The gaming industry is always at risk from the whims of government, which is one reason valuations of casino stocks tend to be lower than those of sister industries, such as lodging, restaurants, resorts, or amusement parks.
And that vulnerability is almost everywhere.
Take PhilWeb as an example.
PhilWeb is a small company in the Philippines that operates a network of what in the U.S. are often call internet cafes. They are places where people sit down at computer screens and basically play slot games.
Often, in the U.S., these cafes get around laws against gambling by masquerading as sweepstakes games, or by falling within the so-called Chucky Cheese laws in which small prizes are allowed.
It’s been a constant back-and-forth between internet café operators and local law enforcement and district attorneys over whether they violate laws, with each shut-down followed by some clever tweak to the games that operators claim makes them legal—at least until the next attorney general ruling.
But their intended appeal is clear based on the names of establishments that include words like Vegas, Lucky and 777.
PhilWeb is a more serious case. It is not a mom-and-pop operating in some small strip center. It is a publicly traded company that runs some of its e-cafes, as PhilWeb calls them, in bingo halls operated by none other than the Philippine Amusement and Gaming Corp, the government agency that both regulates and operates gaming in the country.
The problem is that the Philippines has a new president, a populist named Rodrigo Duterte who is no friend of gambling, seeing it as an exploitative industry. He especially doesn’t like Internet gambling.
Thus PAGCOR, the former accomplice in PhilWeb’s growth, has pulled its license, and no longer is issuing new licenses to others and has announced that it won’t renew yet others as they expire.
Understandably, PhilWeb’s stock price collapsed.
For now, the brick-and-mortar casino industry that is rising at Entertainment City in Manila appears safe. Durerte wants tourism, and those gambling at the new palaces are often from places like China and South Korea.
But whatever happens, PhilWeb should be a reminder of gaming’s vulnerability. Look at Macau for the biggest example of what can happen when government policy conflicts with the ambitions of casino developers and operators.
Nor is this vulnerability just at the hands of populist or Communist governments.
In the U.S., it’s often at the hands of greedy governments. Or, perhaps more accurately, governments that spend more than they take in so the obvious industry to tax for new revenue is gaming, as casino owners don’t get much public sympathy.
It’s been awhile since this pattern has played out in the U.S., most notoriously in Illinois, but perhaps most damagingly in Delaware.
But that doesn’t mean the risks are past. Just this year, Pennsylvania raised its table game tax by two percentage points.
Additionally, legislation had been introduced in Pennsylvania to significantly allow the spread of slot machines to airports and liquor-licensed establishments. That caused Sands Bethlehem President Mark Juliano to say his property would not invest in expansion if such legislation passed.
In New Jersey, Carl Icahn put off a promised $100 million investment in upgrading Taj Mahal until after the results of November’s referendum to allow two casinos in North Jersey. Now, of course, he’s playing a game of chicken with UNITE HERE labor union and plans to close the Taj in October, anyway.
There is some concern that the U.S. economy could slip into recession next year. If so, state tax revenues will dry up making casinos a target for tax rate increases.
If that happens, legislative risk will once again become a factor in the valuations that investors are willing to put on casino stocks.
