EASG,  Warsaw, September 21 - 23, 2000

Cross border betting - A need for a new regulatory environment.

Andrew Tottenham, Managing Director, Tottenham Consulting.

Introduction

As we approach the end on the twentieth century there is a need for a change in the current regulatory environment for gaming in Europe.  Traditionally, legislation and regulation of gaming has been developed on purely national grounds with only the national interests being taken into consideration.  However, the expansion of gaming, changing social attitudes, increased mobility and the competitive threat from Internet gaming mean it is now time for European legislators and regulators to review gaming legislation with a view to developing realistic regulations.  I realise that, whilst ideal, it is not possible to have a single set of pan European regulations, it should be possible when making proposals for new laws or regulations, regulators should co-operate with one another and to take into consideration the laws and regulations of the surrounding countries.  Too often gaming regulation protects vested interests; operators, suppliers and regulators.

Why is there a need for a move towards regulatory harmonisation?

Europe is becoming more homogenous

Travel is becoming cheaper.  More people have cars. Europe's citizens see national borders as less of a physical barrier.

More and more law and order issues have to be dealt with on an international basis; terrorism, hooliganism, fraud, drug trafficking and immigration.

Developments in technology make it more difficult to legislate purely on moral or cultural basis.

Casino operators are becoming more international.

The competitive threat of Internet gaming.

Today fewer Europeans think of national borders as physical barriers and are prepared to cross them for business, retail or leisure opportunities. The massive increase in car ownership in the last two decades has revolutionised retailing and leisure time activities.  Britons are prepared to cross the channel to buy cheaper household goods, cars, alcohol and cigarettes. EU officials believe this cross border trade will lead to a more efficient intra-European market, drive down prices and a convergence of tax rates. The Belgians, Dutch, French and Germans freely commute to work in across their national borders.

As we know people will travel within a country to get access to gambling product.  For example, someone living in the suburbs of a big city will travel into the city to go to a city centre casino. In the past, it has not been unusual for citizens of one country to visit a casino in another on a regular basis.  In fact, it is no accident that some of the largest casinos in Europe sit on the borders of countries with limited gaming supply.  Take for example the casinos in Divonne (http://www.domaine-de-divonne.com) and Evian, the second and third largest casinos in France.  They sit on the French/Swiss Border close to the Canton of Geneva; a canton of over 400,000 people. 

Switzerland has had extremely limited gaming supply.  Casino style gambling has been limited to small low stakes gaming on Boule and low stake/low prize "skill" slot machines.  Geneva had one of these casinos in the basement of the Noga Hilton.  Clearly this is a product that does not appeal to the vast majority of gambling citizens.  Consequently, many Swiss people cross the border each and travel the thirty minutes to the casinos in France.  Another example, is the St Vincent Casino in the Val D'Aosta in Italy.  This casino sits in an Alpine valley near the Swiss/Italy border. Another is

Casino di Campione in Lugano or Casino Novo Gorica in Slovenia (www.hit.si) close to the Italian border . I could go on.

In all these examples citizens of one country, with an extremely limited supply of casino gaming product, are making the conscious decision to travel to another close by, on a regular basis in order to play.  The casino operators know the strengths of their position and market themselves to patrons on the other side of the border.

Governments that limit their gaming supply will find that their citizens will try to find gaming in those areas that have a better and/or more accessible product.  In the absence of any, I expect that illegal gambling casinos flourish.

Even countries that appear to have many casinos do not, either through legal/regulatory reasons or poor business judgement, cater to the needs of their citizens.  Austria, for example.  The casinos in Austria are operated by a quasi-governmental organisation called Casinos Austria ( www.casinos.at ).  They operate all the twelve casinos in Austria under a concession granted by the Austrian Government.  I was speaking with a senior executive of this company about the development of casinos on or near the borders of this country. He told a tale about how he had visited the Kranska Gora Casino in Slovenia not far from the Austrian and Italian borders.  When he got there it was about 2300 hours on a weekday night.  The casino was full and he went around the car park to see where the customers came from and more than 90% of the cars were from Austria.  He stayed for an hour or so and left to visit the Kitzbuhel casino not far away on the Austrian side of the border.  To his dismay the Kitzbuhel casino was practically empty.  Consumers were clearly making a purchasing decision based on the fact that the product on the Slovenian side of the border, although less accessible, was better value than that on the Austrian side.  What are the main reasons;

1.      Lack of a dress code; players in the cross border casinos do not have to wear jackets, ties etc.

2.      A more agreeable ambience.  Less formal surroundings.

3.      Better customer service.

4.      Lack of financial scrutiny.  Many of the customers are people who own small businesses (bars, restaurants, shops, etc.).  Austria is an extremely high taxed country.  Many people owning small, cash businesses do not declare all their income, and are unable or unwilling to be seen playing under the possible scrutiny of the tax inspectors.

I asked whether Casinos Austria perceived these casinos to be a commercial threat.

His response was very telling; firstly one of Casinos Austria's prime remits is to promote tourism and although it does depend mainly on Austrian citizens for business, Casinos Austria would not like to be seen competing for Austrian business.  Secondly, there is no management will to change their operating philosophy and thirdly the unions would not allow it. 

He sited, as an example of management's lack of commercial vision, the example of refurbishing the splendid casino in Baden in 1995 some miles south of Vienna at a cost of many millions and the opening of a much smaller casino in the centre of Vienna in a pedestrian area, with no car parking.

I suggest that this lack of vision is due to the environment in which Casinos Austria has operated for the past thirty-five years.  Effective monopolies rarely generate market sensitive management.  Where possible the market will vote with its feet.  What, in the short term, might appear to be beneficial to the national interest, is not always so in the long term.

Another example of operators being out of touch with the market is France.  I was in Cannes a few years ago.  There are beautiful casinos in this city.  However, as I strolled through the back streets I passed a bar that was very crowded and noisy. I stretched over the crowd to see what all the excitement was about.  Dice!   They were playing a local gambling game with dice.  The action was fast, furious and noisy.  The men had their shirtsleeves rolled up and were yelling loudly.  By the look of the money changing hands the stakes were considerable.  This was a sharp contrast to the staid, elegant casinos one finds on the Croisette. 

These people could easily have walked 200 metres to the casino and played there.  Obviously, what was on offer in that bar was far more to their liking.  It is not just a question of allowing gambling.  It is more a question of what you allow and in what environment.

More and more operators are becoming trans-national. Casinos are becoming more acceptable to institutional investors as a legitimate business.  Regulation is an important part of this.  We have seen recently small casino groups in France become large national operators through the use of institutional money.  However, institutional money likes to see growth, and where successful they want to see more acquisitions.

Most countries try to limit their gaming supply.  The UK has 120+ casinos, France 150+, Germany 40+ etc.  During the last twenty years there has been very little enlargement of the number of casinos in Europe, except perhaps in the newly emerging democracies in Central Europe.  Therefore the operators' growth has only come through acquisition or development of new casinos beyond their home territories.  Usually, but not always, in these new markets.

However, moving beyond their home territories is fraught with problems.  Different regulatory regimes present a nightmare for compliance.  Often ill thought out legislation and regulation creates a different set of circumstances than originally supposed.  This usually results in a knee-jerk reaction, with hastily prepared legislation and regulations that again do not have the desired effect.

Short-term measures by legislators encourage short-term measures from entrepreneurs.  Entrepreneurs should be allowed to invest, know their investment is protected, and be able to make a sensible return.  More importantly, it should allow him/her to reinvest in the product and management to ensure the long-term future of the business.

Regulations should not impinge on management's ability to manage.

Entrepreneurs are not going to make large investments and will look to get a return as fast as possible if they cannot be sure that the legislative framework will remain stable.

Examples:

Poland

Casino gaming was legalized in the early 1990's.  There was little regulation or oversight.  Casinos opened up all over Poland and some had less than desirable owners or partners.  The lack of regulation and oversight allowed the less scrupulous operators to under-declare their revenues and pay little or no taxes. The government's reaction was to disenfranchise all foreign ownership with little or no compensation.  They effectively nationalised the casino industry overnight.  Legitimate operators were penalised along with the others.  Today there is talk of allowing foreign investors back in to the country.

Given the history why would anyone want to invest again?

The Czech Republic

I have personal experience of this one.  I am the man that persuaded some investors to give me money to buy two casinos in the Czech Republic.  Within five weeks of closing the acquisition parliament decided to disenfranchise all foreign investment from Czech casinos.   This came from nowhere, we, and our investors had done extensive due diligence.  In believe this was an initiative from the State Lottery Company to stop its privatisation.  The Lottery Company threw around much disinformation about the casinos being owned by foreign gangsters and this legislation would remove them instantly.  Also, they said that no foreign owned casinos were allowed in any other European country!  As with the Polish legislation, it did nothing to address the local undesirables who were involved in the industry.  Through their allies in the House of Deputies (lower parliamentary house), the State Lottery company was able to pass the legislation despite vetoes from the Senate and the President.

Thank goodness that the legislation also encompassed sales promotion companies.  We had powerful allies in the like of major oil companies (Agip, Shell, etc.), Proctor and Gamble, Phillip Morris, American Brands, etc.  We were able to get formal protests from the EU and the US government.  As a result the legislation was amended and foreign investment is now allowed.

Conclusion

Regulators need to understand that they cannot regulate in isolation.  They need to take account of other countries' regulations.

People will gamble.  However, they will do so on those activities and in surroundings they find conducive.  Today's populations will travel to find what they want.  (Even to the Internet.)  Gaming regulation should not preclude differing styles of gambling.

Tastes and social attitudes change.  Regulations should not be so inflexible so as not to allow operators to alter their product to meet the demands of the market.  Supply led products rarely succeed.

If you want a clean, transparent, legitimate gaming industry you need sensible, stable legislation and regulation. 

Entrepreneurs should be allowed to make sufficient profit to reinvest in their product, to take account of changes in technology, taste and attitude.  Otherwise the casinos will close or the market's taste will change and force people to seek their gaming entertainment from other sources. 

A review of all European national gaming legislation and regulation, taking into account the point raised above, with a view to moving towards harmonisation would go along way to address the needs of the industry and its customers in the next century.