Casino Wars: Packer, Echo and the battle for the grind

James Packer’s move against Echo can be seen as an attempt to become the pre-eminent, if not monopoly, casino operator in a number of Australian cities. AAP

Gambling revenue from Australian casinos amounted to just over A$3.5 billion in 2009-10 (the year of the most recent official data).

Of that, about a third, A$1.3 billion, came from Victoria’s single casino, operated by James Packer’s Crown. Crown’s Perth casino generated gambling revenue of over A$536 million in that year; thus, Packer gambling interests controlled over A$2 billion, or 53% of Australia’s casino market by gambling revenue.

In contrast, Echo Entertainment, Crown’s protagonist in recent public battles for the casino business, limped along with gambling revenue of a little less than A$1.3 billion from its five casino properties (four in Queensland and one in Sydney), including a fairly modest A$735 million from the Sydney casino.

There is little doubt that Crown has managed its Australian casino operations well, if that means they are profitable and prominent. It also operates two casinos in Macau and a more modest, if up-market casino in London. Recently, plans to develop a casino in Sri Lanka were announced, relying on significant tax breaks. Expansion into the Canadian gambling market is also mooted.

Given all this, it’s interesting to consider why Crown would be so seemingly focused on dismembering its less well-endowed Australian competitor. To address this question requires some background in the nature of the Australian gambling industry.

Casinos are certainly big business, but represent a fairly modest proportion of Australia’s overall gambling market, which generates gambling revenue (i.e., gambler losses) of around A$20 billion per year. Of that, about A$10.5 billion comes from poker machines in clubs and pubs, A$5 billion of that in NSW and A$2.6 billion in Victoria. Enticing even a small proportion of gamblers away from these local venues would be a lucrative proposition for any casino operator.

This is because within casinos, the revenue also largely derives from poker machines, which contribute about A$1.5 billion – about as much as table games. VIP or “high roller” gambling contributes about A$600 million to casino gambling (as the Productivity Commission reported in chapter two of its 2009 report).

VIP gambling is certainly useful, but much less than the more quotidian revenue generated from local punters. But it does have the capacity to legitimate casino expansion plans, on the basis that few politicians and commentators are troubled by the prospect of an overseas millionaire dropping a bundle in an Australian casino. Unfortunately, VIP-only gambling is far from being a successful business model for the sort of casinos operated in Australia (or in the US, Macau or most other mass markets).

Claims by Packer that the proposed casino at Barangaroo will not target the domestic market thus need to be taken with a grain of salt, as Frances Markham and Martin Young pointed out last week.

Such claims are commonplace in the development phase of casinos; few see them through. Table games operate with much lower house edge than slot machines, and staff costs are far higher. Even with high minimum bets, it’s not easy to turn a profit on table games. Slots are the bread and butter (or, as the industry puts it, “the grind”) of the casino industry. However, Crown can’t concede at this stage that it is after the domestic Sydney gambling market. The adverse political fall-out of a huge new Sydney casino going after average Sydneysiders is not a good look, politically. And there are other factors at work as well.

In NSW, the situation is complicated by the many large poker machine clubs, operating hundreds of poker machines each. Penrith Panthers, for example, operates around 900 machines and generates revenue of about A$90 million a year from them. The 20 or more such clubs sprinkled through Sydney’s west and south west are formidable and well connected operators, generating hundreds of millions in gambling revenue and maintaining strong and traditional links with politicians at both grassroots and more senior levels.

The clubs cemented an agreement with the (then) O’Farrell opposition prior to the last NSW election; this deal has recently delivered them access to casino-style automated table games – automated versions of what’s on offer at casinos such as roulette and blackjack, with bets of up to A$100 per spin.

The club’s political nous was also on show in their successful opposition to the Gillard government’s poker machine pre-commitment proposal, using tactics gleaned from the National Rifle Association. The Peter Slipper imbroglio was a desperate attempt by Gillard to find a way out of the Wilkie deal; the success of the club’s campaign can be measured by the fact that Gillard contemplated and then enacted the deal to make Slipper Speaker of the House of Representatives, something which any casual political observer could have advised her as being at the very least a highly risky proposition.

This latter episode demonstrates the truism that gambling businesses need politicians on side if they are to succeed. Packer has former ALP operative Karl Bitar and recent Senator Mark Arbib on his payroll, and former Liberal Senator Helen Coonan sits on the board of Crown.

The recent decision by the NSW government to proceed further with Packer’s unsolicited bid for a second casino in Sydney demonstrates the capacity of the Packer operation to get what it wants, as of course did its increase in capacity for the Melbourne casino in 2009. Both of these achievements took a matter of weeks rather than years. What Packer wants, Packer gets, and usually on his preferred timeline. These connections may well facilitate his ambitious plans to usurp Echo’s markets and consolidate Crown as the pre-eminent, if not monopoly, casino operator in Melbourne, Sydney, Brisbane and Perth. From this position, competing against other operators for domestic gamblers will be a much more straightforward proposition.

Echo, on the other hand, seems much less inclined to stretch itself. This may be a function of its monopoly position (although Packer’s monopoly operations haven’t held back his development plans), or a hangover from its prior life as an element of Tabcorp, from which it was separated in 2011. Whatever the cause, it has been much less successful at generating revenue and at prosecuting its cause.

For Crown, however, Australia is arguably a launching ramp for his global casino aspirations. Internationally, Crown is a small player. Packer’s attacks on Echo, including recent attacks on Echo’s CEO John Redmond and Chair John O’Neill as well as accusations that Echo has done “a terrible job” of its Queensland casinos can be seen as elements of a campaign to consolidate Crown’s Australian position, as a bolster against the difficulties of the very difficult international casino business. Crown’s unsuccessful investment in Las Vegas in 2008, resulting in hundreds of millions of dollars of losses, was a cautionary example of what can go wrong in the gambling business.

There is an old saying amongst gamblers: never bet on anything you don’t understand. Packer is nothing if not a model gambler, having apparently learned at his father’s knee that the house (almost) always wins. Unlike his dad, who famously dropped millions at other people’s casinos (at least until he acquired Crown), James has learned to take advantage of the house edge.

Playing to his strengths by going for a big share of what he sees as an under-utilised market in Sydney and Brisbane is clearly part of a strategy to consolidate casino operations in Australia, a business he now knows very well. If successful, he is likely to end up with a virtual monopoly on the casino business in the big Australian cities, providing him with an excellent and stable platform to move more confidently into the international business he so obviously craves.