William R. Eadington
October, 2003

Compared to their American cousins, the British are very careful and deliberate when it comes to revising laws that have the potential to significantly affect present and future generations. The current path to revise the Gaming Act 1968 provides an interesting illustration of such a process.

In the United States, gaming legislation has often been passed through state legislatures toward the end of a hectic legislative session, sometimes with the intent of “sneaking it through,” often without careful forethought as to the implications of what was being passed, and usually influenced primarily by the economic interest groups who would be most directly affected, positively or negatively, by the legislation. Though this is more a commentary on the American legislative process at the state level than on gaming, this is perhaps the only way to explain how we have ended up with such a mish-mash of eccentric casino gaming industries in our various states: casinos on riverboats that must sail, small stakes casinos located in rural mining towns that last boomed in the 19th century, a wide variety of casino types on tribal reservation lands scattered throughout the country, racinos (race track casinos) which offer hundreds or thousands of well-attended slot machines while nearly no one watches the racing taking place on the other side of the grandstands, and urban casinos in the downtowns of two of America’s more distressed major cities: Detroit and New Orleans.

Had we used a more careful and deliberate process in America, then we would have—should have—collectively asked ourselves:
• What do we hope to gain from permitted gambling?
• Where would be the best places to locate casinos?
• What kinds of casinos and casino-style gaming should be permitted?
• How do we mitigate the unintended negative consequences that are associated with casinos and other forms of legal gambling?

Had states in the United States pursued such an inquiring approach, they might have come closer to the process that Britain is presently following. However, this also suggests an intriguing fundamental question: Will the resulting gaming industries in the U.K. on balance be better or worse from a variety of perspectives than their American counterparts?

The British story is a lesson in deliberation. In December 1999, the Home Secretary announced formation of a commission to review gambling policy in the U.K. The subsequent Gambling Review Report (the Budd Commission Report) in 2001 laid out a variety of recommended principles for revising Britain’s gaming laws. The Government, in their response (“A Safe Bet for Success,” DCMS, 2002), largely agreed with the philosophy and the specific recommendations of the Budd Commission. To date, the pronouncements of the government regarding the specifics of the new bill have given it some shape and allow us to reasonably speculate what the new gaming industries and, indeed, the new casinos will look like.

The Budd Commission recommendations strongly adhered to the following principles:
• Gaming should be considered a normal commodity that adult consumers should be permitted to pursue if they so choose;
• Companies wanting to supply gaming services should not be inordinately constrained from doing so, nor should they be protected from competition in the marketplace;
• A single regulatory body should oversee all commercial gaming, with the exception of spread betting, which is regulated as part of the financial sector, and the National Lottery, which is given special status and a protected monopoly because of its role in raising revenues for good causes;
• The most important negative side-effect associated with widely available permitted gambling is problem or pathological gambling. However, this issue can be dealt with by requiring gaming industries to finance programs that address the education, treatment, and research needs of problem gambling in society.

Recent pronouncements have established a formula by which casinos can offer the most popular gaming products. Small casinos are required to have a minimum of 5,000 square feet of gaming space, and no more than three gaming devices per table game. (Existing casinos that are below the minimum square footage requirements are “grandfathered” in.)
Large casinos are defined as those with a minimum of 10,000 square feet of gaming space and at least 40 table games. Large casinos are not limited in the number of gaming devices they may have.

The types of gaming devices permitted in casinos will be unconstrained in design, insofar as they can offer any wager size and maximum payout prize that the market will accommodate. The only constraint is a limitation regarding linked progressive jackpot machines: casinos will not be permitted to link progressive jackpots among casinos, though they will be able to do so within the confines of a single casino.

Regional Planning Bodies and local authorities will have considerable discretion in determining whether casinos should be permitted in particular geographic areas, specifically where casinos can be located, and other conditions that will need to be met for their construction and operation. It is likely the planning process will be an important determining factor in the shape of the emerging casino industry. However, because the national planning laws are also under revision at present, there is some uncertainty regarding how this will ultimately work out regarding the dispersion of casinos throughout the U.K.

Finally, there will still be a substantial convenience gaming market with limited prize gaming machines permitted in a wide variety of non-casino outlets throughout the country. Types of such gaming machines permitted will range from small wager (30 p maximum)/low prize (£5 maximum) amusement with prize machines for children and others, to gaming machines that are permitted to offer moderate (£25) to reasonably large (£500) jackpot prizes. The latter two categories will only be permitted in age restricted locations, primarily to protect the Nation’s youth from exposure to such forms of gaming.

Finally, as of yet there has been no formal determination of the tax regime that will apply to the casino industry and gaming machines subsequent to enactment of the new Gaming Act. Interestingly, in many other jurisdictions throughout the world, this is often the first thing discussed, either because government’s primary motivation for legalizing casinos or gaming machines is to raise revenues for government coffers, or because the tax rate has such a significant impact on the profitability of investments in the “bricks and mortar” of modern casino complexes.

What are the implications of this legal structure based on the experiences of gaming jurisdictions elsewhere in the world? First, we should note some of the major economic trends and social forces around modern gaming that will have a bearing on developments in the U.K. Among the more important of these are:

1. Commercial gaming industries typically have much more substantial economic presence than casual observers would expect. In the United States, spending on all legal gaming products approaches about one percent of disposable income, a figure comparable to the current situation in the United Kingdom. It is higher in other countries; in Australia, for example, gaming spend represented about 3.4% of disposable income in 2002.
2. The size and shape of legal gaming industries is largely determined by political decisions, as is being demonstrated in the U.K. today. However, this suggests that gaming industries are particularly vulnerable to arbitrary political decisions and to substantial investments in lobbying activities, to influence or protect the terms under which the industry must operate. This is particularly important when gaming markets are artificially constrained or under-supplied.
3. Slot machines—more accurately, modern electronic gaming devices—are now the gaming product of choice in casinos and other gaming venues in most parts of the world, with the notable exception of Asia. Such devices have undergone substantial technological innovation in the past decade, resulting in games that are more productive (in terms of win per device per hour of play), more attractive, more entertaining, and perhaps more seductive. An interesting implication is that, for many new generation gaming devices, the size of the top prize is not the most important dimension that defines its attractiveness to players. The United Kingdom has seen virtually none of these gaming products yet.
4. Slot machines are not only the most popular modern gaming product; they are the most profitable as well. A typical American casino (with the exception of those located on the Las Vegas Strip) generates about 80% of its gaming revenues and upwards of 90% of its gaming profit margins from slot machines. This reflects a continuing trend that is traceable at least as far back as the 1970s.
5. Convenience gaming venues that offer modern electronic gaming devices can be serious competitors to site-specific casinos. In jurisdictions as varied as Australia, Canada, and Spain, gaming revenues generated within casinos are dwarfed by revenues generated by gaming devices operating outside of casinos. Sometimes these are called Video Lottery Terminals (when run for the benefit of the lottery) or Poker Machines (when limited to video poker machines), but the economic effects are similar: a large portion of the demand for casino-style gaming can be captured outside of casinos. When this happens, it limits the economic and catalytic potential of casinos.
6. Under relatively free market conditions, such as in Nevada, the casino industry demonstrates strong economies of scale and of scope. In recent years, this has been manifested in terms of both plant size (i.e. larger casino-hotel complexes) and company size (i.e. companies owning multiple casinos, even in the same market.) Reasons for this are a combination of cost efficiencies and the ability to segment product offerings and therefore appeal to customers in different socio-economic categories, age groups, and to differing expectations regarding the casino experience.
7. Though this is a somewhat subjective observation, one can distinguish between “attractive” gaming and “ugly” gaming by the general image it puts forward. For example, Las Vegas style destination resorts would be considered “attractive” not only because of their architectural splendor and substantial non-gaming amenities, but also because they are so popular across a wide swath of the population. On the other hand, slot machines in bars and taverns or at spartan racinos might be deemed “ugly” because they present gambling in relatively unattractive settings, and draw their customers disproportionately from lower socio-economic groups and from ethnic minorities. As a result, once established, they might too obviously challenge the general public’s sensibilities about government raising revenues in this manner, on the backs of people who look like they should not be spending their scarce resources on gambling. Furthermore, pro-active attempts to mitigate problem gambling through such strategies as self-exclusion are more difficult to implement in small dispersed “ugly” locations than in large “attractive” casinos. “Ugly” gaming therefore is more likely to trigger political backlash than “attractive” gaming. It is worth noting, however, that jurisdictions in the United States in recent years have been more prone to consider or authorize “ugly” forms of gambling, such as racinos or state operated slot machines, than “attractive” private sector multi-faceted resort casinos. In 2003, for example, political debates in the states of Maryland and Pennsylvania, and elections in the state of Maine, reflected this anomaly.
8. Political backlash can also show up from “too much gaming.” This has occurred in a number of jurisdictions throughout the world, including Australia, New Zealand, parts of Canada, and in South Carolina. The most dramatic of these cases have centered around problem gambling issues, and around convenience gambling in particular. In one important respect, this is directly understandable. Convenience gambling brings about few of the tangible visible benefits often associated with large American-style casinos, such as tourism, new investments, major job creation, stimulation of the neighborhood or region, or complementary spin-off commerce. However, convenience gambling seems to intensify the visibility of problem gambling because of the ease of access to the gaming product among friends, neighbors, or relatives. Furthermore, the integration of convenience gambling into other social settings, such as the local tavern, may change the nature of the tavern itself, and the ability of neighbors to interact in that environment. Therefore, the general public sees fewer of the economic benefits and more of the social costs associated with expanded gambling, if the expanded gambling is largely of the “convenience” variety.

Based on these realities and the strategy being pursued with the new Gaming Act, what is likely to occur? The following are my best guesses on the implications of the new Gaming Act in its present form:

1. Small casinos, generally speaking, will have considerable difficulty surviving in this environment. Since the real profit in modern casinos is derived from gaming devices, the ratio of no more than three gaming devices per table game will make it very difficult for small operations to compete effectively against those large casinos who have more than 40 table games and a substantial multiple of gaming devices on the one hand, and age restricted venues that are able to offer attractive limited prize gaming machines on the other.
2. The Regional Development Agencies will probably limit the number of Large Casinos permitted in their specific regions and substantially determine casino locations for a number of reasons. They will want to harness the tourism and regeneration potential derived from new casinos, and guarantee the sustainability of those casinos they authorize. Furthermore, they will be likely be responsive to concerns over the adverse impacts of new casinos on city centers, other businesses, and traffic patterns, and will be interested in avoiding “boomtown” developments around casinos that have occurred in the United States. For example, concerns have been raised about large casinos serving as “car magnets,” which would be considered to be an undesirable side effect of such developments. Also, there have been pronouncements by government officials that regeneration of city centers is preferred to new developments in out-of-town locations, which is the same issue that has come up with regional shopping centres. Thus, even though Budd argued strongly for an unfettered competitive market in casino gaming, the combination of constraints on the product mix of small casinos and planning concerns for large casinos may create a restricted environment anyway.
3. As in Australia and Spain, the convenience gambling venues may end up being the most popular of all the casino-style gaming outlets in the Nation. This will depend to a large extent on what future constraints are placed on these venues, especially with respect to the number of permitted gaming devices per location. The larger the convenience gambling sector in the U.K., the less profitable the Large Casino sector will be, especially in terms of its ability to attract financial capital.
4. The possible success of seaside resort areas—such as Blackpool—as casino centers, will depend on what decisions Regional Development Agencies make with respect to the number of permitted large casinos elsewhere in their respective regions. For example, if the North West Development Agency were to permit a significant number of Large Casinos in the Manchester and Liverpool areas, then much of the latent demand for casino gaming from that region would be taken up by those casinos—and by convenience gambling—because of their proximity to the region’s population centers. On the other hand, if there were only a limited number of large casinos permitted in the metro areas of the North West, the attractiveness of Blackpool as a destination resort area with casinos would be enhanced. The parallels between Blackpool and the American seaside resorts in Atlantic City and Biloxi are very strong, but those American resorts were permitted to develop their casino industries without direct competition from nearby urban or suburban casinos. Had they confronted such competition, the willingness of companies to invest large amounts of capital into either destination resort market would have been severely limited, and neither area would have been nearly as large as it is today.
5. Placement of significant large casinos in the Greater London area will be challenging because of the planning process, the scarcity of available sites that can be used for casino development, and the difficulties of access to some of the more obvious sites. For example, the Millennium Dome and Battersea Power Station may both become candidates for casino projects, but both pose serious challenges of access either by automobile or by public transit. Concerns over “neighborhood effects” might bog down the planning process in political considerations for many potential gaming sites. Land costs alone make it difficult to envision the kind of mega-casino that has characterized Las Vegas and Atlantic City in recent years. That said, the substantial population and discretionary income to be found in the Capital City might overcome a lot of other negatives.

Finally, it is worth revisiting the issue of problem gambling one more time. The problem gambling issue might become a topic of much greater concern within a few years after passage of the new Act than it is at present because of fundamental changes the Act will bring about with regard to the quality and amount of gaming that will confront the British population.

The existing gaming and betting products—with the exception of the National Lottery—are relatively primitive with respect to their market penetrations. Most products, such as the existing British casinos, gaming machines, betting shops, and bingos, are really niche markets that have only limited appeal beyond their core customer base. Modern casinos, on the other hand, are mass-market products. Their presence will substantially broaden the number of British participating in casino-style gaming, as well as the aggregate amount of money spent on this new form of leisure entertainment.

The fact that the quality of gaming products in the United Kingdom will improve dramatically—quickly achieving an international standard—along with the fact of substantially improved access to a wide variety of casino and casino-style gaming, will make gambling a popular topic for personal discussion as well as in the media. As has been the pattern elsewhere, there are going to be many more visible, dramatic, and tragic stories centering around problem and pathological gambling that will attract much attention. If the new gaming industry is perceived to be predatory, uncaring, or generally “ugly,” there is a real possibility of a backlash that might call for a roll-back of the liberalization taking place now.

From Budd and the Government Response, the proposed strategy for dealing with problem and pathological gambling is to allocate financial resources to invest in treatment, education, and research of the topic. This may or may not be enough to mitigate these unintended negative consequences of expanded gaming in Britain, or to protect against future political backlash. However, the experience of other countries and other jurisdictions should be drawn upon to steer a proper course in the further implementation of the new Gaming Act. Of all the issues that pose challenges for policy makers, this one might indeed be the most important.


Date Posted: 20-Nov-2003

William R. Eadington
Professor of Economics
Director, Institute for the Study of Gambling and Commercial Gaming
University of Nevada, Reno