The Global Economics of Gambling
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
- 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
Source: 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!
