Sheldon Adelson, billionaire and chief executive of casino company Las Vegas Sands Corp. (LVS) told Forbes on 11/22/2013 that he is determined to stop online gambling in America.
I won't go into the moral debate but will examine his standpoint from a business strategic / investor perspective. I'm quoting Sheldon Adelson from the recent Forbes article and will address the concerns he raises with respect to online gambling.
Adelson also thinks that online gambling is "suicidal" for the U.S. casino industry in the long run and will destroy hundreds of thousands of jobs.
Many inefficient industries float hundreds of thousands of jobs. I think there is a good chance online gambling will fuel demand for real-life gambling but if not, the general economy will prosper because technology solves inefficiency. It's not fun if it's your job but it's great for consumers whose money goes a longer way.
In the short-term, Adelson predicts that U.S. casinos could make money from their branded offerings online, but that non-branded web sites would quickly saturate the market with financial incentives that casino-branded offerings would inevitably need to match to stay competitive, eating away at their profit margins.
This is the most important issue to discuss when you are actively investing in the gaming space. In the current landscape of online gambling this trend can clearly be observed. At least the main way for gaming sites to attract sophisticated gamblers by offering more deals on better terms. Newer players are marketed to in other ways as they are not as price sensitive.
It turns out we can easily falsify Adelson's claim. If we review statistics of Pokerscout it is immediately obvious that Pokerstars is the leading network to play online poker. Pokerstars is leading the pack on many fronts but from my personal research I can assure you that they are not leading in financial incentives or just plain price to play. The only players for whom Pokerstars might be most attractive from a financial perspective are those with very high MGR ("Montly Gross Revenue") over a prolonged period of time. I'm sure many players aspire to that kind of MGR but the vast majority will be better off at other networks.
If you want to do your own research comparing prices and incentives of poker rooms you should compare rake of the various rooms. Next thing you compare rake back offers and bonus offers. You will find out that comparing prices is incredibly complex and casual players will have a very hard time differentiating on the basis of price between the rooms.
The Pokerstars example clearly demonstrates that the leading network does not match the lowest prices on offer, while it does have the economy of scale advantage and easily could offer the best prices.
How can this be explained? Online gambling where other players are involved like Betting exchanges, Poker, Backgammon and other gambling games involving real competitors can capture a real and sustainable competitive advantage: The network effect. If you are logging on to play poker, you need the game to start immediately and other players to be there at your preferred level of stakes/game/structure. Only the top rooms offer this kind of "liquidity" and it's very important to the quality of their offer. It's also a sustainable advantage because once you have this advantage it becomes very hard for other competitors to match your offer.
Online gambling where it's player vs machine compete much more on price but it's not the only issue to players. For example many players view security as an important issue. The sustainable competitive advantage of Customer preference for rooms can definitely be developed.
Margins may very well become razor thin but this type of business returns on capital can be astounding nonetheless.
At the same time, Adelson claims, the casinos would be cannibalizing their existing land-based businesses, eventually hurting their revenues and making them vulnerable. As proof, he points to the impact he claims online gambling has had on land-based casinos in certain European jurisdictions.
Sure Casinos will cannibalize some of their current business. From time to time it will function as a substitute. However the rooms can also be used to drive traffic to their venues. Just browse through Pokerstar's live event offerings. Everyday it runs countless tournaments that qualify players for these events. Usually including event tickets, hotel and spending money. There are huge opportunities for cross promotion and to leverage the brands of existing casino operators.
I can't speak for every land based casino in Europe but the ones I have visited are terrible. If they were hurt by online gambling, that happened because their offerings are so terrible that any substitute will be a lethal threat.
If I examine the Holland Casino in my country (The Netherlands) that is clearly demonstrated. This state enterprise failed to turn a profit last year and is on the verge of bankruptcy while the venues charge an entry fee, charge an entry fee on a weekly tournament of €50 of €10 and then have the nerve to take 5% out of the remaining prize pool.
The only reason people visit the place is because there are no alternatives to this state monopoly. Is it really surprising their attendance is hurt when an online substitute becomes available?
Inevitably, Adelson argues, the states will increase taxes on the online gaming businesses
The state may very well do so and if Adelson is afraid this will happen and it will be so high returns on invested capital will not be worth it, he will be free to stay away. It's not an argument to fight against legislation. If he were right it could turn out great for him when legislation passes. His competitors will invest heavily and end up getting taxed to death while he scoops up the profitable parts of the market.
And social media companies will enter the online gambling market and crush the casinos.
I can see Zynga Inc's (ZNGA) poker app develop into a competitor but overall if gambling were to become popular to access through social networks, that seems like a positive for the industry. It would mean casino's get a shot at monetizing social media traffic instead of Facebook Inc (FB) crushing the Mirage out of business. You could argue social media threatens almost every business model in existence while the reality is, customers just have to be acquired through different channels.
"I won't go into the business because it's a moral issue for me," says Adelson about online gambling.
Perhaps the most important and actionable comment of Sheldon Adelson is the above. Adelson and his wife own more than 50% of the company and his strong moral opinion (right or wrong) is a huge threat to shareholder value.
When I reviewed LVS on May 9 I was tempted to buy into it. However this statement alone reinforces my view that the Wynn Resorts (WYNN) is more attractive. Wynn and MGM are much stronger positioned to capitalize on a legalization of online gambling. They have a much wider footprint on the Las Vegas Strip and control stronger brands like Bellagio, Aria, MGM Grand, Mirage, Wynn and Encore. Perhaps the most attractive name from this perspective would be MGM Resorts International (MGM).
Perhaps the reason Sheldon Adelson is so concerned is that legalization of online gambling will threaten the competitive position of Las Vegas Sands, I'm of the belief (as are his competitors) it would be a huge driver of growth for the industry as a whole.