The COVID-19 outbreak and the resulting shutdown of so-called non-essential businesses have wreaked havoc on the U.S. economy, producing soaring unemployment and economic and fiscal pain across the country. Apart from air travel, no industry has taken a bigger hit than legal and regulated gaming, and the effects could linger for years rather than months.
Still, any policy changes designed to mitigate or repair the damage need to be carefully considered, lest they be counterproductive or produce more harm than good.
These were among the takeaways from a webinar in early April, “Addressing Long-term and Short-term Fiscal Questions: How to Establish Gaming Policy to Generate Optimal Economic Benefits,” produced by public policy experts Spectrum Gaming. The presenters were Michael Pollock, managing director, Spectrum Gaming and Rod Motamedi, senior research manager, University of Massachusetts Donahue Institute.
The crisis presents a number of challenges, but it doesn’t change the basic rules of gaming policy, Pollock said. These are: fully assess the options; understand the long-term consequences; and avoid long-term solutions for relatively short-term problems.
“Every policy change in gaming has a reaction which may or may not be equal or opposite,” said Pollock. “There are two checklists for policy makers when considering changing gaming policy. These acknowledge that lotteries and other forms of gaming will continue to converge and the interests of all forms of gaming must be taken into account.”
MORE 9/11 THAN SARS
The first thing to understand and accept is the magnitude of the crisis. “What kind of disaster are we in?” asked Motamedi. “When it comes to gaming, is this going to be more like SARS or 9/11?”
His answer: 9/11.
SARS had a profound effect on the casinos in Macau and in Ontario when there were outbreaks in Toronto. Those were, classic “V-shaped” situations; sharp declines followed by sharp rebounds, said Motamedi. On the other hand, 9/11 had “profound and prolonged impacts on industries well beyond the event.”
“There was a lingering fear of an unseen menace that drove people’s behavior. It took three years for demand for air travel to return to pre-9/11 levels,” Motamedi added. “Unlike SARS, where in a month or two the thing passed and casinos were back up and running as they normally would. I suspect that this is going to be more on a 9/11-like situation where, even after we get some sort of all-clear, I think there will be this lingering fear of congregating in public place and being around strangers. I think things like gaming, restaurants, bars and movie theaters will be experiencing a longer hangover than might be felt in the general economy.”
Motamedi expects a prolonged recession. “Right now, we are essentially in a recession by fiat,” he said. “For plenty of good and valid reasons, the leaders of federal, state and local governments have told people to essentially go home. They have by order created a recession. The alternative is far worse, but that’s the strange situation we find ourselves in.”
He suspects that the shutdown will last long enough that things won’t immediately snap back because productive capacity has been eroded. He noted that Goldman Sachs has predicted that it is going to take about three years for employment levels to return to where they were prior to this.
“One of the other differences between this event and the SARS V-shaped impact is that people and businesses had cash on hand at the end of that impact that they were willing and able to spend,” said Motamedi. “After a prolonged period of economic contraction or stagnation, people are less likely to have cash on hand. For the vast majority of people, gaming is a discretionary purchase that is precisely the type of expense they might forego in the coming months because of economic anxiety.”
How will we know when we can go back to normal? Motamedi sees a four-part test for this to happen: A sustained reduction in cases for at least 14 days; hospitals equipped and staffed in such a way that they can provide non-crisis level care; the ability to test everyone who needs it; and the ability to actively monitor cases, do contact tracing, and isolate and quarantine individuals as necessary to prevent any lingering reservoirs of disease from exploding into a new pandemic. Speaking in early April, Motamedi didn’t see any area in the country that is anywhere near meeting all four of those criteria.
HASTE COULD MAKE WASTE
Given the scope of the present challenges facing gaming, in the coming weeks and months decision makers in many jurisdictions will surely either consider or reconsider legislation designed to address the fallout. These conversations figure to include fast-tracking sports betting bills, be they from scratch or by expanding mobile betting options, new forms of online gaming and changes in gaming taxation policies. Any or all of these measures must be handled with care.
For instance, mobile betting is up for discussion with increased intensity most everywhere. “But it should be recognized that expanding mobile betting from scratch is a long process; it is not something that should be done quickly,” said Pollock. “If you do, it does create problems. It obviously generates revenue for governments and operators while casinos are closed and it allows adults who are sequestered to gamble safely and it also creates a database of new players who can visit casinos when this crisis abates. The downside though, is that adding mobile betting from scratch can take months. If you endeavor to try and take shortcuts, they can prove costly.”
Pollock cited two potential problems: The entry of bad actors—people who you do not want to participate in gaming and who have not earned the privilege of participating in gaming; and a lack of a clear determination as to the number of licenses or the requirements for licensure.
“Decisions made quickly can have permanent consequences,” he said. “Any decision to issue licenses broadly cannot easily be undone.”
On the i-gaming front, Pollock noted that i-gaming can involve any sporting events and can be implemented relatively quickly. The question becomes who best to offer it: lotteries, land-based operators, third-party independent operators or some combination of all. “This raises a lot of questions that have never been answered: Should lotteries compete against casinos? How do states identify appropriate lanes? Should licenses be limited to lotteries and casinos or should states create opportunities for independent third parties? The answers are likely to be permanent and resistant to future change.”
Expanding the number of gaming outlets in response to short-term budget shortfalls carries with it another accompanying question: What will the impact be on the value of existing gaming licenses and how might that in turn affect their willingness to invest additional capital?
“Fast-tracking the expansion of gaming may be desirable to address fiscal pressures—and every state that has gaming is facing unprecedented fiscal pressures at the moment—but it’s not necessarily advisable in the long-term to do that,” said Pollock. “Gaming expansion is a long-term solution not well-suited to solve short-term issues.”
DO THE MATH
Digging into the economics of sports betting and i-gaming, Motamedi encourages decision makers to do the math. “The economics of sports betting are different; unlike casino games, there is no mathematical certainty to the outcome,” he said. “With casino games, the gaming operators know over a large number of plays exactly how much they can expect to win. There is some sense of that in sports betting, but there is no guarantee on a particular event or over time. Oddsmaking ends up playing a crucial role in this activity.”
In addition, sports betting is a low-hold business and tax rates must be competitive if regulated operators are to be competitive with illegal bet shops. “Hold is five or six percent for sports betting versus up to double-digits for slots,” said Motamedi. “A 10 percent tax rate on hold would mean the operatorholds $5 million and the state gets $500,000 of revenue off of $100 million of betting activity.”
On the digital gaming side, setting this up costs much less money than building a $1 or $2 billion resort. “You’re buying servers and computers and that kind of infrastructure rather than cement and rebar and carpeting and TVs and all the things you need for a resort-type casino,” said Motamedi. “The difference is also in local supply. Almost every state will import what it takes for a digital betting system, whereas many states will locally supply what it takes to build a casino.”
The bigger question is what operations looks like; to start, the number of people it takes to run a digital infrastructure is “profoundly fewer” than the number needed to run a casino. The occupation mix is different as well: “You need computer and network engineers; IT specialists; and cybersecurity people on the digital side,” Motamedi said. “On the brick-and-mortar side, you need far more early- and mid-career occupations—valets and housekeepers and dealers and bartenders.”
The way these operations scale per dollar of revenue is also quite different. Higher traffic and betting volumes has no impact on digital operations. “You don’t need to double everything in digital gaming to handle double the number of bettors or even triple the number of bettors,” said Motamedi. “But in a casino you start having scalability questions in order to incorporate greater volumes and those create different economic and fiscal questions.”
“It’s a question of goals,” Motamedi concluded. “If your goal is tax revenue maximization, it would seem that casino-type games are your best bet, regardless of channel. If your goal is employment maximization, brick-and-mortar seems to be more beneficial than digital. If your goal is physical contact minimization, then your channel is more important than the game type; you can do everything digitally. If you want to support tourism or other economic development, you’re back to thinking about brick-and-mortar. New customer attraction? Digital. These things all play off each other and you can’t maximize all of them.”