The phrase was stark and graphic: gaming risks suffering “the stench of cigarettes.”
That was the warning of Paddy Power co-founder Stewart Kenny to the gaming industry if it doesn’t act strongly enough to confront the risks of gambling addiction.
In the United States, that risk is expressed in the more pedestrian-sounding term of legislative risk. It refers to the risk that state legislatures, seeking more tax revenues, might damage the financial underpinnings of their casino operators by raising taxes or authorizing new competition. Illinois has been the poster child of legislative risk, and certainly acted the part this year with its way-too-big gaming expansion.
Legislative risk is generally credited as the reason that casino company stocks sell at seven or eight or 10 times EBITDA while companies in sister lodging and entertainment industries sell at much higher valuations.
But what American legislatures have done pales to actions the British government has taken and may yet take, though motivated more by the pervasiveness of gambling and concerns about resulting addiction than about tax revenues.
Indeed, when the government slashed the maximum bet on gaming machines in betting shops from £100 to £2 it did so knowing that millions of pounds in tax revenues and thousands of jobs would be lost.
In a way, the betting companies had it coming. As they proliferated over the years populating towns and cities with thousands of betting shops, nobody expected that some day they would depend not on a bloke laying down a bet on a football game, but on people pumping potentially ruinous sums into gaming machines.
The impact of the bet limit imposed on April 1 has been significant. William Hill took an £882 million non-cash write down in March in anticipation. GVC said core profits would be hit by $170 million this year. Nearly a quarter of Britain’s 8,500 betting shops will close.
In an effort to get ahead of the public policy curve, the rising tide of concern over problem gambling has led the five largest UK betting companies to tax themselves 1 percent of revenues to build a £60 million pool to fund responsible gambling programs.
But that might not be enough. Companies are no longer advertising during televised soccer games in response to complaints that teams those ads will be seen by youngsters. Yet controversy has erupted over a record 10 of 20 Premier League wearing gambling company logos on their jerseys. Those jerseys also are seen by youth, Labor Party deputy leader Tom Watson has pointed out. The party says it will ban such sponsorships if elected to government.
The United States might be heading for a similar environment. At present, there is excitement over proliferation of legal sports betting. Professional sports teams and leagues that just last year were fighting against sports betting now are rushing to sign up gambling companies as partners and betting kiosks will appear in numerous stadiums and arenas.
However, when the NFL season begins in September, public attitudes might turn if the airwaves are filled with gambling information and shows. Consider the negative reaction a couple of years ago to the repetitive advertising of just two daily fantasy sports operators.
Already, U.S. Senator and presidential candidate Elizabeth Warren has introduced a bill to provide gambling addiction treatment to U.S. service members.
Dave Trujillo, executive director of the Washington Gaming Commission, warns that legalization of sports betting in his state could lead to an explosion of illegal gambling. That contradicts the industry’s argument that legalizing sports betting reduces illegal activity, but it shows the thinking of an influential regulator.
The point being that legislative risk could rise in the U.S. as it has in the UK, and that’s a trend investors need to consider when weighing their decisions.
