THE BACK PAGE: Instability at a lower level
July 15, 2009
“Stabilizing at a lower level” has become the catch-phrase for this economy, and the phenomenon extends to gaming. In a conference call last month, for instance, MGM Mirage Chief Executive Officer James Murren said business in Las Vegas has “clearly bottomed out”.
“It’s just a matter of how long we’re going to be on the bottom, and that is what we’re debating internally,” he said.
It’s what everyone is or should be debating.
The business cycle is one thing, damaged consumers quite another. In the United States, where people have been preached the gospel of self-reliance for three decades, the crumbling of retirement portfolios combined with crapshoot economics in the basic-needs industries of health care and education are finally driving savings rates up. Savings rates, which were 0 percent from 2003-2007, have climbed to 5.7 percent, or close to their historical level of 7 percent.
This has economists very worried because the end of free-spending consumers represents a long-term barrier to growth. They will loosen the purse strings again, but behavior figures to be more cautious than earlier in the decade, and that caution is beginning to extend to the most affluent sector of the market. The recessionary bloodletting of job losses and pay cuts will make many high-income earners more determined savers and more risk-averse for years to come.
So separating people from their money won’t get any easier any time soon. In gaming the good-news-bad-news scenario is that the pain has extended to governments, and they are becoming more reliant than ever on the revenue that the industry provides. But they are also adding more supply to the market all the time. That creates winners (new and/or expanded gaming jurisdictions) and losers (those who stuck their necks out first).
Wherever you stand in this market, you are not looking at stability at a lower level. It’s instability at a lower level as the playing field gets more crowded all the time and increasingly tight-fisted customers consider an ever broader range of gaming options.
Taking the Northeast, which is perhaps the most obvious example, the spread of slot machine gaming to Pennsylvania has led to the introduction of sports betting in Delaware and helped lead to the creation of a new market in Maryland. Pennsylvania responds in turn with table games legislation. Meantime, Atlantic City founders. Overseas, the prospect of Chinese-resident gamblers spending money outside the country helped speed the creation of Macau. Its soaring success fast-tracked gaming in Singapore and elsewhere in the region, most recently Taiwan.
In every case, of course, gaming expansion runs through government. And as markets become more complex government has to become more sophisticated and more flexible in its approach to the industry. If market participants, including governments, are to make the most of their opportunities, that is.
Take Atlantic City, where ex-Mayor James Whelan, now a state senator, made a compelling case for government-led change at the East Coast Gaming Congress in May. “The regulatory model we currently use is not the model we would develop today if we were just starting out,” he said, suggesting a merger of the Casino Control Commission and the Division of Gaming Enforcement, which as currently constructed make New Jersey the only state with two regulatory oversight authorities. He also urged the state to reconsider the need for casino inspectors to be available 24/7.
That was the cost-savings piece. Whelan also spelled out a vision for the physical space of Atlantic City. “We have to talk seriously about developing the abandoned areas left between casino properties,” he stated. “This means using eminent domain, knocking down unsightly, abandoned buildings and finding creative solutions to attract new casino operators into the city.” To realize this vision Whelan encouraged the state to lower the 500-room threshold for hotel development so that smaller gaming properties might fill the void. We’ll see what happens.
Government appetite for gaming has made the industry a global business, and it has also shed light on the need for large, well-capitalized companies to be able to respond to the opportunities and, yes, the threats posed by government decisions and/or inaction on a global scale. The Asian market, for instance, with China as its center, carries levels of political and regulatory risk that are almost as high as its rewards, which is one reason why leading operators try not to be wholly leveraged in one jurisdiction.
Some of those strong global brands, however, are still working themselves toward financial health, an outcome which is tied to making the right decisions about the U.S. market.
Clarity, as reflected by Mr. Murren’s remarks above, is still hard to come by.
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