Monday, 12 December 2016

Poker machine profits

Pubs and clubs have been battling to maintain gaming revenue since overall player losses from gaming peaked in 2008. Losses in pubs and clubs has been relatively stable over the past eight years. Casinos have suffered declines in that period..

The annual report of the Liquor and Gaming Commission revealed overall gaming losses in 2016 were similar to the previous year at $237 million. Casino EGM losses fell again but Keno in pubs and clubs came to the rescue with turnover jumping 10 per cent. The total tax take fell slightly as Keno tax rates are much lower than EGM tax rates.

Federal Hotels has offset reduced gaming income in casinos by expanding its stable of gaming pubs. Since 2003 when its sole license to conduct gaming in Tasmania was renegotiated Federal Hotels has increased pub numbers from four to twelve.

Gaming in pubs and clubs is the major focus of public concern, and will be at the forefront of the parliamentary inquiry into post 2023 gaming arrangements. If gaming is to continue outside casinos then a better understanding of the financial aspects is a prerequisite.

Federal Hotels cop most of the attention but other owner/operators with multiple sites have a significant presence in the industry. Glenorchy epitomizes the issue. Five out of eight of the State’s top EGM performers are in Glenorchy. Eight of nine Glenorchy venues are held by groups/persons with multiple establishments, with four of Federal Hotels’ twelve pokie pubs located here.

There is a logical reason for this hive of activity. Average losses per machine in Glenorchy are $80,000 per year or $217 per day compared to average losses across the State of $130 per EGM per day.

However it’s the split up of the associated costs, between fixed and variable, which helps make the bottom line so attractive for the top EGM earners..

For every $1 in player losses:

·       The State government gets 30 cents

·       The venue gets 30 cents

·       Federal Hotels as licencee gets 31 cents

·       GST is 9 cents

Third party pub operators get 30 cents in every dollar. If Federal Hotels own the pub the share is 61 cents.

There are direct costs that have to be met. In the case of pubs the hire of EGMs is a fixed cost. Wages of gaming staff are the main variable cost which is no more than 10 cents. Hence once fixed costs are covered a venue is making 20 cents in every dollar of player losses.

Federal Hotels as sole licencee and network operator will face mainly fixed costs to administer the network via network Gaming. Once the fixed costs are covered, Federal Hotels is making 31 cents for every $1 of losses, or 51 cents if it owns the pub. There are few variable costs. The El Dorado Deluxe EGM at the Elwick Hotel costs no more to administer than an EGM in the Dover RSL.

In economist’s speak EGM gaming has low marginal costs. Once fixed costs are covered every extra dollar of player losses sees a significant increase in the bottom line. Better than for bar operations and far superior to bottleshops. In the case of a pub the marginal EGM costs are mainly wages and these probably decline with increased turnover. For Network Gaming marginal costs would be close to zero.

In an area of public policy with heightened social risk, the current gaming system is perversely structured. Once fixed costs are covered tax removes only part of the bountiful booty. That’s why Glenorchy is so attractive, why multiple site owners already dominate and are looking to expand.

A system of stepped tax rates makes public policy sense if parameter changes such as altering the house percentage and the frequency of spins doesn’t remove some of the excess profits.

Even pubs with below average EGM turnover can easily make normal profits on their gaming, equivalent to levels in other areas of hotel operations. Average and above average venues currently make super profits.

The number of gaming staff in pubs in full time equivalent terms is only about 200 (based on gaming staff in pubs as a percentage of EGM losses). Network Gaming boasts a business unit with 30 staff running the network. Figures will be trotted out listing the number of licenced gaming staff, a total of 4,000 Statewide, but the number of FTE’s working at any time is a fraction of that figure. Stand by, however for the bogus employment argument.

Keno has exhibited contrarian behavior over time. Its relative share of the gaming pie has almost doubled since 2004, which combined with low tax rates and lower commissions to pubs and clubs compared to EGMs, is now making Keno an important contributor to Federal Hotels’ bottom line. Merely taxing Keno at the same rate as EGMs would increase Keno taxes five times. And raise $8 million per year

It’s always been a mystery why the community service levy of 4% of EGM losses doesn’t apply to losses in casinos. The notion that EGMs are part of the tourism industry is hopefully one that the parliamentary inquiry will lay to rest. Granting favourable licence conditions for EGM and Keno gaming on the pretext that the benefits will spill over into the tourism industry has demonstrably failed. The proceeds of gaming have been paid to shareholders and used to buy more gaming pubs and bottleshops. Not only is this contrary to the community’s understanding of what the 2003 sole licence agreement would provide, it has given Federal Hotels an unfair advantage over its competitors jostling to benefit from the spillover effects of MONA, paradoxically the sort of benefits that Federal Hotels were supposed to generate with the extension of its sole license in 2003 and the promised expansion of its tourism investments.

The gaming industry if it is to continue outside casinos will be a regulated industry. There’s no argument in logic, equity or economics why a regulated gaming industry should allow operators above normal rates of return compared to other industries or above normal rates of return compared to other offerings of the hotel industry.

The parliamentary inquiry has much to consider.

(Published in The Mercury 12th December 2016)

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