With the Philippines and Cambodia leading the charge, Asia’s cross border gaming has grown too big to ignore, perhaps exceeding revenue of land-based casinos. Now China is fighting back against these multi-billion dollar financial outflows.
Some see Cambodia’s declared online gaming ban and the Rodrigo Duterte government’s review of its Philippines Offshore Gaming Operator (POGO) licensing regime as the beginning of the end for online casinos in Asia. But recent changes in response to pressure from mainland China may instead mark the end of the beginning for the segment.
Experts believe that online play, particularly live dealer online (LDO) streaming from POGO licensees’ studios in Makati, or from casino floors in Cambodia, along with the explosive growth of resort construction in Sihanoukville, became impossible for authorities to ignore.
Cambodia has declared it will outlaw LDOs and other forms of online play when current licenses expire on 31 December, but the Philippines appears unlikely to follow suit.
Going forward, governments that want to reap the investment, employment and revenue benefits of online gaming may move toward greater oversight. More stringent regulation and taxation could address the concerns of critics while providing a more stable platform for growth. It’s also likely, insiders say, that current gray market forms of online gaming – approved by an operator’s jurisdiction but not necessarily legal in the player’s location – will find ways to persist, albeit more quietly.
“We all knew this day was coming. The only way to control it is by regulation,” FootballBet.com Chairman and CEO David Leppo says. “The industry is going through birth throes, growth throes. For years people have asked how big can online gaming be? Now we can begin to quantify it, and the governments want a piece of it.”
The numbers appear staggering. Several sources suggest that the cross border casino market, including online gaming and proxy betting, has surpassed the gross gaming revenue of land-based casino in Asia, exceeding US$50 billion, much of it flowing from China.
“Disguised as retail transactions, these online bets illustrate the holes in the [Chinese] central government’s ability to monitor and restrict the movement of money out of the country,” Global Market Advisors Senior Partner Andrew Klebanow says. “POGOs and LDOs also target wide swaths of the general Chinese population – not just wealthy individuals that have the financial wherewithal to participate in this form of recreational gambling but working class citizens.”
That kind of marketing push requires tens of thousands of workers sending out appeals to potential players by text message and replying to respondents in their own language, so the majority of these workers speak Chinese. Estimates of 150,000 Chinese online workers in the Philippines seem low to some observers, and the number in Cambodia was believed to be as high as 300,000.
OUT OF SIGHT
Keeping all that money and all those people flowing freely requires a low profile. In the Philippines, rising prices for office and residential properties and the expansion of businesses catering to Chinese workers drew negative reactions from the Philippine public.
“Everybody is well aware what’s going on; the Philippines made the mistake of making noise about it,” says Dylan, an experienced gaming executive in the Philippines who requested anonymity.
To lessen POGO local visibility and disruption while facilitating oversight, PAGCOR – the Philippine regulator and government owned-casino operator that took over regulation of overseas online gaming in 2016 from special economic zones outside Manila – POGO operators and real estate developers proposed overseas gaming hubs for Cavite on the southern outskirts of Metro Manila and Clark, about 65 kilometers (40 miles) northwest of the capital.
POGO hubs would feature office space, related government services such as tax and immigration, worker housing and services for businesses and residents. PAGCOR offered to extend the license term of POGOs agreeing to relocate to these hubs in Cavite and Clark to five years from the normal three years.
China’s embassy in Manila lambasted the hub concept and alleged illegal employment of Chinese in the Philippines in a 9 August statement, then upped the ante. The embassy decried “cross-border gambling activities” targeting Chinese citizens, saying it increases “crime and social problems” in China. “The Chinese side hopes and urges relevant departments of the Philippine Government to pay more attention to China’s position and concerns and take concrete and effective measures to prevent and punish the Philippine casinos, POGOs and other forms of gambling entities for their illegal employment of Chinese citizens and crack down on related crimes that hurt the Chinese citizens,” it said.
In response, PAGCOR suspended issuance of new licenses – there are currently 60 POGOs of which 48 are operational – and ordered a review of POGO operations. China’s Ministry of Foreign Affairs then further raised the stakes, calling for an online gaming ban.
“As is well known, online gambling is a most dangerous tumor in modern society detested by people all across the world,” a Ministry spokesperson declared. “It is a shared hope that the problem could be effectively dealt with.”
“Philippine POGO operations and Live Dealer/Online (LDO) operations in Cambodia have grown so large that they now demand the Chinese central government’s intervention,” Klebanow says. “Combined, these are multi-billion dollar a year industries and represent a considerable amount of revenues flowing out of China.”
In addition to the economic argument, some believe there’s an internal political dimension to Chinese President Xi Jinping’s stand.
“Beijing has been increasingly emphasizing
‘socialist/communist ideology/values’ in many aspects, with which gambling – especially online gambling and proxy betting – apparently contradicts,” an executive requesting anonymity writes in response to questions. The executive has observed multiple “signals that are definitely not in the gaming industry’s favor,” with implications beyond the current online gaming debate.
After meeting with President Xi in late August, Philippine President Rodrigo Duterte said he would consider a halt to cross border gaming. That statement sent property shares tumbling on the Manila stock exchange, since POGOs are a leading source of demand for office space. Within days, Duterte decided POGOs would stay, citing their domestic economic impact.
“There’s absolutely no reason why the Philippines would want to curtail it,” Dylan said.
PAGCOR collected an estimated US$150 million in taxes and fees from POGO operations last year. Establishing an online casino business requires a US$150,000 application and processing fee, US$200,000 license fee and triennial US$150,000 renewal fee. Online casinos also pay a 2% fee on gross gaming revenue. Operators say fees under PAGCOR have more than doubled and in some cases quadrupled compared to levies under previous regulators. PAGCOR did not respond to questions regarding offshore betting regulation by press time.
For the first eight months of this year, POGOs overtook business process outsourcing (BPO) as the largest demand driver for office space, accounting for 38% of the transacted space in Metro Manila – compared with 24% in 2018 – and 35% of transacted space nationally, according to Leechiu Property Consultants. As reported by Philippine news network ABS-CBN, Leechiu estimates that POGOs make annual office rental payments of PHP11 billion (US$219 million), one-sixth as much rental revenue as BPO operators, plus PHP36 billion in housing rents.
POGOs employ 470,000 with salaries totaling PHP504 billion, compared with 1.4 million BPO employees earning PHP400 billion. CEO David Leechiu notes that, in case of a crackdown, BPOs would likely take up the slack in office space, but consumption from POGOs and their employees would be missed. For example, Leechiu says POGOs comprise the country’s largest van fleet to transport employees.
For Cambodia, billions of dollars in Chinese state investment trumps any other economic benefits from online casinos, at least for now. After China made its displeasure with cross border gaming clear, Cambodian Prime Minister Hun Sen decreed a ban on new online licenses and that existing licenses which expire on 31 December will not be renewed.
“Some foreign criminals have taken refuge in the form of this gambling to cheat and extort money from victims, domestic and abroad, which affect the security, public order and social order,” the declaration said. The announcement triggered an exodus of Chinese workers from Cambodia, especially Sihanoukville, along with Poipet, the kingdom’s center for online gaming.
Sihanoukville’s transformation from quiet beach resort to aspiring resort destination and site of billions of dollars in Chinese investment in casinos, hotels and condos owes a large debt to President Xi, who made the area a key focus for his Belt and Road Initiative. Japan developed infrastructure for the deep water port at Sihanoukville but China is making the greatest use of it for trade. Factories from China are the main occupants of the Special Economic Zone near the port. The region has seen billions more in Chinese investment for offshore oil exploration and a new expressway to Phnom Penh that will cut driving time from more than 10 hours to around three hours.
In three years, Sihanoukville has gone from three casinos to more than 80, with dozens more under development. Casinos licenses have included permission for online gaming, a way to jump start cash flow while the destination looks for traction with visitors. A June building collapse in Sihanoukville that killed 28 Cambodian workers put an embarrassing spotlight on the building boom, drawing greater international and domestic scrutiny.
The announced end of online gaming has driven an exodus from Sihanoukville.
“It’s estimated 200,000 Chinese online workers were in Cambodia,” Fortuna Investments Director Tim Shepherd says. “Two-thirds have left, and more go every day. That means two-thirds fewer people eating in restaurants, two-thirds fewer people staying in hotels, two-thirds fewer people renting condos.”
Despite the flight, much of the building activity in Sihanoukville continues. Some online operations have already shut down, but many are continuing until the deadline. Some operators hold out hope that LDOs will get a reprieve, though Hun Sen’s government appears to be holding firm.
FootballBet.com’s Leppo believes Cambodia will end online gaming on 31 December. “Do I think this is going to be a permanent situation? No … the online business in Southeast Asia has gotten so big, they’re going to have to regulate it. Governments are going to have to take a serious stand. They have to establish regulators that are going to do due diligence.”
Cambodia has been expected to approve a gaming law for several years. That pending legislation presents a window for the kingdom to create a new framework for online gaming, along other industry segments, that accommodates domestic demands and China’s concerns. Leppo expects greater oversight will mean fewer and more expensive online licenses. Higher prices, less competition and greater regulation could pave the way for established international operators from the European Union (or the US, as it introduces online gaming) to enter the Asian market. It could also lay the foundation for finding a model that takes overseas players out of the gray market.
“Cambodia is going to catch its breath. Whether they go with a US model or a Macau model or an Australia model, they will have online gaming in some form again,” Leppo, who operates under a Cambodian sports betting license unaffected by the online ban, says. “They want the revenue stream and they want the relationship with Beijing to move forward without a hiccup. Cambodia doesn’t want to lose that.”
Meanwhile other jurisdictions will seek to fill the void. Cambodia’s ban plus President Duterte’s decision to allow POGOs to continue to operate despite China’s concerns prompted a 200,000 square meter (2.2 million square foot) surge in demand for Manila office space in early September, Leechui reports.
Europe’s established operators covet Asia and are not sensitive to Chinese pressure, but their regulators and bankers may be more leery of Beijing’s wrath. Myanmar, which recently implemented gaming legislation, has begun live streaming.
Global Market Advisors’ Klebanow believes that Laos and even former Soviet republics in central Asia could join the mix. Vietnam, a country traditionally at odds with China with an expanding gaming sector and domestic restrictions, may see cross border gaming as way for its casinos to boost revenue.
Taiwan reportedly already has unsanctioned online casinos. Shepherd thinks the island that Beijing considers a renegade province has the right stuff for online gaming in Asia’s predominantly Chinese market.
“Language, time zone, same mindset, great technology,” he says. “It’s not like Costa Rica or Panama: try to find a Chinese speaker there.”