Japanese gaming will likely be the biggest topic in the gaming world in 2014. The one obstacle in the way, however, is the fact that casinos are still forbidden in the country. The government will vote on legislation in the coming months that will decide whether or not casinos will be allowed to begin building in Japan. Analysts expect that if the country allows casinos, it could beat out Singapore to become the second-largest gambling hub in the world, behind Macau.
After winning its bid for the 2020 Summer Olympics in Tokyo, Japan immediately started looking at how the games would be funded. The government, which had already been toying with the idea of legalizing casinos, said that it would like to use gaming revenue to fund part of the cost of the 2020 Games.
Because of this, and because the bill is supported by both major government parties, the general consensus is that Japan will vote to pass the legislation which will allow casinos. Analysts expect that four licenses total will be awarded in Tokyo and Osaka.
One area of contention that has already come up during debates on the legislation is whether or not the industry can be built without the seediness that is stereotypical of some gambling hubs. Similar concerns were raised by the Singaporean government before it allowed casino companies to operate.
Singapore officials were swayed by casinos that offered the added bonus of family friendly entertainment, such as live theater and theme parks. So which casinos have the best chances of getting one of these licenses? Two companies, Las Vegas Sands (NYSE:LVS)and Melco Crown (NASDAQ:MPEL), both have track records of success with Asian gamers and Asian governments.
What will sway the government? Revenue without seediness
Gambling is not new to Tokyo. Though the government has not yet allowed casinos to build their megaresorts there, gaming in the form of betting and similar gambling options is rampant. Unfortunately, the industry has been pushed to the fringe of the clean market, and it resides in pockets of dirty, grungy gambling hot-spots within cities.
Nowhere is this more true than in Kabukicho within Tokyo. Taking up about one square kilometer, this area is filled with betting houses, massage parlors, seedy hotels, and Yakuza gang hoodlums who hawk services of sex, drugs, and gambling. The government does not want a gaming industry that operates in this way. Politicians believe that they can help to pull gambling out of this seedy mess by putting it into large, family friendly, regulated casinos.
Singapore as a model:
Four years ago, Singapore decided to allow two casino companies to build in the island nation: Marina Bay Sands, operated by Las Vegas Sands, and Resorts World Sentosa, operated by Malaysia's Genting.
Before the casinos were allowed to build, the Singaporean government insisted on the need for non-gaming, family friendly entertainment. These two casino resorts now boast large areas of restaurants, shops, hotels, and other features.
Both casinos include large theaters that host traveling shows or original creations such as Resorts World's group of original acrobatic musicals. Marina Bay Sands offers a spectacular garden that is an attraction on its own, as well as an infinity pool on its rooftop. Attached to Resorts World Sentosa is Universal Studios Singapore. These non-gaming entertainment perks keep the government happy, and add a unique level of tourism for the casino companies.
The casinos with the best chances of winning bids
Las Vegas Sands has shown that it can appease Asian governments while reaping incredible profits. Sands received 86% of its 2013 revenue from Asia, so the company clearly has placed large bets on the region already. With its success of adding family friendly non-gaming entertainment in Singapore while still bringing in incredible taxable revenue, Las Vegas Sands is likely to be the kind of company Japanese government officials will be excited about.
Melco Crown is a serious contender for a spot in Japan, and it has already been aggressive by meeting Japanese officials early and often. The company will be able to use its Macau casinos as an example of how it will incorporate entertainment into its Japanese casino. The City of Dreams resort in Macau brings entertainment to a new level. World-renowned live acrobatic and dance shows housed in the Macau casino, such as the beautiful House of Dancing Water, have made this property a destination for vacationers, even those not gambling. An analyst at Barrons notes that "the House of Dancing Water show is a well known and respected brand and has given MPEL some brand equity in Japan."
Genting partnered with Universal Studios in Singapore to attach a family friendly theme park to its casino resort. Universal Studios is owned by NBC Universal and parent company Comcast (NASDAQ:CMCSA). Theme park operations have been a lucrative segment for Comcast. The company made $270 million in total theme park income during the third quarter of 2013 alone, up 7% from the same quarter last year.
Most recently, Genting announced the same kind of partnership with Twenty-First Century Fox (NASDAQ:FOX) to build Fox's first-ever theme park which will be attached to Resorts World Malaysia. Greg Lombardo, vice president of location-based entertainment for Fox Consumer Products, said in an interview with CNN that "We are creating a unique and exciting destination brand with a true global appeal... In the coming months you will be hearing much more." Speaking about the choice of building in Malaysia, he said that based on the growth of demand for this kind of excitement in the region "It was a natural place for Fox to create our first theme park and marks an important milestone in our global location-based entertainment strategy."
Foolish Takeaway: Finding out which casinos will be allowed to build in Japan may be a winning bid
With the expected growth and profits that will come from the Japanese gaming market when and if the government legalizes the industry, the casino companies that win bids to build there are likely going to see big gains. Betting on which company will win one of the four bids may be a good way for investors to get in on this industry early. From the government discussions, and using Singapore as a model, family friendly entertainment is likely to be at least one consideration that determines which casinos will ultimately win their bids.
Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.