Two casinos, one dream: the battle for Sydney’s gamblers

Crown Resorts and The Star glare across at each other from either side of Darling Harbour, with all the swagger and scandal and shame of the last decade passing as water under Pyrmont Bridge.

Once great rivals, they are no longer in competition. One casino is fully compliant, and empty. The other has customers, and is at risk of losing its licence.

An overlooked detail from the troubles that have swept the casino industry in recent years is that they began by accident.

In 2019, James Packer, the controlling shareholder of Crown Resorts, was desperate to sell. Each morning he woke up and reviewed the profit and loss statements; each morning his day would be made or ruined by the results. Slave to a notoriously volatile industry and, as he later revealed, battling internal demons, the billionaire’s state of mind was a day-to-day proposition.

He nearly sold to Wynn Resorts, only for the buyer to walk away from the deal when it was prematurely leaked to the press. Salvation arrived in the form of Macau-based casino operator Lawrence Ho, son of the shady gambling tycoon Stanley Ho, whose company Melco Resorts offered to buy nearly half Packer’s stake for $1.8 billion.

He snatched up the offer before even consulting the board.

At that moment, the first domino fell. The NSW Independent Liquor and Gaming Authority’s chair Philip Crawford had been disturbed by stories appearing in the Sydney Morning Herald and The Age reporting that Crown had formed relationships with junket operators who were backed by organised crime syndicates.

Crown was due to open a casino in Sydney, and had yet to be provided the opportunity to engage in wrongdoing in NSW. But the sale of a 20 per cent share in Crown Resorts to the son of a prohibited casino operator, without gaining the requisite approvals, was the excuse Crawford needed to open the inquiry that the Victorian regulator would not.

By the time the Bergin Inquiry opened in 2020, Ho had abandoned the deal citing the coronavirus pandemic, but the train had already set off. It would soon become a wreck. State after state had no choice but to follow suit with their own inquiries. The Bergin report resulted in the cancellation of Crown Melbourne’s casino licence and delayed the opening of Crown Sydney.

Inevitably, The Star fell under the same scrutiny. And by the time the world emerged from the pandemic, the overseas VIP market that the casino industry hoped would sustain it for years to come had disappeared. All it was left holding was a folder of new regulations.

Uncharted territory

The respective challenges facing Crown and The Star in Sydney pose the question: is it even possible for them to turn a profit in the brave new world of casino regulation? Their executives privately concede they’re in uncharted territory.

They are now required to collect a significant amount of identification and financial information about their customers, conduct regular welfare checks on gamblers and, come August, The Star must meet its deadline to take its 1500 poker machines cashless.

These regulations do not extend to the 400-odd pubs and clubs that operate 98 per cent of the state’s poker machines. Some of the biggest have quarterly revenue figures that make Crown and The Star envious. Both have been clear they’ve already lost customers to venues that do not have the same administrative burden.

And this follows hard on a second judicial inquiry, almost as embarrassing as the first, which finished on Wednesday with a recommendation from counsel assisting for the commissioner to find The Star unsuitable for a casino licence. Most of its executives have left the company. Its market capitalisation has plummeted from $5 billion in 2018 to less than $1.5 billion. And predators are circling.

Crown, now owned by US private equity giant Blackstone, was recently given a clear bill of health by the regulator to operate its operations in NSW. But it has struggled to find a market. Last year it shut one floor and made about 300 people redundant. The parent company recently cut another 1200 staff.

Crown’s Sydney casino was already prevented from operating poker machines in NSW due to an exclusivity agreement between The Star and the state government that does not expire until 2041. But the VIP high roller market on which its business model was premised has evaporated on the back of COVID-19 and a Chinese government crackdown. Its best hope now is domestic whales – a much smaller proposition with limited growth potential.

Speaking to the Herald hours after regaining suitability in NSW last month, Crown boss Ciaran Carruthers admitted the company could not have met the regulator’s remediation timeframes without the deep pockets of its private equity backers.

“Their funding was necessary to get us through what we knew would be a very expensive remediation program that required us to move mountains,” Carruthers said.

But he stopped short of conceding the added due diligence at Crown would permanently eat into the group’s profits. Other sources within the business, who are not authorised to speak publicly, say its flagship Melbourne casino has bled customers since transitioning its pokies to totally cashless play.

Despite making less money than ever, both Sydney casinos will soon be required to pay more tax with Crown Sydney due to hand over $1 billion in taxes to the state government by 2032 and Star Sydney due to pay $2.7 billion in duty rates from 2030 to 2040. Whether either casino manages to cough up even a fraction of this amount seems unlikely given gaming analysts expect both casinos to remain in the red for the forseeable future.

The only Crown casino that has returned to pre-COVID levels of profitability is Perth, which also happens to be the only city where it has poker machine exclusivity.

One person not surprised by Crown’s financial trouble is Chris Sidoti, who was chairing the Independent Liquor and Gaming Authority when then-premier Barry O’Farrell decided to give Crown a licence to operate in NSW in 2013. It was his task to sign off on the suitability of Crown to run a casino, but the government never asked him whether there should be a second casino in Sydney, probably, he says, because he would have said no.

“I was always sceptical about the capacity of Crown in Sydney to turn a profit,” Sidoti says. “I would have said, ‘Without poker machines it’s not going to be financially viable’.”

Local gaming analysts and some US investors question whether Blackstone’s purchase of Crown will ever pay off and baulk at the hundreds of millions of dollars it has poured into regulatory compliance to regain suitability.

Inside Asian Gaming consultant David Green, who worked in Macau for five years and earlier at the South Australian regulator, predicts that Crown has hit rock bottom and can return to profitability if Blackstone continues to hold faith. But it will be difficult for the Sydney franchise to reach the scale it originally envisaged without international VIPs or poker machines, he says.

“The VIP market is pretty much dead and that’s almost a global phenomenon now because the traditional Chinese junkets have really lost favour with regulators and jurisdictions around the world,” Green says. “The only place you will see them operating are less regulated places like the Philippines.”

Having said that, the VIP market was never likely to be as profitable as the so-called grind market because its players prefer games such as Baccarat where the losses are lower, and they expect compensating benefits such as hotel accommodation, personal hosts, food and support staff, he says. Poker machines, on the other hand, virtually run themselves.

“It’s all about velocity of money. The thing about VIP players is you can’t dabble in that market. You’re either in, but you’re all in, or you’re not in it … [because] the market is volatile.”

IGamiX Management and Consulting managing partner Ben Lee once had the job of attracting such players for The Star casino in Adelaide. The domestic VIPs were people with their own businesses who had access to cashflow and typically spent $30,000 to $50,000 in a session, maybe $100,000 for an interstate traveller. He remembers customers who owned jewellery shops, audio shops, groceries and a baker who cooked bread from 3am to 11am and then handed over to his wife while he headed to the casino.

“They’re the bread and butter in terms of domestic VIPs and yes, particularly in Crown Sydney, they would be going after The Star’s VIP market, that’s for certain,” Lee says. “But they tend not to splurge as much as the internationals.”

Future profitability

As The Star’s new executive team scrambled to contain allegations of chicanery that fell from the latest inquiry into its suitability to hold a casino licence last month, there was a revealing exchange between counsel assisting the inquiry, Caspar Conde, and the incoming chair Anne Ward.

Conde invited Ward to outline her vision for a transformed The Star “in light of the changed regulatory landscape”, eliciting a fuzzy response that featured themes of honesty, compliance and transparency.

He then cut to the chase. “Do you envisage the transformed business as being as profitable at levels that The Star has historically been able to achieve?”

Ward: “There have been changes and there are significant changes coming with the advent of cashless and carded play, and the financial impact of all of those things is not yet clear ... I don’t know. The revenue mix and the profit mix may change.”

It is open to debate whether measures such as cashless play are expected to affect revenue because casinos have historically relied on money laundering. Industry observers say there is a range of reasons that gamblers might not wish to be identified that do not involve organised crime, and the link is too crude.

But there is unanimity on one point: if cashless play is mandated in the casinos, it should also be extended to clubs, many of which offer hundreds of poker machines and operate as mini-casinos. The Star, which will be required from August to have cashless pokies, operates less than 2 per cent of the machines in NSW. The state government is currently trialling cashless play in pubs and clubs.

“If the regulators are serious about doing their job and doing NSW a favour, then apply the rules universally,” lamented one former casino operator, who asked not to be named while disciplinary action from the first inquiry into The Star is still pending.

In Victoria, where the change has already come in, the casinos are now at a competitive disadvantage to the pubs and clubs, says Crown’s Carruthers.

“Some of these regulations are proven to be viable and able to be implemented, yet they still only apply to us,” Carruthers says. “That’s when it’s challenging.”

But Ben Lee, the former VIP marketer-cum-gaming consultant, has no doubt that Blackstone will end up recouping the $8.9 billion it spent on Crown and more. It made back its outlay five-fold when it bought the Cosmopolitan in Las Vegas, cut its costs and flipped it seven years later. That is its schtick. And he has no doubt that casinos will return to profitability.

“No doubt they will pay attention to their compliance for the next two or three years but if history is anything to go by they will find a way to work around those safeguards,” Lee says.

“It has happened over and over and over again. Even in Macau, we went through a stage where we got rid of junkets, but they found a way around that. Now they have friend-and relative-referral programs. I would expect that to spread to Australia.”

The casinos are down on their luck, but there are many plays yet to come.

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