perhaps this is merely the perspective of a cynical economist, the fact that they did so seems less significant than the incentive structure that encouraged this behaviour and the role that Australia’s state governments played in creating that structure. One cannot help but wonder what would’ve happened if journalists didn’t turn junket play into a salient political issue – would the governments have passively tolerated (or did they passively tolerate) money laundering in the name of importing tax revenue? In the aftermath of the last eight years, Crown is now owned by an American firm, the industry’s biggest players have all been severely fined, and new regulations (many economically unjustifiable and completely unrelated to money laundering) have been imposed. What are the prospects for this industry going forward?

Firstly, as we are already seeing, it will be casino patrons who will pay the price. That price will take the form of worse odds and/or higher minimum bets, and reduced quality due to cost-cutting initiatives. All three big players in the industry expanded their operations and took on debt in doing so – eventually they will have to pay their debt and will do so with profits that are primarily extracted from the locals they have a monopoly over. Lower-tier VIPs – those who can afford to travel but not to wager several hundred dollars per hand for hours every day – may start leaving or ignoring Australia entirely and gambling in different markets, such as the Philippines and the USA.

Secondly, we won’t see any Australian casino shut down any time soon. At most, we will see these casinos be bought and sold, but state governments want the revenue from them and as such they will remain open. State governments will not regulate them to the point of economic unviability, nor will they take over the casino and attempt to run it themselves – private firms have industry experience and membership databases of significant players and also provide a scapegoat that policymakers can use to avoid being blamed for the results of their policies.

Thirdly, it may very well be the case that the Australian casino industry’s prospects are only downhill from here. Zealous overregulation and over-taxation, combined with far fewer whales than initially anticipated, are not the only problems the industry faces. Non-Asian younger persons are far less interested in casino gambling than previous generations were, so even those monopolies over the locals market that are enjoyed by Australian casinos will become less lucrative – the Magic Pudding isn’t going to regrow like it used to. In addition, younger people have many alternative sources of entertainment to choose from than previous generations did, many of which are substantially cheaper than casino gambling, and Australian casinos are clearly not financially (or even legally) able to offer better odds and lower table minimums. Unless Chinese players return (which is arguably not going to happen unless China experiences a substantial change in government), or state governments radically deregulate the industry (which, again, is almost certainly not going to happen) the glory days are over for Australian casinos.