Web operators look to scale the Great Wall, and sports betting may provide the ladder
Ten years ago, facing demotion from England’s Premier League and the prospect of bankruptcy, south London’s Crystal Palace football club took a chance on a couple of defensemen, Sun Jihai and Fan Zhiyi, from China’s national team.
The signings cost the club a quarter of their broadcast revenues at the time, about US$1.7 million. But it wasn’t long before 100 million Chinese were in front of their TV sets watching Crystal Palace in the first live broadcast in China of an English match. — That’s more viewers than the NFL’s Super Bowl was drawing. — Little-known Crystal Palace was suddenly the hottest sports commodity in the most populous nation on the planet.
Europe’s top clubs have been mining gold in the Far East ever since.
In 2002, the Premiership’s Everton Football Club closed a US$3.2 million shirt deal with Chinese mobile phone manufacturer Kejian. Everton, with Kejian’s help, signed midfielder Li Tie, known at the time as “China’s David Beckham,” and World Cup teammate Li Weifeng. Later the same year, a match between Everton and Manchester City — Jihai also was now suiting up for the Blues, whose jerseys sported the Kejian logo in Mandarin and English — would draw the largest TV audience ever for a league game — an estimated 360 million Chinese.
Lucrative tours of China by clubs of the caliber of Manchester United, Arsenal and AC Milan are fairly routine these days. Two trips by Real Madrid a few years back brought in US$10 million from sales of tickets, shirts and souvenirs, according to Forbes magazine. The Spanish powerhouse capped this success by signing on with state-owned investment conglomerate CITIC Group to promote the club’s brand in China. A licensing agreement the Premiership recently concluded with Guandong Provincial Television’s WinTV is good for US$50 million over three years. Taking broadband demand as another indicator, the price for streaming European football over the Internet in Asia has more than doubled in the last year. NOW Broadband TV, a subsidiary of Hong Kong-based telecom PCCW, paid a cool US$200 million earlier this year for exclusive rights to Premier League matches and the 2008 European Champions tournament. And where “the beautiful game” goes is gambling ever far behind?
Chinese fans currently comprise 20 percent of the world’s football audience, and betting on matches is estimated by UK-based Global Betting and Gaming Consultants to have tripled over the last couple of years to a whopping US$33 billion, surpassing even the UK. Of course, about 90 percent of this massive market is deemed illegal by Beijing. But European matches dominate the legal sports lotteries as well. And at a mere US$25 in spending per capita, compared with more than US$480 in the UK, the reality of the market, huge as it is, is dwarfed by its untapped potential.
Looking on from the West, the major Internet operators have long been aware of the opportunities. Overcoming the many obstacles is another matter and one of some urgency given that the ability to diversify geographically in the wake of the shutdown of the multibillion-dollar US market is key to the continued growth of the leading brands in 2007 and going forward.
“The ex-US-facing companies have to pick up the pieces and shift their focus,” said Jodi Littlepage, director of corporate finance for London-based Citicourt & Co. Asia, where the propensity to gamble is generally high across cultures and markets are well-established, is drawing more attention than ever.
China, the obvious giant in everyone’s sights, is cracking down on “unlawful” Web gambling — that is, sites hosted and managed within the country — but government currently does not forbid sites from passively taking wagers offshore so long as they do not market or collect money within China. The ability to process payments, then, is one of the bigger obstacles. China is still predominantly a cash culture where credit cards are rare and not always trusted. This is largely the case throughout East Asia.
“It’s been hard to crack it,” said Sue Schneider, chief executive of eGaming specialist advisors River City Group.
“There are not a lot of good Asian payment solutions. And there are regional distinctions in terms of payment preferences. But there are a lot of people working on this. It is a huge topic for the industry.”
There are cultural obstacles as well: a distrust among the Chinese generally of machine gambling – and this extends to computerized random number generators – and there is the primacy the Chinese place on person-to-person relationships, which is as powerful when it comes to placing a bet as it is in every other area of commerce.
Despite all these factors, though, and despite low Internet penetration relative to her 1.3 billion people and per capita income levels that are still very low compared with Western Europe’s, online gambling has grown in China into a substantial industry populated by several hundred Chinese-language Web sites. Since the first Chinese-language portal was launched about six years ago, the market has expanded to US$12 billion in annual revenues, according to the estimate of US-based Christiansen Capital Advisors. Other analyses figure the market to be several times larger.
“China and Japan stand out to me,” said Simon Holliday of Global Betting and Gaming Consultants. “Increasingly China, especially in soccer betting. The middle classes there are growing and they’re getting wealthier. China is the stand-out opportunity. But it is going to take some time.”
The ‘Grandfather of Mahjong’
In a development that could speed things up, the government of the Macau Special Administrative Region, home to Asia’s largest casino industry and the only legal one in China, announced earlier this year that is was crafting regulations for licensing Internet operators based in the peninsula. The structure is not expected to be in place before 2008. Neither is it certain whether licensees will be taking wagers from the mainland, although it is difficult to see how the S.A.R. could proceed down this road without the nod from Beijing. Tax is another unknown. But even a 25 percent rate, which is what officials are bandying about, might not be insurmountable given the enormous potential of the market.
“These are not features that have yet been passed,” said the SAR’s Commissioner for Gaming Jorge Oliveira, “but we intend to regulate everyone. Anyone who accepts bets, including betting exchanges, will be regulated, and the regime will be open to all.”
What this sets up is the possibility of some interesting combinations for the well-known casino brands that are already cleaning up in Macau’s US$7 billion land-based market — Wynn Resorts, Las Vegas Sands, Galaxy, Stanley Ho’s SJM and big names that soon will be bringing big resorts of their own to the peninsula, like MGM Mirage and James Packer’s Australia-based Publishing and Broadcasting Ltd.
“I think we’re going to see some Asian and Western joint ventures,” said Littlepage, “just as we’ve been seeing a lot of the Asian companies coming to London for financing.”
That said, official recognition in Macau will not guarantee access to the mainland without Beijing’s approbation, and what this appears to require at this point are business models consonant with the central government’s so-called “green Internet policy” designed, in the words of the ministries responsible for implementing it, to “purify the cyber environment.” In line with this policy, China imposed a law last year to beef up prosecution of Internet pornography, spam and gambling. At the same time, government is said to be interested in the public revenue potential of legalized, controlled Web games if the right regulatory framework can be presented to them. This cautious approach can be said to be characteristic of governments’ official approach to the Web throughout Asia, and other jurisdictions in the region are taking a similar look.
“Regulation is a big hurdle,” said Littlepage. “You have to get to a point where these rather unsociable political environments can be enticed with the benefits of legalization.”
Macau, meanwhile, is testing multi-site mahjong gaming, which could be operational this spring. A Toronto-listed company called Dynasty Gaming, which has developed software for a cash wager version of the popular Chinese pastime, has signed a letter of intent with Sino Strategic International — a well-placed investment holding company with offices in Hong Kong and Australia and a significant stake in China’s US$8 billion plus welfare and sports lotteries market – for distribution of Dynasty’s “play-for-points” version of mahjong and other Asian “soft” games. These will run on a virtual private network operating out of Shanghai. The VPNs are a platform through which legal games and lotteries can be played on the mainland. Dynasty also is one of the organizers of the “World Cup of Mahjong” scheduled to be played in Macau this month.
Combinations like these illustrate the importance both Asian players and Asian officialdom place on brand comfort. It cannot be overstated. Tim Holland of TheKey2Asia, a Singapore-based firm specializing in marketing and business development in gambling, sports and media, highlighted this in a recent issue of the trade magazine eGaming Review:
“A quick look into the history of Asian gaming and the history of new entrants to the market explains why branding is important. The industry has traditionally worked on trust through a peer-to-peer network of individuals working on behalf of an operator. Wagers are placed verbally and money is collected after the event. The operator has to trust the client that he has the money to settle while the client trusts the bookmaker that he will record his wager and pay out winnings according. Second, the poor history of some Western operators in Asia is also problematic. Many Asian consumers have seen Western operators opening their doors in Asia only to simply close them. This has led to some distrust.”
The market is “large” and “complex” and “requires a commitment and market understanding to implement systems that work for the Asian consumer,” notes Holland. “This makes a going-it-alone strategy difficult and risky.”
With an eye on the enormous potential of fixed-odds betting in China, bookmaking giant Ladbrokes spent several months in Beijing in 2005 and 2006 sharing its expertise as a consultant to China Sports Lottery Sales and Marketing Co. This led to the launch early last year of the country’s first betting shops — branded “Happy Pools,” 200 of them, offering pools wagering on big-league European football.
“While this is a very small step into China it is also an encouraging one,” said Ladbrokes CEO Christopher Bell, who has expressed the belief that the country “has the potential to be one of the biggest betting markets in the world,” one which “Ladbrokes is well prepared to take advantage,” he said.
Ladbrokes also recently entered into a joint venture with Hong Kong-based MegaInfo Holdings to form a company called Asia Gaming Technologies with a view to increasing the bookmaker’s presence in the People’s Republic.
Interestingly, the relationship between Ladbrokes and China Sports Lottery stemmed from the former’s involvement in training programs operated in Britain for lottery staff in which China Sports Lottery participated, and Bell has credited the UK’s reputation as a stable, well-regulated gambling environment for the welcome his company has received from the Chinese.
Among other top-tier Western operators and suppliers, AIM-listed Playtech has stood out in recent months for the bridges it is building across East Asia after its US-facing clients had to exit the American market. Earlier this year, the company sealed a three-year partnership with the China Mahjong Association as a tournament sponsor and software provider and signed a contract to provide software for peer-to-peer games to Foundation Group Ltd., a Hong Kong-listed company with ties to the PRC’s Communist Youth League.
In this context, no Western company could have secured a better partner than the CMA. The association operates 23 mahjong chapters in 20 Chinese provinces. Among its 47,000 members are many high-level business executives and members of government, including the head of the China Sports Bureau. CMA Chairman Sheng Qi is credited in the official rule book of the game published by the China Ministry of Sports and is known affectionately in his homeland as the “Grandfather of Mahjong.
Qi said, “We chose Playtech over other potential sponsors as they demonstrated an outstanding knowledge of mahjong, of China and its regulatory framework and had extensive Asian and Chinese support operations already in place.”
One of these operations stems from an important licensing agreement Playtech signed back in December with Sino Strategic International to provide P2P game content to some 600 SSI arcade venues in and around Shanghai. Playtech and SSI also will be the first major distributors in the People’s Republic of Texas Hold ’Em, the most popular poker game in the world.
“This is a significant deal for Playtech and provides the company with an important gateway into a huge developing market,” said CEO Avigur Zmora. “Coupled with our long-term focus to provide the right products to the Asian market, this agreement also further diversifies the Group’s geographical reach.”
Looking ahead to later this year and Betfair’s inaugural “Asian Poker Tour” in Singapore, it’s instructive to note how the London-based betting exchange giant used a similar approach to implementing its Far East strategy. Betfair partnered with a company called Capital Events to become the first gambling operator to obtain permission from Singapore to host a poker tournament in the populous city-state. The event is supported by the Singapore Tourist Board and is featured on the board’s Web site. The APT will be held in November and will be televised internationally.
Said Betfair, “It’s an opportunity to raise [the company’s] profile in Asia by working with local partners who understand the sensitivities and regulatory restrictions of working in the region.”
By James Rutherford, International Editor of International Gaming & Wagering Business magazine. Reprinted with permission from IGWB.