Focus on Asia: Japan’s other casino industry By Andrew Klebanow, Principal, Klebanow Consulting August 4, 2020 at 2:45 pm The process to bring integrated casino resorts to Japan continues to evolve, albeit at a very slow pace. With the government’s introduction of numerous regulations over the last twelve months, several notable casino developers have decided to opt out of the forthcoming bidding process. A 30% tax on gaming revenue, a requirement that casino operators withhold taxes from gambling winnings from both Japanese residents and foreign nationals, a daily entry fee of ¥6,000 (USD$56.50), a limit on the number of times a Japanese citizen can enter a casino (capped at three times a week and ten times a month), a restriction that limits the amount of floor space that can be devoted to gaming to three percent, coupled with high development costs have conspired to make multi-billion dollar investments in integrated resorts a very risky proposition. When one realizes that Japan already has a very sizable and mature casino industry where citizens can avail themselves of gaming entertainment today, then it is easy to understand why the risks of integrated casino resort development may be greater than any possible reward. Japan’s other casino industry is more commonly known as Pachinko/Pachislots. Often referred to as Pachis, these are electronic gaming devices housed in storefront locations, and they can be found in clusters near train stations and transportation hubs throughout Japan. There are approximately 10,000 Pachi parlors across the country, with their size ranging on average from 200 to 1,000 gaming devices. In total, there are approximately four million Pachis in operation, and they generate USD$30.1 billion a year in gross gaming revenue. This is not a small industry. Pachis are comprised of two distinct kinds of gaming devices: Pachinko machines and Pachislots. Pachinko is often likened to an upright pinball machine. Using a lever, players shoot steel balls onto a game grid in an attempt to get those balls to land in the right holes, which in turn releases additional balls. Balls in turn accumulate in a tray at the base of the machine. At the conclusion of a playing session, players redeem these balls for prizes at a counter inside the parlor. Since gambling for money is prohibited in Japan, players take their newly won prizes to a kiosk outside of the parlor and redeem them for cash. Pachislots are essentially electronic three-reel slot machines where players can press a button to stop each reel. This feature, which stops the reel within .19 seconds, rewards players who have developed a certain level of skill to influence the outcome of each game. Pachislots are also highly entertaining, employing a variety of graphic elements along with sound and lights that enhance game play. Like Pachinko, Pachislot players earn tokens that in turn can be redeemed for prizes. Again, those prizes can be exchanged for cash at storefronts adjacent to Pachi parlors. It is this one degree of separation that makes the entire gambling enterprise legal in the eyes of regulators. Pachislots are constantly evolving with manufacturers frequently introducing new game titles with enhanced mix of electronic features. As such, machine turnover is very high. Sammy Group, Japan’s largest manufacturer, produces over 100,000 machines a year. Daito-Giken is second with 85,000 units manufactured in a year. Customers have come to expect an everchanging mix of game titles to keep their interest. Despite their entertaining features, unit costs for Pachislots are considerably lower than traditional slot machines, at less than USD $5,000 per unit compared to $25,000 for a traditional slot machine. Pachi parlors have traditionally attracted male office workers that found escape and entertainment in these games of skill. Today, 73.5% of Pachi players are male and 26.5% female, although several Pachi operators have developed parlors that are more appealing to women. Nevertheless, it is this skewed demographic that IR operators had hoped to capitalize on. Casinos in other jurisdictions have a far higher mix of female players, owing to their more comfortable environments and perceptions of safety. In the United States, female players make up on average 58% of slot participants. By attracting a higher percent of female players with greater disposable income, IR developers recognized an under-served market. Nevertheless, the emergence of onerous regulations, taxes and levies are conspiring to limit the size of this market. With the government only planning on issuing three licenses, integrated resorts are not expected to materially impact the Pachi industry, as it has a distribution network of games and parlors throughout the country. What has become clear to IR bidders is that regulations, taxes, levies and other restrictions will make it increasingly difficult to pull players from Pachi parlors or attract enough potential slot players willing to pay ¥6,000 for the privilege of playing a slot machine. There are a lot of places to play an electronic gaming device in Japan today and none of them require a long commute, an admission fee, or a government mandated tax on winnings. Japan’s other casino industry is not going anywhere anytime soon and will continue to appeal to millions of players. The opportunity for integrated resorts to seize market share from Pachis, given the expected levies and regulations, will remain limited. Andrew Klebanow is a Principal at Klebanow Consulting. He has worked in the casino industry since 1977 and as a gaming consultant since 2000. He can be reached at firstname.lastname@example.org.