A Chinese proverb says, “If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time.” Unfortunately, in not heeding this advice, some casual gamblers find themselves grappling with gambling addiction. Partly because of the well-documented adverse effects of compulsive gambling, a subset of ethics-based investors exclude gaming companies, along with other “sin stocks,” from their investment universe. Even for investors not using explicit social criteria, integrating ESG factors into the analysis of gaming companies is key in identifying those that are well-positioned to provide long-term returns to shareholders. More specifically, the implementation of responsible gaming principles is a critical aspect of the business model — not only in reducing risk, but in driving a more sustainable revenue stream.

With gross winnings (total take minus payouts, excluding expenses) last year of about $440 billion, the global gaming market represents several sub-industries including casinos, non-casino gaming machines, betting, lotteries and interactive gaming. Like many other consumer industries, the gaming sector has witnessed a significant expansion in Asia, primarily through the rise of the Chinese consumer. According to H2 Gambling Capital, China is now the second largest gaming market globally, up from the tenth largest a decade ago, and is expected to become the largest by 2020.

The gaming industry is also witnessing an expanding online market – both in online gambling (i.e. virtual casinos where real money changes hands) and in social gambling (i.e. virtual casino-type games that in many instances follow a “freemium” model described below). One cannot discuss responsible gaming without considering the percentage of revenues derived from “problem gamblers.” According to a 1999 study by the National Opinion Research Center at the University of Chicago, “pathological and problem gamblers, who comprise about 2.5% of adults, probably account for 15% of casino, lottery and pari-mutuel receipts.” Some would argue this number is concerning, yet other studies are more alarming. The Wall Street Journal recently noted that “some studies based on survey questions by gambling researchers have estimated that between 25 and 50% of casino revenue can come from problem gamblers. In our opinion, the exact nature of this number is not as important as the inherent conflict of interest that is highlighted. Even at the low end of the range, a material percentage of gaming revenues are generated from problem gamblers. Gaming companies agree that problem gamblers are a risk to the business and not a sustainable source of revenue. As such, investors need to be aware of the responsible gaming policies that have been implemented, and should be engaging management if the measures taken are deemed insufficient.

In examining responsible gaming policies, it’s important to note that not all policies are created equal. Of particular interest, a recent study on two types of responsible gambling strategies (RGS) – compulsory and supplemental —differentiates between the two in that “compulsory RGS restricts gamblers who engage in severe and problematic gambling through forced policies, such as identification procedures or betting limits, while supplementary RGS focuses on voluntary prevention or treatment programs for gambling addiction.” The study supports the notion that “compulsory RGS, such as user authentication, a deposit system, and a betting limit [are] able to reduce obsessive compassion (e.g., inability to control the need to gamble), whereas supplemental RGS, such as self-exclusion, self-limit, and self-diagnostic programs helps gamblers to enhance harmonious passion (e.g., harmony with other activities in life).” For gaming companies and investors, a major implication of the study is that RGS can potentially shift the percentage of revenues away from problem gamblers and towards “harmonious gamblers,” which are inherently a more sustainable customer.

The aforementioned study was conducted in the context of online gambling, but tools developed for the online environment have the potential to be applied to land-based casinos as well. For example, Playscan is an independent subsidiary of Svenska Spel, a Swedish government-owned gaming operator that aims to help fellow gaming operators detect unhealthy gambling among players. Playscan’s software first asks players questions about their own habits and techniques and then evaluates these against the player’s actual gambling behavior by collecting and analyzing risk and behavior statistics. Initially, one may doubt that capabilities of this technology in land-based gambling, but Playscan rightfully points out that many casinos issue loyalty cards to players that are used to provide rewards, such as complimentary rooms and upgrades. In being able to identify a player, Playscan’s software can then track detailed information on gameplay, analyze the data, and identify potential behavior risk. In doing so, the player and/or casino can be notified through an early-warning system.

Another compelling feature of Playscan’s product is the ability for the gaming industry to collaborate and better focus on harm minimization. If a player’s gambling activity is monitored across companies and platforms, more accurate intelligence is collected and improved risk minimization methods are implemented. Of course privacy concerns must be addressed, but this should not be an insurmountable issue, especially for players that opt-in to a monitoring program.

Responsible gaming policies are critical for regulated companies operating in environments where real money is at stake, however, investors in social gambling companies should be taking an interest in this topic as well. This is highlighted in the convergence between real money online gambling and social gambling where virtual currencies are exchanged. Whereas real money online sites are essentially casinos on the internet, social gambling sites often operate under a “freemium” model where users play for free but can buy additional chips and pay for upgrades. For instance, Zynga offers real money poker in the UK, but otherwise offers only “play money” poker. Recently, Amaya Gaming Group announced the acquisition of Oldford Group, the largest real money poker casino. As a result, some investors in Zynga are pushing the company to expand its real money poker offering or risk losing critical mass, an important element of the business model given that users are drawn to sites with the most players.  As the lines blur, investors must ensure the companies possess the strategic insight and operational expertise to manage the stakeholder risks that accompany the convergence.

The strategic importance of responsible gaming is currently on display in the ongoing fight to legalize online gambling in the U.S. today. Casino mogul Sheldon Adelson (CEO of Las Vegas Sands) is waging a campaign against online gambling in the U.S., citing the risks to young and economically vulnerable Americans. He is taking on a number of gaming companies and investors that are betting on online gambling and believe it will complement the land-based casino business. Caesars Entertainment, a company that has aggressively pursued online gambling, spun off its online gambling assets (among others) into a separate publicly-traded entity called Caesars Acquisition Co. With the regulatory issue of online gambling being left in the hands of the individual states, the outcome of this battle depends, at least in part, on the perception of legislators/regulators about how well companies are addressing responsible gaming.

Investors should take steps to incorporate reliable ESG data into their decision-making to monitor ongoing performance and identify opportunities in the sector. Anything else is just rolling the dice.


Michael Shavel, CFA, is the Research & Business Analyst at Cornerstone Capital Inc. and a former Research Analyst on AllianceBernstein’s Global Growth & Thematic team.