Pachinko industry is facing triple threat

Japan Times Sunday, Oct. 1, 2006

Pachinko industry is facing triple threat

By MARK SCHREIBER
Shukan Economist
Pachinko, with its 30 trillion yen annual turnover, stands out as Japan’s most popular form of gaming, surpassing lotteries, horse racing, boat racing and all other forms of betting combined. In 2005, 15,165 pachinko halls with an average of 343 machines were in operation.

But not all is blissful in the realm of bouncing ball bearings. Writing in Shukan Economist, Bunkyo University professor Kosho Yamada, an authority on the leisure industry, notes that pachinko revenues declined by 0.5 percent in 2004 and 2.5 percent last year.

Some of pachinko’s problems, of course, are nothing new. Because “hard” forms of gambling are illegal in Japan, the halls are not permitted to pay money to winners, but must reward them premiums like designer-brand wallets, boxes of laundry soap and other commodity items.

But roughly 9 players out of 10 prefer money. So to circumvent the regulations, a quasi-legal arrangement, known as santen hoshiki (three-shop system), has been adopted, by which winners can take their prizes to a small exchange counter nearby where they are converted to cash. These premiums are then recycled to the halls.

The worst, however, may be yet to come, as Shukan Economist raises three impending problems confronting the business. First is declining patronage. After peaking at 30 million in 1994, for various reasons the number last year fell to an estimated 17 million. With the aging of Japan’s population retirees who enjoyed pachinko during their working years, find themselves with less disposable income, and enthusiasts are projected to decline to 11 million by 2020.

A second issue relates to the size of machine payouts. Concerned that payouts were getting out of hand, the authorities recently revised regulations to ban a high-paying machine called a pachi-suro (pachinko-slot), which is played using medals resembling coins. Some 2 million existing machines must be phased out by June 2007, and replacing them will impose heavy cost burdens, particularly on already hurting small operators.

A third issue awaits a vote in the Diet, probably next year, to legalize gambling casinos. If pachinko were to come under a consolidated gaming law, hall operators, who have relied on the santen hoshiki, would be forced to adopt greater transparency — not necessarily a bad thing, writes Yamada, as stricter governance would, at least, make possible public share offerings to attract new investors.

Hidenori Kato, President of Toyohashi City-based Daiei Kanko Co., Ltd., operator of a chain of 47 pachinko halls, is critical of operations that appeal mainly to customers willing to take high risks to obtain a high return — in other words, bona fide gamblers.

The machines that form the mainstay of the business, Kato explains, are preset to discharge their first big payout at a miserly ratio of one for every 360 to 500 insertions, which means that to win big, a player has to put in at least 20,000 yen worth of balls.

“Those are very high odds, and not consistent with pachinko’s traditional image as a form of recreation for the masses,” he remarks.

To return pachinko to its roots as a form of mass recreation, Kato has begun experimenting with a marketing concept he calls “dream time,” by which customers can enjoy “carefree play every day,” on special machines requiring technique and dexterity, and which are preset to a more generous payoff ratio — one for each 100 insertions or fewer.

“We launched the new machines from August last year,” smiles Kato. “Initially they made up 8 percent of the total, but now they’re up to 25 percent. Since it costs customers less to visit, they tend to visit more often.

“This doesn’t mean that big payoff machines will disappear,” Kato adds. “What we’re doing is trying to offer customers a wider choice, based on what they like.”

It’s a wonder nobody’s thought of it before.