When experience meets numbers
This week we discuss online casinos, how global payments are made, and the history of family offices.
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Blog Post
When experience meets numbers…
There were trends that appeared during the pandemic which were expected to be paradigm shifts in the way we consumed. However, several of those trends have fizzled out now that the world has returned to somewhat normal. It turns out that peloton was just a bike with a screen, online shopping was not going to be the predominant way to purchase goods (at least not yet), and crypto is not going to overtake fiat as a medium of exchange.
However, one trend that we’re not seeing abating is the rise of online gambling, and in particular, online casinos. There are two reasons for this increasing trend. The first, and the larger factor, is the legalization of the activity in several US states as well as LATAM countries. However, the other is more of an observation of how much of a superior product online gambling is to land-based gambling.
Before we get too far into this discussion, it's important to lay out a few things. We are specifically going to discuss online casinos (i.e., not online sports betting nor online lotteries). Also when we say online casinos, we are discussing online slots or table games (live or RNG). We will also mostly be focusing on the US market for this discussion.
Ok now coming back to the main point on why I think land-based casinos are going to get decimated by their online counterparts, let me tell you a story. Up until I went to business school, I thought I liked to gamble. Until then I associated gambling with two experiences 1) playing poker with my friends and 2) gambling in Las Vegas. The first experience is evergreen. On the second, I thought gambling in Vegas was a blast (and still is). There’s an atmosphere of fun, you’re given free drinks, there are award-winning shows ongoing, amazing restaurants, and a nightlife second to none. So, when I went to business school in Chicago, I was excited to check out the local casino scene. So, a few friends and I hopped into a car and went to a casino near the city, the Horseshoe Hammond (located in Indiana and operated by Caesars). My excitement, however, was short lived as I realized that the Horseshoe Hammond was where despair was born. It was smoky, dingy, dull, and the punters really looked like they should have been cut off a long-time ago. There were no free drinks, no atmosphere, and I was constantly berated by a 70-year-old man sitting next to me on the blackjack table for “taking his cards.” It dawned on me quickly that it wasn’t really the gambling aspects I liked about Vegas – it was all the aspects around it that enhanced the experience. This also made me realize that I’m not much of a gambler, I don’t think I’ve ever made a bet at a casino for more than $30 and never lost more than a few hundred dollars at any visit. What excited me was all the accoutrement (if you will) that went with the gambling.
What readers need to remember though is that while Vegas is synonymous with gambling in the US, only about 25% of US casino gross gaming revenues (GGR) come from Nevada. Further, a lot of the ‘drivers’ to gamble in Vegas are as a result of all the entertainment around it, whereas for most non-Vegas locations, the gambling is the main attraction. This is what I experienced when I gambled in Indiana, and rarely has my experience been so closely matched with the numbers until I read MGMs annual report (see below).
MGM, the largest casino operator in the US breaks out its US net revenues in 2 buckets: Las Vegas Strip Resorts and Regional Operations (i.e. resorts elsewhere in the US). As you can see, the Vegas revenues are quite evenly split between the Casino, Rooms, and F&B whereas the regional operations revenues are primarily driven by Casino operations. This helps to illustrate the point that visitors to Vegas are not just there for the gambling, whereas visitors to other land-based casinos are there for just that purpose. Now it could be that regional resorts have smaller ratio of rooms, shows, restaurants etc. to casino square footage and thus lower overall revenue. This is possible, I haven’t done that math. But even if that’s the case, it is telling, as it shows that the good people at MGM understand that the regional resorts are more about the gambling.
If we accept that regional casinos resorts are more about the gambling than anything else, then the next question is, are they an inferior product to online casinos? I think so. First, most regional casinos require significant travel time. In fact, the 10 largest casinos in the US are not actually in Vegas (see list below) and none are in a major city. An online casino on the other hand is as close as your pocket.
Second, as I experienced, the atmosphere in some of these places can be quite off-putting and not quite what you would expect in Vegas. For example – the WinStar World Casino, (the largest casino in the US) has only a 3-star hotel and ranks only 3.8 for atmosphere on Google. It doesn’t serve free alcoholic drinks and has no celebrity-chef restaurant. A land-based casino experience can be rough. Strict rules about having your phone out, heaps of second-hand smoke, annoying patrons, slow games, having to carry chips around hoping you don’t drop one. Now compare this to the online experience. You don’t have to travel, wait in lines, wait for seats to open on tables (several online casino offerings can host hundreds of players at once), deal with aggressive pit bosses nor unruly fellow patrons. Games are vast, fast, and you can play multiple games at once without ferrying your chips back and forth. You can play with other friends by making use of the chat feature (or hosting a twitch channel for followers), and you can chat with dealers via live casino games. Online casinos are offering attractive signup bonuses or free credit to play for the first time, and while they may not have as robust rewards programs, this can be added to over time.
Some might argue that other online trends also have significant benefits to their offline competitors which is true. However, the offline competitors also have significant competitive advantages that can’t be overcome just yet. Gyms have far more equipment for a full-body workout vs a peloton, and grocery stores/pickup give you instant satisfaction for a purchase you need right away. Yet the more I think about it, I’m yet to see a large long-term benefit of land-based casinos vs online ones. A friend once argued that it's kind of sad to sit in your pajamas all day and gamble at home, but one step into the Horseshoe Hammond and I think that friend would agree it's not much cooler to gamble at that location either (btw, some guests were wearing pajamas).
The trend is early, For example, 2021 US online casino revenues crossed over $3bn, whereas US casino revenues are over $53bn. The growth though, has been rapid. For example, online casino revenue for New Jersey was just $8.4MM in 2013 but was nearly $1.4bn in 2021. Now regulation will matter a lot here, and several states will struggle to legalize online casinos as nearly 500 casinos in the US are run by Native American tribes who are typically opposed to online casinos and have strong lobbying power. But most brands are taking note. Nearly every major land-based casino brand (MGM, Caesars, Wynn etc) has an online strategy, and even Sands whose founder was vocally opposed to online gambling has forayed into the space after the death of Sheldon Adelson.
Just to reiterate – I don’t think Vegas is going anywhere – the entire entertainment package it offers is unmatched and cannot be replicated online (move along, metaverse bulls). That said, I do think regional casinos both in the US and elsewhere are under threat as they offer few (if any) significant benefits as compared to their online peers. Thus, if regulation doesn’t get in the way, I believe we’re going to see significant GGR flowing from land-based casinos to the online space over the next decade.
Bias disclosure: Clients of Farrer Wealth own shares in Evolution, which is a leading supplier in online casino offerings and IAC, which is the largest shareholder of MGM.
Farrer Fun Fact
How we pay: This is a fascinating table of how payments get processed around the world. Two logos seem to pop-up nearly everywhere. (source)
Articles and Videos of the Week
A story about passion in journalism might also be one of the best ways to think about analyzing businesses. (Thanks to our friend Graham for posting)
The history of family offices is fascinating, and this writeup does a great job of summarizing it.
This tweet illustrated how quickly an aligned society can act when you add technology. Just hours after California sent out an alert to residents asking them to cut their power usage, demand dropped enough to avoid a blackout.
As if we needed more depressing news. Stanley Druckenmiller believes major indices will trade flat for a decade (which actually could work well for stock pickers).