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Crown’s Sydney plans take the next step

Not content with having the main casinos in Melbourne and Perth, James Packer’s Crown (ASX: CWN) is currently moving forward with its building and gaming approvals to open a new casino and hotel complex in Sydney, breaking open the casino licence monopoly that Echo Entertainment (ASX: EGP) up until now had enjoyed.

Next is Brisbane, where Echo Entertainment has exclusive casino rights there and in the Gold Coast. Crown is attempting to win over the Queensland government to develop a completely new casino, promising a new hotel that will revitalize the CBD area. The state government is currently considering selling government real estate along the Brisbane River, and Crown wants to seize upon it.

Echo Entertainment is trying to hold its own on two fronts. Barriers to entry for competitors in the form of government licencing are cherished by companies that can claim a whole city or region as their own, and Crown knows if it can crack open the Sydney and Brisbane gaming markets, it can establish itself as the premier site even if Echo Entertainment continues business in those cities.

Casinos are big-time development projects — gaming rooms, hotels, restaurants, retail shops — so billions of dollars are required just to enter the game, and the buildings constantly have to be renewed and remodeled. Crown is developing other casinos in other countries through its joint venture company, Melco Crown, of which it owns 33.4%, but it won’t pass up this opportunity to expand its business.

Echo Entertainment completed renovating its Star City casino in Sydney in 2011 for $1 billion to bring the hotel and restaurant facilities up to international standards, but Crown is proposing completely new buildings along the Barangaroo development site near the Sydney Opera house.

The committee overseeing the government approvals wrote in their report: “The Steering Committee believes that Sydney and NSW would derive greater benefit through a competitive casino market which delivers increased tourism and visitation as well as broader economic benefits.”

Translation: Crown is going to sink a lot of money into the project, and the local economy benefits from the construction jobs, ongoing business and increased taxes it will generate. New proposed facilities would also improve the city’s reputation as a desired international tourist destination. They are allowing Crown to go onto the next stage of approvals, widening the crack in Echo Entertainment’s exclusive casino rights even more.

Foolish takeaway

Crown is limiting this project to VIP gambling within a $1.3 billion hotel complex, but it is really a foot in the door for future Australian growth and market share. The same will be done in Brisbane, no doubt. Companies challenging barriers of entry in tightly held industries need licences and deep pockets to succeed. If they can also appeal to the vanity of cities wanting to be “world-class” tourist hotspots, all the better.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any of the companies mentioned in this article.

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