From Golden Nugget owner Tilman Fertitta to Wall Street analysts and new American Gaming Association President Goff Freeman, the message was consistent on several key points; unit growth will continue to be slow, which is a good thing; Internet gaming is not a “savior;” and the biggest long-term challenge facing the industry is the need to develop slot machines that will find favor with younger players.
As one operator from the Midwest put it during the question-and-answer portion of a session on slot analytics, “I just don’t have a sense that what we’re doing on the floor is connecting with what is happening in the outside world.” He’s not alone.
THINNING THE HERD
Southern Gaming Summit coincided with the topping off of $100 million renovation of Golden Nugget Biloxi, whose owner, Tilman Fertitta, delivered the opening keynote. One of his key messages was less will be more as the industry goes forward.
“Flat revenues will be an issue as we go into the future,” said Fertitta, whose roots are in the restaurant business, but he has been in gaming nine years since the purchase of Golden Nugget properties in the Nevada cities of Las Vegas and Laughlin. “We continue to open casinos, yet we’re not growing revenue. For these jurisdictions, one of the smartest things that they could do is stop letting people open casinos. The gaming commission here in Mississippi has at least said that you’ve got to have 300 rooms. But, if you let people keep building, you’re going to have weak sisters. Even in Biloxi today, you have weak sisters. Think what would happen if you added another resort or two.”
Fertitta sees the revamped Golden Nugget reallocating existing market share in the Gulf Coast, not growing the market. “All we’ve done is take a property that was basically dead and made it into a competitor,” he said. “But we’re not going to bring in more than a little new business, we’re just going to be taking it from everybody else and that’s not good.”
The issue, as in all regional markets, is increased competition. “It’s tough out there right now; it takes a lot of capex to run these and you’ve got to execute well,” Fertitta said. “I think you’re going to continue to see consolidation out there and you’re going to continue to see properties close. I think you’ll see properties close in this market just like you’ve seen them close in Tunica and Atlantic City.”
What’s going to save it all, asked Fertitta? Not Internet gaming, where the Golden Nugget has been an early entrant via its Atlantic City property. “Internet gaming has been a bust,” he said flatly. “We’re losing $7-8 million a year on iGaming in New Jersey, which is a high-population state, just because we feel like we have to do it in case the whole country opens. And even if the whole country does open, it’s not going to be that big of a market; $2 billion by 2020 and that’s if California and a lot of other places open. Most people haven’t even done Nevada, just because there are not enough people there. Anybody who thinks Internet gaming is going to be the saving grace; it isn’t. There are so many casinos out there; basically every big city in America has a casino nearby. We’ve also got to get all the big banks to let people put the money up easier; but if the biggest banks in America can’t protect you from fraud, I can promise you that we won’t be able to either. Until the whole world opens up and you can globally market it, I just don’t think it’s going to be a very good business.”
Going forward, one of the things that scares Fertitta is young people do not play slot machines. He thinks the slot machine companies have done a great job creating what one would think of as games for young people, but young people want to play table games.
“As we all know in this industry, you get beat X number of days on table games, but you never lose on slots,” he said. “The slot player says, ‘I know I’m going to lose, but how long do I get to play?’ In the nine years that I have owned the Golden Nugget in Las Vegas, it has been hard to replace the older players who have passed on and were huge slot players. That’s scary to me; we’ve got to get younger people to play slot machines and not table games because you just don’t make the same amount of money on them I think it’s a weakness in the industry. If you don’t have slot players, casinos are going out of business, unless you’re in Macau and everyone plays mini-bac, and that’s not what’s going to happen here.”
STILL A GOOD BUSINESS
From the gaming analyst perspective, growth will be lower but it isn’t going away, in part because of new players like Fertitta, who are privately-owned and able to accept lower returns and longer investment horizons. Access to capital helps as well.
“We’re seeing demand for licenses in just about every existing market,” said Bill Lerner, principal, Union Gaming Group. “Part of that is availability of equity and debt capital for greenfield and brownfield development. Part of that is also more stability with consumers.”
“This is still a very ego-driven environment; there’s always going to be one person who thinks they can do better, added Joel Simkins, senior gaming, lodging and leisure analyst, Credit Suisse. “In the case of Tilman Fertitta, he doesn’t have to report to shareholders, which is a nice thing from his perspective. He doesn’t have to manage to monthly and quarterly expectations. We see the same thing right now from Genting, which unveiled a $4 billion plan for its Las Vegas project. Why would they want to do that? Because they have infinite access to capital and they’re going to take a longer-term view. It’s a very entrepreneurial business; you’re always going to see people who think they have a better solution.”
Such competitors can also make life difficult for publicly-owned companies when they go head-to-head, as will be the case in Lake Charles, where Simkins expects the new Nugget property, “to come out of the box very hard” when it opens later this year and be so focused on taking market share away from Pinnacle’s L’Auberge that it will be on margins.
There will be more closings such as those in Tunica, Miss., and Atlantic City, and the competition for every available license will be less intense than during the boom years, but that’s not necessarily a negative for shareholders. “Public equity prefers that management teams use greater discretion than they have in the past,” said Lerner. “Deciding not to move forward in a market where a license has been rewarded is probably looked at more favorably now.”
Summing up the present investor mindset, Simkins said, at the end of the day, this is still a very good business, but questions of where future gaming revenues will come from are starting to crop up. “We have had a lot of supply growth in the last 15 years, and markets that didn’t refresh the product or stay up with the times are certainly suffering,” he said. “Increasingly, though, when I talk to investors, you do get the structural question. When you walk around during the middle of the week, it’s a core baby boomer demographic and we know those folks are going to move on and they continue to feel less-than-great about their finances. They’re not earning any interest on their cash and they’re facing health care pressures. It’s a tougher demographic; I think the industry broadly needs to think about getting a younger demographic into the building. Those who are 20-something and 30-something are playing social games right now and they’re not really seeing the casino product as appealing.”
“WE’RE REALLY AT A CROSSROADS
Geoff Freeman, who took over as president and CEO of the American Gaming Association almost a year ago, has proven a quick study on industry history.
“If Gaming 1.0 was about Las Vegas and Atlantic City, and Gaming 2.0 was about expansion from the mid-90s until now,” he said, “I think we can all agree that expansion isn’t going to define the next chapter of gaming. It’s really going to be about something different; and I would suggest it’s going to be about getting away from the tax-and-torture model of the last 15 years and moving to a model that treats gaming like the mainstream business that it is. That’s where we need to get to; that’s the opportunity that we have.”
When you look at what’s happening in Tunica and Atlantic City, Freeman sees two ways to look at it, and the productive option depends on a more enlightened approach from the public sector. “It’s a more progressive outlook; which is, what do we need to do to empower gaming to survive? Because the approach that has been taken in countless communities around the country simply will not work. It’s not sustainable. To the extent that we’re looking at growing gaming, there are things that some of these communities can begin to do: We have to find prevailing tax rates that allows companies to reinvest in the product. When we look at compliance costs, we can look at new technologies that reduce those costs and create opportunities to eliminate duplication. We need to look at areas that enable companies to invest in games that meet the consumer interests of the day. We need partners in state and local government who are going to appreciate the value of the industry.”
“We are really at a crossroads at this point, where it’s really going to be death by a thousand cuts, as we’re seeing in some communities, or a more progressive outlook that looks at these companies as their partners as we seek to grow,” Freeman added.
Part of marching forward into the future depends on improving the industry’s image. Freeman thinks the industry’s failure to find common cause has been a boon for its critics. He took the example of Florida, where, “Las Vegas Sands and Genting have hired top-notch lobbyists who are working day and night with Tallahassee to try and get something done. While they’re working behind the scenes in Tallahassee to try and improve the environment for gaming, Disney is taking a different, smarter approach. They’re running an air war that blasts gaming for every social evil you can imagine. They almost want to pretend that the Seminole tribe doesn’t exist and Isle isn’t already operating a gaming property and jai alai isn’t all across the state. Gaming is already there, but they’re running a PR war against the industry and that is happening in state after state.”
Turning to Massachusetts, Freeman said, “There, you see an effort to have gaming, but to put in every unreasonable policy they can think of when it comes to responsible gaming, ignoring the tried and proven efforts in gaming around the country and the world and perhaps taking those up a notch. There’s an inclination for one state to try and out-regulate another. Policies are being proposed not to necessarily focus on the three percent or less of people who have a problem, but rather harm the experience of the other 97 percent of people who go to casinos and don’t have a problem. Our job at the AGA is to make sure that proven policies are adapted elsewhere and that the industry can thrive.”
The spirit of collective effort will extend to the all-important area of revamping the games themselves, which Freeman and the AGA board has identified as a top priority.
“We’re going to need to adapt as an industry and find new products that connect with people,” Freeman said. “The broader casino resort entertainment offer resonates with people, but when you look at the gaming floor, obviously, that needs to evolve. We had a board meeting in Las Vegas two weeks ago and there were six or seven CEOs sitting around the table asking that very question, and asking how we can connect with the next generation. That’s an area where we’re going to be active, through research, facilitating the conversation and trying to help the industry get ahead of that issue. Obviously, there are many who believe that for us to thrive and meet the needs of the next generation, we need to be online. That certainly unites these two issues. We’re not going to sit back and pretend that the industry can thrive with what it has been offering to date.”