The United States gaming industry set a new record for gaming revenues in 2014, generating $68.6 billion, an increase of 0.3 percent over the previous record set in 2013. For purposes of this analysis, the U.S. gaming industry includes commercial and tribal brick-and-mortar casinos, iGaming, and slot machines located in restaurants, truck stops, and taverns.
While the increase in gaming revenues set a new record, the give and take of gaming revenues continues to place pressure on existing operators. For the first time since the modern era of gaming began in 1989, the number of casinos operating declined during the calendar year. At the end of 2014 there were 941 brick-and-mortar commercial and tribal casinos, which was four less than the 945 casinos operating at the end of 2013.
The revenue growth seen in 2014 is largely attributed to the growth in iGaming and slot machines available in restaurants, truck stops and taverns. These two segments of the industry saw a combined increase in gaming revenues of $480.4 million.
Tribal gaming revenues remained relatively flat last year, increasing by an estimated 0.2 percent. When examining the regional growth, the tribal nations within the Oklahoma continue to see the most growth; however, the rate of growth has slowed dramatically from double-digit growth rates seen in 2008 and 2009. The continued slow-down in growth is attributed to the tribal segment of the overall gaming industry reaching point of maturation, where there are fewer opportunities for expansion.
While the growth was limited in 2014, the industry had a favorable legislative year which will continue to support the overall development of tribal gaming and protection of tribal sovereignty. Specifically, in May 2014 the United States Supreme Court ruled in favor of the Bay Mills Indian Community, upholding tribal sovereignty. Later in the year, the Tribal General Welfare Exclusion Act was passed providing Indian Country greater protection from the IRS efforts to tax tribal government programs providing education and housing to tribal members.
After achieving record gaming revenues in 2013, the commercial gaming industry could not sustain the growth in 2014. The overall commercial gaming market declined 0.8 percent in 2014, generating $37.4 billion. Of the 23 states that have commercial gaming, only eight states saw an increase in gaming revenues.
The decline in commercial gaming revenues does not come as a surprise to the industry, as the 2014 news headlines were focused on the closure of four Atlantic City casinos and the impending bankruptcy of Caesars Entertainment (eventually occurring on January 15, 2015). Beyond these headlines, there were two important trends that go beyond the 2014 numbers.
First, the Pennsylvania gaming market finally stalled in 2014, with overall gaming revenue declining 2.4 percent. However, this decline was not felt by the gaming operators as the 2014 gaming revenue after state gaming taxes paid remained unchanged when compared to 2013. The casinos’ ability to retain the same amount of revenue after gaming taxes was due to the mix of gaming revenue shifting towards table games. As the percentage of revenue generated from table games increased, the casino operators were able to benefit from a lower tax rate as the Pennsylvania gaming tax applied to table games revenue is 39.0 percent less than the tax rate applied to gaming machines revenues.
The trend of revenue shifting from gaming machines to table games is expected to continue across the nation. In 2015, we are already seeing this trend emerge in Maryland where both Maryland Live! and Horseshoe-Baltimore are replacing gaming machines with table games to accommodate the increased demand.
One hour away from the Pennsylvania border, we saw another important trend emerge in Atlantic City. In 2014 continued market saturation in Atlantic City resulted in four casinos closing their doors. While the casino closures and overall market saturation continue to bring down the local economy, the market produced the two fastest growing casinos in 2014. The Golden Nugget and Tropicana were able to capitalize on the reduced competition and experienced revenue growth rates of 30.4 percent and 16.5 percent, respectively.
The U.S. iGaming industry completed its first full calendar year of activity in 2014, generating $135.6 million. New Jersey led the industry, generating 90.6 percent of the iGaming revenues. However, the success in New Jersey was tempered as the iGaming revenue was less than 50 percent of the low-end estimates and well short of the $1.2 billion cited in the New Jersey FY 2014 budget.
Looking towards 2015, the future growth of iGaming remains uncertain, with many supporters claiming California will legalize online poker removing the player liquidity constraint in today’s market. However, opponents to online gaming see the expansion into California as a near impossible feat with the diverse political interests that exist within the state.
The video lottery terminals offered in restaurants, truck stops and taverns (RTST) was the fastest growing segment during 2014. In 2014, revenue from gaming machines in RTST increased by 13.8 percent to $2.95 billion.
The increase in this segment was solely due to the continued expansion in Illinois. When removing the growth seen in Illinois, the revenues generated by the five other states only increased by $1.3 million, or 0.06 percent.
Overall, the United States gaming industry will continue to see a redistribution of gaming revenue as new regional gaming markets emerge. The most notable expansions to watch will be in Massachusetts as the state’s first gaming facility, Penn National Gaming’s Plainridge Park Casino, is schedule to open in 2015. Outside of Massachusetts, expansion will continue in the New York, Philadelphia, and Washington D.C. markets, with opening dates extending beyond 2015.
Amidst the market expansion, existing operators will continue to focus on cost reduction efforts and diversifying revenues away from the gaming floor to other amenities.