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Elliott Morss | September 21, 2014

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The Global Economics of Gambling

© Elliott R. Morss, Ph.D.

Introduction

In an earlier article (http://www.morssglobalfinance.com/the-economics-of-the-global-entertainment-industry/), I examined the global entertainment industry, where entertainment was is defined as goods, services, or other activities that people pay for to enjoy in their leisure time. The total sales by entertainment category presented in that article are summarized in Table 1.

Table 1. – Global Entertainment Expenditures

Entertainment Category (in bil. US$)
Alcohol 1,163
Entertainment Drugs 546
Sex 400
Restaurants 183
Movies 180
Gambling 110
Sports 63
Computer Games 54
Live performances 35
Tourism 25
Music 7
Total 2,862

David G. Schwartz, the author of the great history of gambling: “Roll the Bones: The History of Gambling” (Gotham Books: NY, 2006), suggested that that my gambling total was low. That, coupled with the fact that I had already planned to write on global gambling, led to this article.

Gambling Defined

The common definition of gambling/gaming is “playing games of chance for stakes”. That definition would include the recent activities of AIG and large global banks. However, this article will be restricted to the following gambling activities:

  • Casinos;
  • Gaming Machines;
  • Lotteries;
  • Charitable Betting (Bingo, etc.);
  • Other Betting (including horse racing).

Common statistics used for gambling data are the Global Gambling Yield (GGY) and the Gross Gambling Revenie (GGR). These statistics are defined as gross bets minus winnings payments (GGY and GGR are a gross figures in the sense that they do not include the costs and taxes of the gambling institutions). I use GGY/GGR data in this article (for more on gambling definitions, see the Appendix).

As can be seen in Table 2, Schwarz was right: my gambling total in the earlier article was too low. The global total for 2007 was $337.1 billion which puts gambling just below drinking, drugs, and sex in entertainment outlays.

 

Global Gambling

The most authoritative data on gambling comes from the Global Betting and Gaming Consultants (GBGC). Their estimated global GGY totals for 2007 are presented in Table 2. Casinos are the primary vehicle for gambling.

Table 2. – Global Gambling Revenues (GGY), by Method

2007
Gambling Method (bil. US$) % Total
Casinos 108.9 32%

Lotteries

98.3 29%
Gaming Machines 69.7 21%
Betting 48.7 14%
Other (Bingo etc) 11.4 3%
Global Total 337.1 100%

Source: GBGC Analysis

The gaming machine contribution is even larger than indicated because GBGC includes gaming machines in casinos in the casino category. Pari-mutual wagering is included in the betting category.

Table 3 presents data on gambling by region. North America and Europe generate the most gambling revenue with Asia & the Middle East in third place.

Table 3. – Global Gambling Revenues (GGY), by Region

  2007
Region (bil. US$) % Total
North America 120.1 36%
Europe 102.5 30%
Asia & Middle East 75.6 22%
Latin America & Caribbean 17.5 5%
Oceania 16.6 5%
Africa 4.7 1%
Global Total 337.1 100%

Source: GBGC Analysis

Table 4 disaggregates Table 3 data by listing gambling by the leading countries. The countries listed include 91% of total global gambling revenues. In 2006, Macau revenues were slightly less than those of Las Vegas. Since then, Macau’s revenues have exceeded Las Vegas’ revenues.

Table 4. – Global Gambling Revenues (GGY), by Country

2006
Nation US$ Bil.
United States 94.9
Japan 35.4
Italy 16.0
UK 15.1
China, Hong Kong, Macau 14.8
China 5.13
Canada 14.7
Australia 13.2
France 11.8
Spain 11.7
Germany 11.2
Macau 7.2
China 5.1
South Korea 4.8
South Africa 4.4
Russia 4.2
Brazil 4.1
Argentina 3.4
Greece 3.1
The Netherlands 2.8
Switzerland 2.7
Singapore 2.6
Sweden 2.5
Hong Kong 2.5
Antigua and Barbuda 2.0
Portugal 1.9
Finland 1.6
Total Global 305.7

Source: GBGC Analysis

In Table 5, Table 4 figures are divided by each country’s population. This highlights the gambling propensities of each country. It also shows “gambling destination” countries. Clearly, Antigua and Macau are leading destination countries.

 

Table 5. – Per Capita Gambling Revenues (GGY), Leading Countries

2006
Nation US$
Antigua and Barbuda 19,700
Macau 14,380
Australia 641
Singapore 580
Canada 450
Switzerland 361
Hong Kong 354
United States 317
Finland 308
Greece 280
Sweden 278
Japan 277
Italy 271
Spain 257
UK 250
France 192
Portugal 175
The Netherlands 169
Germany 136
South Korea 100
South Africa 92
Argentina 86
Russia 30
Brazil 22
China 4
Total Global 47

Source: GBGC Analysis and UN Demographic Data

In addition to Macau, Australia, Hong Kong, and Singapore are popular gambling sites for foreigners. South Africa is also an important destination site for foreigners.

US Gambling

Turning now to the United States, Table 6 presents gambling revenues by method. Out of a total $92.3 billion, casinos took in $60.4 billion.

Table 6. – US Gambling Revenues (GGR), by Method, 2007

Method (in $ billions)
Commercial Casinos $34.4
Indian Casinos $26.0
Lotteries $24.8
Pari-mutuel Wagering $3.5
Charitable Games and Bingo $2.2
Card Rooms $1.2
Legal Bookmaking $0.2
GRAND TOTAL $92.3

Source: American Gaming Association

As can be seen from Table 7, almost all states allow Charitable Games. Commercial casinos do not have the political acceptance that Indian Casinos have. Only two states, Hawaii and Utah, allow no gambling.

Table 7. – States Allowing Gambling

  States
Method Allowing
Charitable Gaming 48
Lotteries 44
Pari-Mutual 40
Indian Casinos 29
Commercial Casinos 12
Slots at Racetracks 12

Source: American Gaming Association

In Table 8, the areas with the largest casino revenues are presented.

Table 8. – US Casino Revenues (GGY), by Region

2008 Annual Revenues
Casino Market (in $ millions)
Las Vegas, Nev. $7,540
Atlantic City, N.J. $4,545
Chicagoland, Ind./Ill. $2,251
Connecticut $1,571
Detroit $1,360
Tunica/Lula, Miss. $1,105
St. Louis, Mo./Ill. $1,031
Biloxi, Miss. $951
Shreveport, La. $848
Reno/Sparks, Nev. $779
Kansas City, Mo. (includes St. Joseph) $756
Lawrenceburg/Rising Sun/Belterra, Ind. $732
New Orleans, La. $701
Lake Charles, La. $651
Laughlin, Nev. $571
Black Hawk, Colo. $509
Yonkers, N.Y. $486
Council Bluffs, Iowa $469

Source: American Gaming Association

Economic Analysis

 

  1. Long Term Revenue Growth

According to GBGC data, gambling is a growth industry. Table 9 indicates that globally, gambling revenues grew by 69% in the 1999-2007 period. Extremely rapid growth occurred in gaming machine betting, while informal gaming was the only method to decline.

Table 9. – Global Gambling Revenue Growth, by Method

% Growth
Gambling Method 1999-2007
Casinos 38%
Lotteries 78%
Gaming Machines 129%
Betting 68%
Other (Bingo etc) -20%
Global Total 69%

Source: GBGC Analysis

Table 10 provides data on gambling revenue growth by region. North American revenues continue to grow rapidly. There is little legal gambling allowed in the Middle East, so the bulk of the gambling growth in that regions stems from Asian sites. South African growth is largely the result of expatriates working throughout Africa.

Table 10. – Global Gambling Revenue Growth, by Region

  % Growth
Region 1999-2007
North America 85%
Europe 53%
Asia & Middle East 81%
Latin America & Caribbean 52%
Oceania 32%
Africa 114%
Global Total 69%

Source: GBGC Analysis

According to the American Gaming Association, US gambling revenues increased 59% over the 1999-2007 period, with commercial casinos lagging the overall average.

Table 11. – US Gambling Revenue Growth

  1999-2007
Method % Change
Commercial Casinos 47%
Total Gaming 59%

Source: American Gaming Association

Overall, gambling worldwide is growing rapidly and is gaining greater acceptance. This is enhanced by it being integrated into an overall entertainment experience. US mega churches and Disney resorts throughout the world have learned this lesson: whether your initial focus was religion or children, you maximize revenues by broadening out your entertainment offerings. As part of the growing entertainment experience, slots have come a long way from just “pulling the crank”. According to William Pfund of the WMS Company speaking at a conference call hosted by USA Mutuals, slots now incorporate the technology of the digital game machines, and these machines are selling well.

Internet gambling bears watching. According to a new Interactive gambling report from GBGC, the online gambling yield surpassed $20 billion in 2008. H2 Gambling Capital estimated that Internet gambling revenue was estimated to be $5.9 billion in 2008 from players in the United States and $21.0 billion from players worldwide. A recent WTO decision against the United States by Antigua opens the possibility for offshore horse betting groups to compete legally with parimutuel betting groups. Only veteran gamblers are likely to gamble on the Internet, and the convenience of doing it on the Web could reduce their visits to gambling institutions.

b. The Recession

Gambling is often discussed along with drinking and smoking as the “sin” industries. They are lumped together in part because all are seen as addictive and consequently recession resistant. But gambling as an industry does not perform like tobacco or alcohol. In the current recession, tobacco sales have been hardly affected while alcohol sales are off only 2%. Gambling revenues, in contrast, are off 12-15% globally.

There are several reasons for the differences.

First, a large portion of the adult population consumes alcohol, and addiction levels are quite high. One sixth of adults smoke, and nearly all smokers are addicted to nicotine.  The American Gaming Association reports that studies have found the prevalence rate of pathological gambling to be close to 1 percent of the U.S. adult population (American Gaming Association). So one major difference is that a very small portion of the population is addicted to gambling.

Second, gambling is increasingly being promoted as an overall entertainment experience. In fact, a recent study has documented that more than 60% of casino revenues are generated by non-gambling activities. This makes a gambling outlay far more like a discretionary consumption item than a necessary addiction purchase.

Charles Norton, Portfolio Manager of the USA Mutuals Vice Fund reported on a recent USA Mutuals conference call that with the exception of Macau, gaming has not started to recover as yet. There is considerable over-capacity in the industry with a large number of new locations being built.

c. Equity Investments

Dr. K.C. Ma, co-author of Sin Stock Returns has reported on the same conference call that the gambling industry goes down more and later in a recession than the overall market. Dr. Ma reports further that gambling usually recovers more and earlier than overall market. But so far, it is not coming back – in part because of new casino supply coming along, and fear of Internet.

GBGC has developed an index of the 50 largest global gambling companies presented Chart 1 below. It appears that gambling stocks are far more volatile than the overall market. From its peak at the end of October 2007 of approximately 185, the GBGC 50 Index fell to about 55 in early November 2008, or by 70%. Over the same period, the S&P 500 fell 42%. Over this period, gambling stocks lost more than $150 billion in value.

Chart 1. – GBGC 50 Index January 2005 to September 2009

gbgc50Source: GBGC Research

d. Investment Outlook

In earlier articles, e.g., http://www.morssglobalfinance.com/investment-strategies-v-the-global-recession-and-financial-management/, I made two points to guide stock market investing as the world gradually recovers from the global recession:

  • The dollar will weaken as the United States tries to finance its huge deficits;
  • The growing middle classes of emerging market countries will lead the world out of the global recession.

Given these guidelines, one should search for value in gambling stocks in Latin America and Asia. Macau is not the only locale to investigate, but it is interesting. There is a tremendous capacity increase coming in Macau, but the gambling demand is already rebounding there. And the China government is using a mechanism that allows it to increase and curtail demand at will: to curb demand, it restricted Macau visas for Chinese residents.

In terms of investment vehicles, one might want to consider The Vice Fund of USA Mutuals (VICEX). One of its investment categories is gambling.

I am not an investment adviser and nothing I say should be taken as a recommendation to buy or sell an asset. I do not hold any shares of VICEX.

APPENDIX

Gambling Definitions

For my global gambling total, I think I want total bets. I say I think because it can be argued that betting totals are unlike other entertainment expenditures: bettors do not expect to lose all they bet. In fact, “rational” gamblers have a pretty good sense of the odds, and they view their losses as the entertainment charge for gambling. Viewed in this way, the GGY/GGR statistics are the proper entertainment expenditure figure for gambling.

For those who believe total betting is the number I should use, I can use GGYs if I have “institutional take” data. In the following two tables, I present Nevada data on slots and games/tables and data on the Massachusetts State Lottery.

Nevada Gambling  7/1/08-6/30/09
Slots % GGY Multiplier
Wagered 100.0%
Casino GGY 6.1% 16.45
Games and Tables % GGY Multiplier
Wagered 100.0%
Casino GGY 12.7% 7.89

Source: Nevada Gaming Commission

Massachusetts State Lottery
Lotteries % GGY Multiplier
Wagered 100.0%
Lottery GGY 55.0% 1.82

Source: Massachusetts State Lottery

Assume that for all other gambling, the “house take” is 15%. Applying GGY multipliers using these assumptions results in the data presented in the following table.

  GGY   Total Bet
Gambling Method (bil. US$) GGY Multiplier (bil. US$)
Casinos 108.9 7.9 859.2
Lotteries 98.3 2.2 218.4
Gaming Machines 69.7 16.5 1,146.6
Betting 48.7 6.7 324.7
Other (Bingo etc) 11.4 6.7 76.0
Global Total 337.1 2,624.9

Total global bets in 2007 were $2.6 trillion!

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