Few people expected 2009 to be so bad. Yes, the second half of 2008 was not good, but many hoped and prayed that 2009 would see a rebound. It was not to be, as the economy continued to crater and the main gaming jurisdictions of Las Vegas, Macau, Atlantic City, Eastern Europe and elsewhere virtually imploded. There were different reasons for the downturn in the various regions of the world, but the year 2009 was generally a bad one for all involved in gaming.
As we approach the dawn of 2010, there is some light at the end of the tunnel (if it’s not an oncoming train, that is). Revenue decreases have flattened out to some extent. New technology is creating opportunities where there were none before. And the silver lining in any economic downturn is that government turns to increased gaming to raise more revenues, which is happening to a large extent in the United States and to a lesser extent around the world.
The editors of Global Gaming Business put our heads together and sought to identify 10 trends that will make a difference-either plus or minus-in 2010. The start of a new decade is often a turning point in society, and we’re quite confident that things will change in the gaming industry. It’s hard to imagine much worse, but when you review the 10 trends we’ve highlighted for the next year, we’re confident that the members of the gaming industry will come together in confidence to face the challenges and take advantage of the opportunities that will be presented to us next year.
1. It’s the Economy, Stupid!
All the ills of the gaming industry can be traced back to one thing
The economic slide that started in the second half of 2008 accelerated to a thrill ride in the first half of 2009 and slowly coasted to a stop by the end of the year. Now, with a new year looming, questions abound about how the gaming industry will respond.
In some sectors, the economic downturn never arrived, or wasn’t quite so devastating. South America, Australia/New Zealand and some pockets in Europe largely escaped the consequences. Macau was hit with the double whammy of an economic slump and Chinese meddling in its market. Atlantic City and Las Vegas got the triple whammy of economic downturn, increased competition and governmental intervention in the meetings and travel business. And of course, Russia was simply wiped out.
Some experts believe that gaming is “bouncing along the bottom” of the downturn. And there’s some evidence of that, as the revenue declines in most areas now are limited to single digits instead of the double-digit dips we saw in the first half of 2009.
Bill Lerner, a principal with Union Gaming, believes that the end is in sight.
“We forecast the U.S. gaming market will inflect positively in 2010, growing between 5 percent and 10 percent,” he says. “Comparables to 2009 will be relatively easy while the broader macro picture will dictate the magnitude. We are already seeing stability in the last quarter of this year across all markets.”
But all jurisdictions are not created equal, as we see from the initial impact of the economic downturn, and a turnaround is likely to be equally sporadic. The East Coast of the United States has experienced a gaming boom over the past several years, with Pennsylvania, Delaware and New York expanding existing gaming, and Maryland and Ohio joining the roll of legal gaming jurisdictions. This has depressed the Atlantic City gaming industry and increased already-heated competition. Rebound in that sector is far off.
In Las Vegas, the opening of CityCenter this month will skew the first-quarter results.
Larry Klatzkin, a longtime gaming analyst and current managing director at Chapdelaine & Co., says a Las Vegas turnaround is contingent upon the reaction of the Strip operators.
“If they get stupid,” he explains, “and kill their room rates the same way they did when Encore opened last December, it could be a long way back.”
On the Pacific Rim, it’s another opening that will shake the region. The debut of gaming in Singapore will bring almost $10 billion in casino entertainment infrastructure to the region, and, once again, the reaction of the existing operators will be crucial. Ironically, the tipping point will be the structure of the Singapore VIP programs rather than the actual physical facilities.
In Australia, there are some disturbing ongoing trends that will punish the gaming industry for failing to be proactive in combating problem gambling.
At the corporate level, the financial structure of casino companies-public or private-will play a role in the recovery of the gaming business. Many corporations-Harrah’s Entertainment, MGM Mirage, Las Vegas Sands, Station Casinos, Trump Entertainment and more-have to deal not only with reduced revenues, but also with debt payments that were structured on the “reality” of the good times.
Lerner says it makes sense to refinance when possible.
“Debt restructuring will allow for companies to recalibrate balance sheets and to begin reinvesting in existing casinos,” he says. “This could lead to greater share of consumers’ wallets.”
So the revival of the gaming industry is contingent on the major companies not only bouncing back from the recession but also finding lenders understanding enough to allow them to extend their debt.
And that list of companies should have included tribes. The two big Connecticut tribes have already experienced difficulties in repaying their debts, and many smaller tribes and tribal gaming operations are also finding it hard to live up to their debt obligations.
A comment from the former chairman of the Mashantucket Pequot tribe that per-capita payments to tribal members would take precedence over debt repayment frightened the lenders, who long had doubts about lending to sovereign nations. Subsequent commitments to repayment eased those fears, but any repeat could dry up the source of funding for many tribes still looking for financing.
Lerner says questions about tribal gaming finances are just temporary.
“There does seem to be greater reluctance, but that likely is a transitory issue,” he says. “Many gaming tribes have been excellent credits and partners over time.”
But if the Obama administration next year fulfills some tribes’ hopes that the Interior Department would look favorably upon off-reservation gaming, all bets would be off and the spigot would flow once again with tribal gaming financing.
But it all depends on one thing that is largely beyond the influence of the gaming industry: a strong and sustained economic rebound.
2. Asian Interaction
Legalization Trends on the Pacific Rim
The success of gaming in Macau after the Chinese government opened the Special Administrative Region up to new operators in 1999 has spurred interest in gaming in other parts of Asia.
In 2010, two “integrated resorts” will open in Singapore. After gaming was approved by the Singaporean government in 2005, what is often seen as the cleanest and least corrupt city in Asia embarked on a bidding process, regulatory setup and construction phase that is being closely watched by its neighbors. Designed to attract tourism and business meetings, the two Singapore projects (owned primarily by Las Vegas Sands and Malaysia’s Genting) are multibillion-dollar, iconic buildings that will create an immediate impact on the Asian market.
Other countries where gaming already exists are trying to copy the Singapore model. The Philippines has designed a four-casino project for the shores of Manila Bay, asking for an investment of at least $1 billion each.
In Vietnam, several regions are trying to attract mega-investments to that infrastructure-challenged country.
Cambodia hosts a generally healthy gaming industry, though not nearly at the size being contemplated elsewhere.
South Korea’s gaming industry is thriving, but prohibitions on gambling by locals may keep it from growing very quickly.
But it’s the new jurisdictions that have gaming companies salivating because of the size of the markets.
Taiwan approved gaming earlier this year, with an eye to establish casinos on the Penghu Islands, where officials had long pleaded for help to revive tourism on the remote atolls. But residents of the islands had other ideas, and in October rejected gaming in Penghu County, shelving attempts at casinos for at least three years.
Attention has now shifted to the Kinmen and Matsu islands, which are located just off the Fujian Province, on the Chinese coast. But questions about infrastructure, potential Chinese customers and the ever-present referendum may derail those hopes as well.
Other gaming areas of Asia also are on the move. Casino development in Tinian is finally under way after legalization occurred almost 10 years ago, with one casino currently open. Some Okinawa officials are considering casinos, and it seems that Guam may-yet again-vote on gaming in upcoming elections.
The big prize in Asia has to be Japan. With millions of gamblers who seem to be content with pachinko and pachisuro parlors, Japan has been considering gaming for at least a decade as an economic generator. Now that Japan’s Democratic Party was voted into power in August, replacing the Liberal Democrats for the first time in decades, it would seem there is some will to move forward with gaming. But the Democratic Party is trying to consolidate its power so it can remain in office through the next election, so it’s unclear whether it will take on the risky issue of gaming anytime soon. Only time will tell.
3. Jump-Starting The Replacement Cycle
New Slot Sales Hold Promise For 2010
It already has begun.
By the beginning of this month, slot manufacturers reported an up-tick in sales. At last month’s Global Gaming Expo, the booths of most slot manufacturers were packed with a variety of innovative new games that was more extensive than we’ve seen for years.
The slot-makers all have ramped up their R&D in preparation for one giant trend on tap for 2010-the next slot replacement cycle.
“I don’t think the floors have ever been older than they are right now,” said Bally Technologies Slot Development VP Mike Mitchell last month, in an interview for GGB’s annual show issue. “The average age of slots on the casino floor domestically is greater than it has been for the past 10 or 15 years.”
Slot manufacturers agree that a huge replacement cycle is about to boost their business with sales spikes the like of which have not been seen since before the recession. To the existing floors that need to be renewed, we can add new properties coming on board in Ohio, West Virginia, Pennsylvania, Maryland and elsewhere as potential new sales centers.
As in the past, WMS President Orrin Edidin says that the replacement cycle will be driven, in part, by technology.
“Everyone agrees that the replacement cycle is artificially long,” he says. “In the past, we’ve seen technology advances artificially accelerate the replacement cycle, such as with the TITO technology, and that may happen again with server-based technology. But we expect that cycle to normalize over the next year or two. And to be realistic, the slot machine is the revenue engine for most casinos, and they understand they have to update that floor regularly to remain competitive and drive revenue.”
Without even considering the new server-based technology about to begin appearing on the slot floors, all the manufacturers are creating new game styles, from community games to multiple progressives to reel/video hybrids, with an eye toward repopulating a slot floor that has grown old from the absence of capital budgets at the major operators.
“We believe the there is pent-up demand for a refresh of casino floors,” says Eric Tom, executive vice president of sales and marketing for International Game Technology. “While it remains unclear when the reinvestment cycle will begin, we have been hard at work developing great new games and enhancing the DynamiX platform in anticipation of cap-ex budgets loosening up.”
4. Frank Talk
Prospects for Internet Gaming Legalization in the U.S.
One of the most devastating moments in the short history of online gaming was a clarification of the attitudes of the U.S. government several years ago.
Except for horse racing, online gaming in the U.S. has been in limbo ever since the Unlawful Internet Gambling Enforcement Act was passed in 2006. That unenviable piece of legislation-UIGEA was quietly inserted into a ports security bill in the dead of night and never presented for debate-threw the U.S. online gaming market into a legalistic swamp from which it is still awaiting extrication. The impact was felt far beyond the shores of the United States. Many internationally based online casinos, sports books, poker rooms and gaming companies folded or changed their shape forever, as a result of UIGEA.
As of mid-November, two bills directly dealing with online gaming were being studied by committees in the House of Representatives and one bill was in the Senate.
H.R. 2267 was introduced in the House by Rep. Barney Frank of Massachusetts in May. The bill would provide for online gaming licensing under jurisdiction of the Secretary of the Treasury. The bill was intended for presentation to the House for debate in October but was delayed by more pressing matters, including health care reform. The bill had 62 co-sponsors.
H.R. 2268, introduced at the same time as the previous bill, would amend the tax code to include regulation of online gaming. It was introduced by Rep. Jim McDermott of Washington, with Frank as one of four co-sponsors.
In the Senate, S. 1597 was introduced in August. This bill would provide for licensing of specifically online poker and other so-called skill games, again by the Secretary of the Treasury. The bill was introduced by Senator Robert Menendez of New Jersey, with no co-sponsors to date.
UIGEA deals with transferring funds between online gaming accounts and financial institutions and does not itself outlaw any particular form of gambling. Although its effects have been felt since passage, the law was scheduled to become fully operative on December 1.
In early October a bipartisan group of legislators requested a one one-year delay in implementing the full law, to allow time for the above-mentioned bills to pass.
Given the varied interests lobbying for and against online gaming, one year might not be enough.
5. Coming to America
European Slot Manufacturers Reach Out To New Markets In The Americas
European slot manufacturers already were looking to expand into new markets before the economic meltdown of the past two years. Slot-makers in Eastern Europe were looking to expand before the monumental events of last summer.
But last summer’s double-whammy market collapse has added urgency to the quest. European slot manufacturers had plenty of time to prepare for the closing of the Russian casino market on July 1. Few expected Russia’s new, middle-of-nowhere “gaming zones” to be anywhere near ready for casinos by the time the gaming halls were forced to close in Moscow, St. Petersburg and other highly populated areas.
Slot manufacturers such as Casino Technology, Euro Games Technology and others in Eastern Europe had contingencies in place to take games from the Russian market and place them in Serbia, Romania, Macedonia and elsewhere in the Balkan region.
Then came the closure of all slot venues in the Ukraine, a move that had been contemplated by the government there but that was implemented all at once after a fire at one slot parlor-to the surprise of many.
The closure of those two large markets in the East is accelerating expansion plans for European slot manufacturers, and more and more, those expansion plans are turning toward the Americas.
Companies like Novomatic, Casino Technology and EGT are likely to spread their presence in 2010 in the Americas, beginning with product placements in markets such as Peru, Argentina, Chile and Paraguay. European slot manufacturers also are likely to expand efforts to penetrate the market in the United States, where several have games before Gaming Laboratories International intended for California, Oklahoma and other Native American markets. (Novomatic already has games placed in Colorado.)
Finally, European slot-makers, as others, are watching the Americas closely for the opening of some huge new markets that rely on the progress of gaming legislation. The largest of these are Brazil and Mexico.
As casinos everywhere gear to renew their slot floors, and as the slot-supply sector becomes more crowded, 2010 becomes more and more interesting.
6. The State of the States
Economic Concerns Trump Moral Issues
The approval of gaming in Ohio (see page 6) was a surprise, since it took five times before voters realized that gaming could bring an economic boost unavailable by any other means. Whether the favorable tax rate and designated operators remain in place until the referendum becomes law is yet to be seen, but Ohio will clearly become a major mid-America jurisdiction, especially if the governor’s choice to add VLTs to racetracks also comes to pass.
The silver lining in any economic downturn in the United States is the hunt for more tax revenues in many jurisdictions. Where gaming is not legal, officials consider its implementation. And where it is legal, they often try to figure out ways to expand it-and take more tax revenue. That has certainly been true in the current economic environment.
It started with Maryland in 2008 as the state desperately tried to plug a billion-dollar-plus hole in the budget. Up to 15,000 machines were to be deployed throughout the state, but like all new jurisdictions, it has taken some time to be implemented. The state has only issued its first two licenses in the last two months. High tax rates and difficult siting issues ensure that deploying the full contingent of slots in Maryland is still years away.
Nevertheless, other states are considered to be on the cusp of gaming legalization.
Now surrounded by states where gaming is legal, Kentucky is likely to jump on board in the next couple of years. As the nation’s premier locale for race horse breeding, Kentucky will likely designate a portion of its revenues to the racing industry.
Massachusetts, tired of seeing its gaming patrons leave the state to gamble at Connecticut casinos, seems likely to approve large commercial casinos now that the political will is in place on Beacon Hill.
And New Hampshire has already set in place a commission to study gaming and a board to regulate it, so it appears that the effort will continue in earnest in 2010.
Texas rejected gaming at the end of the last legislative session, but economic conditions in the Lone Star State have only continued to worsen, especially in tourist-driven regions, so it’s likely gaming will be reconsidered next year.
Now that Florida has failed to come to agreement with the Seminole tribe on a compact, there are rumblings that legislators may allow voters to decide if commercial gaming should be legalized. If so, all bets are off for the tribal casinos and the racinos in the southern part of the state.
Table games have already been added to the mix in West Virginia and are soon to follow in Pennsylvania. Sports betting has proven to be something of a thorny issue in Delaware following a negative court decision, but the legal challenges to that ruling are not over.
Another Illinois casino is under way in Des Plaines, owned by Chicago billionaire Neil Bluhm, and the approval for video gaming in bars and restaurants only adds to the woes of the existing industry in the Land of Lincoln.
So while gaming is on the move in the U.S. as a result of the economic difficulties, the unrealistic expectations of politicians often impose incredibly high taxes, huge up-front fees and other conditions that keep gaming from reaching the potential jobs, infrastructure and tax revenues sought by those politicians.
7. Proving Ground
CityCenter To Be a Giant Test For Server-Based Gaming
For the past few years, research and development in the slot sector has invariably returned to one theme: Games must be ready for the move into the digital age.
Of course, the economy has held up the move to server-based gaming in some ways. Operators have not been able to convert entire slot floors over to Ethernet capability to create completely networked slot operations. Some manufacturers have been slower than others to invest in technology to make their games network-ready.
In other aspects, though, the economy has helped the move to digital gaming along. Major slot manufacturers have created smaller-scale solutions to show what networked floors can do, without requiring operators to do major retrofits. WMS Gaming has created games that are essentially miniature server-based gaming operations. Bally has demonstrated networked initiatives through its casino management systems and its “iVIEW” service window. IGT has created “sbX Tier One,” a complete server-based gaming system built for a small scale of 40-100 machines.
Meanwhile, all manufacturers have created new cabinet styles that will allow their game content to be easily switched out without switching out the actual boxes. Slot glass has disappeared, replaced by upper LCD video screens. Dynamic button panels have appeared.
In 2010, the industry will have a giant test bed for all the applications that are possible with a server-based floor. The Aria Resort & Casino at CityCenter opens this month with a fully Ethernet-equipped, server-based slot floor. The casino’s slot manager will have complete control of game downloads, instant tournaments, competitive applications and other new technologies via a full-blown IGT “sbX” system.
“Aria at CityCenter is the next-generation business model, providing incredible operator value,” says Eric Tom, IGT’s executive vice president of sales and marketing. “The operator can change his floor instantly to customize to who is in his casino, as well as communicate with those players like never before.”
WMS Gaming, a major IGT rival, has already signed on to provide applications and game content for the system. The two suppliers are hoping other slot manufacturers join in soon, to create a true image of interoperability in the digital slot floor.
The next year will take networked gaming from the theoretical to the practical stage. Everyone will be watching.
8. Chinese Intervention
Macau Growth Uncertain as Mainland Government Tinkers
When the gaming industry in Macau expanded exponentially over the years since China liberalized the gaming laws following the handover of Macau from Portugal in 1999, the Special Administrative Region has been seen as gaming’s hottest spot. But it was that super-heated growth that caused a backlash from the Chinese government in late 2008.
Since the core of Macau’s market is based in the neighboring Guangdong province, China began to regulate the number of times Guangdong residents could visit Macau, cutting it to once every two months from its previous once-a-month routine. This effectively slowed Macau growth, causing revenues to dip throughout the end of 2008 and through 2009.
A relaxation of the restrictions over the summer once again boosted Macau gaming revenues to record territory, and just last month the Chinese government again imposed the visa restrictions to cool the growth once more.
Ironically, this kind of intervention has been welcomed by the operators. Steve Wynn, chairman of Wynn Resorts, said the control of visitors was necessary to make sure the gaming industry in Macau remains healthy.
Also last month, Grant Bowie, the head of MGM Grand Macau, said basically the same thing. ??
“Macau has a very fortunate and experienced industry,” he told the Symposium on Responsible Gambling, at the University of Macau. “So we are in a much stronger position than anywhere else of the world. We should feel quite comfortable with that.”
Bowie believes that the casinos in Macau will be able to adjust.
“This territory is very flexible and dynamic,” said Bowie, “and we’ll be able to respond to this issue. It is a matter we can manage on a day-to-day basis. We will work positively to operate within the situation we have available to us.”
Complicating the control of growth are threats to the Macau market, principally from the debut of the two Singapore casinos in early 2010. With little competition at present for the cherished VIP market, Singapore could present a problem for Macau.
Although it is still unclear how Singapore is going to handle the VIP market, the sheer size of the integrated resorts being developed means that they must make a serious run at the SAR’s business to be economically viable. And with a tax rate-at around 9 percent-much lower than Macau’s 35 percent, the Singapore casinos should become serious players in the Asian gaming sweepstakes.
So for China to be able to manipulate the growth of Macau, it’s going to have to keep a firm eye on the throttle, while at the same time tapping the brakes whenever necessary.
9. Real or Imagined?
Billion-Dollar Mixed-Use Developments in Europe
For years, the standard industry narrative went that the super-sized, Las Vegas concept of a casino resort-while admittedly a lot of fun and fine for the United States-would never float in Europe. The theory seemed to find its proof in the aborted U.K. “super-casino” fiasco and the Harrah’s close-but-no-cigar attempt in Slovenia.
But in the past two years, a new crop of mega-projects that combine casino resorts with family-oriented, destination-style leisure centers has been sown in Hungary, Slovakia, Romania and of course Spain, with its ambitious Gran Scala effort. And from most reports, the projects seem to be moving forward in the areas of legislation, permits, partners and even financing. Even Harrah’s is back in the picture, partnering with a developer in Slovakia. And Hard Rock International will operate one of five casinos planned for Hungary’s EuroVegas.
The time could be ripe for such development. It has been 20 years since the fall of the Berlin Wall and a generation of young people in the former Eastern Bloc has come of age with casinos and other previously forbidden vices as part of the normal social fabric. To those for whom freedom means access to glitz and material excess, Las Vegas is the Promised Land. Now that this generation is grown and raising kids of their own, what better place to spend a family holiday or long weekend than at an all-weather Disney/Vegas resort?
In the West, where casinos have existed for many decades but were seen by the general public as dens of iniquity, Las Vegas has never been more than a guilty pleasure. But the relatively new concept of casino-as-entertainment-only about 30 years old in Europe-has even taken root in traditional casino jurisdictions like the U.K. and France. And with televised poker tournaments and gaming-via-computer bringing the casino into the European living room, the learning curve has been accelerated.
Given the background, combining casino gaming with an enhanced version of the European indoor waterpark, where families have vacationed for years, is not so far-fetched.
Expect more mixed-use projects across Europe as the investment climate improves.
10. The B2B Movement
The Merger of Online Operators and Land-based Casinos
While the online gaming industry remains shackled in the U.S., elsewhere in the world land-based casinos, state lottery organizations and even companies involved in non-gaming enterprises are busy making money with their own online gaming products.
Previously isolated properties like Malta’s Casino di Venezia have been able to overcome geography with an online offering that includes poker dealt by live dealers. Established casino operator Rank Group in the U.K. has blended its entertainment-oriented, land-based G Casino brand with an online casino product of the same name. Even monopolists like Casinos Austria and Sweden’s Svenska Spel, which operates the Cosmopol Casino group and the lottery there, have recognized the need to compete at the online level.
Major online operators like PartyGaming and 888 are moving increasingly into providing B2B service to any business looking to promote itself and generate income while doing so.
Dragonfish is the independent division within 888 responsible for B2B development. In the first nine months of 2009, operating income for the unit rose 32 percent, to $37 million, against the same period the previous year. Among major new clients is Tsogo Sun Gaming in South Africa, which operates seven casino resorts there, and casino giant Harrah’s, which is creating two products for the non-U.S. market. The B2B activity helped offset some of the 19 percent drop in 888’s B2C revenue, which dipped to $142 million.
In early 2009, PartyGaming completed an alliance with Spain-based CIRSA Gaming, which has land-based casinos, bingo halls, arcades and other activities in more than 70 countries. The two will develop online gaming in Spanish-speaking countries. PartyGaming has also picked up a client in U.K. broadcaster Channel 5, to create a branded bingo and casino site.
As gaming regulators become more comfortable with the medium, an online gaming product will become a standard component of the land-based casino.