Rise of Sin Businesses: Online Gambling, Vice Fund & Rick's Cabaret

Rise of Sin Businesses: Online Gambling, Vice Fund & Rick's Cabaret

At 19, Eric Langan, father of one baby girl, has been through a short marriage and a divorce that left him devastated.

Well-meaning friends who wanted to help him move on took him to Fort Worth, Texas, to drink in a bar and watch table-dancers. That first night was followed by many other nights until Langan fell for one of the dancers. Like one of his flatmates, he ended up dating her. Not long after, all six table dancers were spending time regularly in his apartment, with Langan taking to the task of driving them to the bar and fetching them later in the day. Soon, Langan realized the potential of making as much money as the bar owner is making off the girls. So he sold his baseball card collection and put up his very own club with the $40,000 that he earned.

According to Langan, who is now in his forties, he started out with the intention of saving the money and the girls. But he became more interested in the money later on.

Grand Opening of Rick’s Cabaret

That first bar has grown into Rick’s Cabaret, now among the major chains of strip clubs in the US. Langan is now its chief executive and biggest shareholder. Rick’s Cabaret operates in 20 locations across seven states. It is also listed in the Nasdaq. Last 2008, the company posted gross revenues of almost $60m and $7.7m in net revenues. Langan, a high-school dropout, earned dividends amounting to $509,918.

Because of its underground nature, it is difficult to get exact figures relating to the revenues of the sex industry. There are some indications, however. Adult Video News, a trade magazine for the sex industry, found that $12.6bn was spent on DVD rentals, access to porn sites and visits to strip clubs in 2005 alone. Whether or not these figures have increased or decreased is anybody’s guess. Companies that produce porn films have suffered from setbacks due to the availability of free pornware in the Internet. However, strip clubs like Rick’s Cabaret have become increasingly popular, so the number could still add up.

The point is, vices are a steady source of income for those who invest in it. From breweries to weapons manufacturers, to the tobacco industry, these types of businesses are not for the morally responsible. But those who have their eyes on the prize see these as their ticket to greatness.

University Studies on Porn & Tobacco

A study by Yale University finance professor Frank Fabozzi found that the average stock invested in “sin businesses” generates an annual return of 19 percent, judging from 1970 to 2007 figures. In contrast, the average stock generated only 8 percent every year for the same period. The study also found that the sin stocks beat the average stock market for 35 years out of the 37 years involved in the study.

Professor Jeremy Siegel of the University of Pennsylvania’s Wharton School discovered that the tobacco industry’s Altria Group, formerly Philip Morris, posted the best performance from 1957 to 2006 among the original members of the S&P 500 index. According to Siegel, this is mainly because Philip Morris offered better, long-term returns to stockholders, posting up to double the returns on the market for the last 50 years. Ben Bernanke in fact saw this promise. It was the only stock in his portfolio when he assumed chairmanship of the Federal Reserve in 2006.

But the best things in life are not free. For those who have been milking the sin industries for money, there is the worldwide criticism that they have to face regularly.

Behind the Scenes at the Strip Club Business

In 1989, when Langan set up his first strip club in Fort Worth, he drew the ire of the neighborhood association, which lobbied to have it closed. Since then, Langan has been arrested 13 times in total for violating local ordinances. These ordinances were challenged and were later ruled to be unconstitutional but the police would not hear of this. Langan found the arrests annoying, but thanks them nonetheless for helping promote his club. The protesters only served to hype up the business, keeping Langan busy in his Fort Worth location until he had to move to a bigger one.

If there is anything that Langan learned from the arrests, it is this: avoid any brush with the law, especially if you are in the business of strip clubs. As a result, Langan has learned to follow the law to the letter, claiming that despite his strip clubs’ association with prostitution, money laundering and gangsters, he has never transacted with mobsters. Rick’s Cabaret operates in a strict and structured manner that turns off mobsters who prefer “garbage and other businesses nobody cares about,” said Langan.

Langan employs approximately 2,500 entertainers who pay the club for the opportunity to dance and earn from tips and talent fees for private performances. They also earn two-thirds of the fees paid by private audiences. The entertainers are imposed certain house rules the moment the start. In obedience to the regulation against prostitution, Langan dismisses entertainers who violates his club’s no-sex and no-drugs policies.

Langan also exercises strict control over the revenues, and has adopted the system typically used in casinos. When a shift starts, the bartenders and waitresses gets the cash drawer from a highly secured room. At the end of the shift, they tally the sales data from the cashier and reconciles them with the receipts. The sales are turned over the headquarters, sixty percent of which is charged to credit cards. This decreases the possibility of money laundering.

Notwithstanding his conflict with neighborhood associations, Langan believes that his business is on its way to social acceptance. Traditionally, the only women that you saw in his bars were those who are expecting their husbands to show up and want to catch them red-handed. Today, Saturdays find his clubs filled to the brim, with one-third of the audience being women.

The profile of Langan’s employees are also shifting. The recession and the increasing rate of unemployment has pushed professionals like bankers, paralegals and real estate agents to explore employment opportunities as dancers in his clubs. Langan said they are somewhere in between the alleys and the main street now.

The recession has had another impact on Langan’s business: it compelled him to shift to another target market. In the past, Rick’s Cabaret served the high rollers who had an average of $30,000 to spend every night. These days, Langan is capturing smaller-scale, but more mass-based transactions. To serve them better, Langan extended his clubs’ happy hours as early as the afternoon, to attract even the unemployed. Langan said, “Our business is not recession proof, but recession resistant.”

Effects of the Economic Recession on Gentleman’s Bars

It is commonly believed that sin businesses like Rick’s Cabaret thrive during economic recession. Vice Fund portfolio manager Charles Norton believes in the truth of this. Vice Fund is a mutual fund established in 2002, and serves the alcohol, gambling, tobacco, defense and aerospace industries. According to Norton, sin businesses are insulated against economic trends because the demand for their offerings is always on the upturn. Vice Fund founder and former portfolio manager once said: “Even in bad times, people want to drink, smoke and gamble.

Given this, some sectors within the sin industry came out better than others throughout the economic downturn. For example, gambling was down, compelling Vice Fund to reduce their exposure in the sector. According to Norton, the gambling industry is fueled by credit, which was why it ended up suffering more from the recession than the other sub-industries. In 2008, the Vice Fund took a 41.6-percent nosedive as a result of the recession’s negative impact on the gaming industry. These days, Vice Fund has re-channeled its resources to the tobacco and alcohol industry, after realizing that these consumer businesses with global brands will enjoy steady demand. Norton observed that the tobacco industry has been particularly insulated.

Rise of Online Casinos and Internet Gambling

A sub-category of the gaming industry—online gambling—has exhibited certain peculiarities. A relatively new industry, online gaming has been through tough times. The pioneer companies began operating by virtue of licenses granted by the Antigua and Barbuda in 1994. Soon after, bigger countries like Australia opened its doors to online gambling, causing it to become the earliest Internet companies to enjoy revenues. In 2008, global industry profits reached $20bn. Online gambling fared better during the recession, said Global Betting & Gaming Consultants, a firm that services the industry.

Fifty-one-year-old Mark Blandford is among the pioneer bookmakers in the UK who saw the potential of the Internet. Blandford developed his fascination with gambling when, as a young boy, his father would take him to see horse racing. From listening to his father and his friends, Balndford learned that there was more money in bookmaking than betting.

When he was 27, Blandford set up his first betting shop, and subsequently established a small chain. In 1996, he was able to raise his stakes to six shops in all.

It was then that Blandford learned from a neighbor that the European Union was involved in an e-commerce project. He then searched the keywords “sports betting” and “bookmaking” into a search engine and discovered that there were only a few results. He jumped on the opportunity immediately.

After a year of researching on the online gambling industry, Blandford sold his chain of betting shops and used to proceeds to set up Sportingbet in 1998.

Blandford knows that the gambling industry is highly criticized by some sectors who regard it as the source of many social evils such as addictions, match fixing and money laundering. But Blandford insists that these consequences are best controlled through legal means and by regulating the industry. He said, “If it is not legal, you can’t control anything. The underworld doesn’t care if children are involved.”

Since it was established, Sportingbet has acquired its competitors in the US, the world’s largest market in terms of gaming. Sportingbet now has a market value of £1.9bn ($3.1bn). However, players of the online gambling companies have been operating in the US despite the absence of clear legal terms. In 2006, Sportingbet non-executive chairman Peter Dicks was arrested in New York by virtue of an arrest warrant issued in a Louisiana parish.

The arrest came as a surprise to Blandford. A bill was consequently drafted banning banks from transferring money from the accounts of US customers to online gambling sites. In reaction to this, Sportingbet had to let go of its betting and casino operations in the US to prevent further losses. At the end of the ordeal, the losses for the quarter amounted to £252m.

Blandford’s story indicates the effect of a heavily regulated industry such as sin businesses. Because it was at the mercy of government regulations, Sportingbet had to sustain a decline from £53m to £4.4m.

But this is not the end of the story. In 2005 and 2006, Blandford sold his shares amounting to £25m and gave up his post as director in 2007. Now he is looking at other new markets. Among Blandford’s fresh ventures is his investment in Mfuse, a company that develops gambling software especially for mobile phones. This industry has a lot of potential, just like online gaming had a decade ago. Blandford is putting money into it, positive that vice has not yet lost its touch.

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