The evolution of the casino industry has been going on since the first card was flipped and the first nickel dropped in a mechanical slot machine. In our annual “trends” feature, which we present every December to get readers ready for the new year, GGB presents a wide range of things that are going to be important factors in the success or failure of gaming endeavors in the next year and beyond. From online gaming to debt financing, saturation to internet sweepstakes, social media to regulatory reform, things are changing rapidly in the casino industry, and if you are not aware, or even more importantly, prepared for those changes, you will be left behind.
1. State of Internet Gaming
Lame-duck congressional session holds last hope for online poker in the U.S.
The results of the November elections didn’t really matter to online gaming advocates. While their eyes were on the time after the elections, it’s the lame-duck session immediately after the election that was of most interest to them. January seems far off when there is hope to muscle a bill through before Congress turns over.
But the odds are long and getting longer. Senate Majority Leader Harry Reid has made it a priority to pass a bill that would put his state, Nevada, in the driver’s seat for online gaming. But his feud with Republican Senator Dean Heller seemed to take some steam out of the effort. And even if Heller and Reid kiss and make up, and by some miracle are able to pass a bill, the House stands in the way. A Republican-dominated body, chances are slim and none it would move out of the way to approve such a bill.
So with the sun setting on the last best hope, and with champions Jon Kyl in the Senate and Barney Frank in the House retiring after this term, the legalization process already under way will continue and accelerate: state-by-state authorization of online gaming.
But herein lie the bumps in the road that caused major American gaming companies, politicians and regulators to favor the federal model. Just look at the first states that have taken steps to legalize either online gaming or just online poker.
Nevada has made the most progress. A year-long process of hearings, draft regulations and final rules was followed by an extensive investigative period that has resulted in the licensing of a handful of suppliers and operators. Not surprisingly, most of those licensees are Nevada companies that already have either operator or manufacturer ducats from the state. Nevada regs, however, only cover online poker, so the operators of bricks-and-mortar casinos are the likely players, including Michael Gaughan’s South Point casino and several other smaller players.
In Delaware, the state has legalized the full range of online casino games, including poker, slot machines, blackjack and other casino games. The legislation was designed to ease the impact on Delaware casinos of competition in Maryland, and revenues accrued by online gaming will allow the state to reduce fees paid by the casinos on real-life slots and tables.
“We went full-blown,” said state Rep. John Viola. “You want to go online and play craps, poker, slots, buy lottery tickets, Mega Millions, Powerball. You’re either in the game or out of the game. If you want to play, let’s play. I think we’re kind of on the forefront of internet gaming right now.”
The attitude in New Jersey has been the same. The state legislature has considered a bill legalizing the full slate of games. Online sports betting will remain illegal in both New Jersey and Delaware under the 2011 DOJ memorandum. A veto by Governor Chris Christie early in 2011 had legislators scrambling to address his concerns, but with the continuing decline of gaming revenues in Atlantic City, most observers believe Christie will approve a bill. State regulations have been drawn up, but not finalized.
California has seen efforts to pass an online poker bill fall by the wayside because of ongoing conflicts between tribes. Some see online gaming as inevitable and want to get in on the ground floor, while others see a threat to their land-based casinos and want to keep it illegal. There is some consensus now developing, however, and the legislature will once again consider an online measure in 2013.
Florida, Iowa and other gaming states are watching and taking note.
But the difficulties predicted by boosters of a federal bill allowing online poker are already emerging. Different regulations, varied standards for licensing and a variety of diverse games being offered threaten to limit any legal online gaming industry to the individual states. And that won’t work.
Nevada and Delaware do not have enough critical mass to create a serious online poker industry. There are simply not enough players to conduct viable online poker games. Maybe there will be a few slot and blackjack players in Delaware, but certainly not enough to hit the state’s target of over $7 million annually.
So the answer for the states is to form alliances and joint ventures where they share their players. But will California really share its immense player base with tiny Nevada? What’s in it for the Golden State? Maybe New Jersey and Delaware will join forces, but what happens when Maryland and Pennsylvania get into the game?
And then there’s the 10th amendment to the Constitution that says Congress must approve interstate compacts. While this is a little-known clause that often is ignored when it comes to electric grids and the like, a controversial matter like online gaming could spark the interest of conservative congressmen.
So, 2013 will be a watershed year for the legalization of online gaming/poker in the United States—a year that will blaze the path for the next decade.
2. How Much Is Too Much?
Saturation concerns in the Northeast, Midwest and Mid-Atlantic states
The November 6 passage of the referendum to add a sixth state-licensed casino in Maryland after a bitter campaign has implications far beyond the alleged “back-room deal” Penn National Gaming executives claim has virtually pre-approved a massive casino resort at the National Harbor development on the Potomac River across from Washington, D.C.
Much of the opposition to the new casino related to just how much net revenue the state will gain. Maryland Live!, the $500 million, 4,750-machine casino that is currently the largest in the state, just opened in June. Located in the Baltimore suburb of Hanover, Maryland Live! is only a half-hour’s drive from National Harbor.
Some estimates have a National Harbor casino siphoning as much as 40 percent of Maryland Live!’s business, and that does not even consider the fact that Horseshoe Baltimore will open less than 10 miles away with yet another large casino within the next two years.
Critics say National Harbor’s proposed mega-casino will saturate the Maryland market, with three major casinos in the Baltimore-Washington corridor, and others—notably Penn’s own Charleston, West Virginia casino and Hollywood Perryville in northern Maryland, already stung by competition from Maryland Live!—in the immediate region. Proponents say the Baltimore-Washington tri-state area, including Northern Virginia, where there are no current casinos, is a huge market that can sustain those three casinos and more.
It is an argument sure to replay itself in several areas of the U.S. in 2013. There was a time when a new casino was sure to be successful simply because it was a new casino. However, as casino gaming has spread across the U.S., the fact that available leisure spending is finite has become painfully clear.
There are some regions in which this is amplified. As Atlantic City operators know all too well, the Northeast is the epicenter of saturation. The seashore town’s one-time monopoly is now a crowd of jurisdictions headed up by former feeder markets Pennsylvania and New York. This year, the trend continues with new casinos in Massachusetts, and with potential gaming at the Meadowlands in North Jersey not out of the question.
The increasingly crowded Maryland market will battle with new sports betting and video keno venues in Delaware. In the Midwest, Ohio will have four urban casinos in 2013, as well as slots at racetracks strategically placed to capture business from surrounding current markets.
That young Ohio industry, in turn, could face significant new competition from Kentucky, as Governor Stephen Beshear pushes for expansion of gaming. Beshear recently appointed state Senate President David Williams—the main opponent and roadblock to expansion in the legislature—as a judge in the 40th Circuit Court, a move expected to pave the way for racetrack slots and full-blown casinos.
Finally, Pennsylvania, which has been arguably the healthiest market in gaming throughout the recession, is facing saturation concerns of its own. The state Gaming Control Board held last summer that the second gaming license originally designated for the city of Philadelphia, stripped in December 2010 from Foxwoods Philadelphia, must remain in the city. There are several high-profile projects in the running for that license.
A second large city casino would bring to six the number of gaming venues in the Philadelphia metropolitan area. It would join SugarHouse in the city, along with the successful Parx racino in nearby Bensalem; Harrah’s Philadelphia in Chester, six miles south of the city; the Valley Forge Casino Resort in King of Prussia, a Philadelphia suburb; and the Delaware Park racino, less than 30 miles down I-95 in Delaware.
These casinos are joined by others within easy driving distance, including Mohegan Sun at Pocono Downs and Mount Airy Resort in the Pocono Mountains resort region. Two hours away are Sands Bethlehem and Hollywood Casino at Penn National outside Harrisburg. In Western Pennsylvania, the last racetrack casino, Valley View Downs, may finally move toward construction this year.
As with the other markets, there are mixed opinions on Pennsylvania saturation. Some still view the massive Philadelphia region as untapped potential that will draw new players from central New Jersey without harming existing operators. Others feel the time is near when operators on the eastern side of the state will begin cannibalizing each other’s revenues.
As with the other markets, the actual numbers will tell the tale.
3. Why Macau Matters
Mixed messages from SAR government confuse gaming industry
Adding Macau to a list of trends for the next year might be one of those “duh” moments, but the events at the end of 2012 have truly made people once again sit up and take notice of what’s happening in the Special Administrative Region.
October’s approval of both MGM China and SJM for Cotai land concessions is just one of the “say one thing, do another” moments that has assailed the Macau government over the last year.
In February, Lands and Public Works Bureau director Jaime Carion told reporters that only two companies would receive land concessions for Cotai developments in 2012. When the Wynn concession was confirmed in May, the positioning for the second concession became intense. MGM China and SJM were the two competitors, and both issued confident public statements that they would be chosen. So when the Macau government announced that MGM had been granted its concession in mid-October, it was a shock to learn the next day that SJM had also been included.
So, what at one time seemed to be carefully crafted control of the gaming growth in Macau has suddenly become a free-for-all. In addition to Wynn, MGM and SJM, Melco Crown has obtained majority ownership in Macau Studio City and expects to resume construction there at any time, while navigating a similar Macau flip-flop where transport and public works secretary Lau Si Lo said a casino was not included in the project, but later Chief Executive Fernando Chui contradicted him.
Let’s not forget that Galaxy Entertainment has already been approved for Phase II of its Cotai development, which is already under way—more hotel rooms and another casino. And Sands China, just finishing up its fourth Macau development, Sands Cotai Central, expects to be approved for the $2 billion Parisian resort very soon, apparently mollified with the loss of parcels 7 and 8 by the approvals for the France-themed property.
So where does this leave the table-game cap that the government outlined this year that would limit growth to 10 percent annually for the next 10 years? The current cap of 5,500 games would indicate that approximately 550 would be approved next year, with small increases each subsequent year. So what happens in the 2016-17 time frame when many of these casinos will be opening? The government has indicated that it would be flexible with the total number of games over the 10 years of the cap, but how flexible? That’s a lot of floor space.
But before we even get to the tables, the casinos have to be built. And with the government’s strict control of foreign construction workers, it seems unlikely that there would be enough workers to complete all of these projects in the time frame they are expecting. Will there be some relaxation of the foreign workers limit? Or will it be a wink and a nod, with the casino companies taking the risk to bring in enough workers to stay on schedule?
Overriding the potential development are concerns about the leadership of the People’s Republic of China. While the country always tries to project an orderly transition of power, veteran China-watchers are confused by the national government’s current plans, with some purges under way or expected. Some experts contend that Macau government officials and casino executives want to get the development pipeline built and structured before new leadership can take over in Beijing and turn its attention to the super-heated Macau growth. Recall, a significant slowdown occurred in the Macau market in in 2009 when the Chinese government reduced the number of visas visitors could receive on an annual basis. When those restrictions were relaxed, the gaming economy boomed, which continues to this day.
And what about the reported slowdown of the Chinese economy? Should the growth of the Chinese middle class be suppressed, what effect would this have on Macau’s pursuit of the mass market? It is this economic growth and expansion of more wealthy Chinese that has fueled Macau’s growth over the past decade, and the mass market will surely grow by an expansion of the Chinese middle class.
Most likely, the Macau government will use a combination of all the above factors that will help to stagger the openings of all the developments in the Cotai pipeline. The government could limit the number of construction workers available to any one project, thereby limiting its ability to proceed on schedule. Or the government could delay the granting of a specific number of table games, which would cause financing to lag, thereby slowing development.
So while it might seem a no-brainer to add Macau to a list of trends for 2013, there are some very serious issues that the Macau government must clarify in the new year. That’s why Macau will remain a focal point of the gaming industry for 2013 and beyond.
4. The Sweepstakes Problem
The gaming industry begins to recognize the threat from internet sweepstakes cafés
They’ve been around for years—internet “sweepstakes cafés” that double as mini-casinos. An ostensible mom-and-pop business in a strip mall will offer computers with internet access, but will sell phone cards with prepaid minutes, which are also loaded with “points.” Those points can be used to log onto on-site computers to play online slots, keno or poker, with the final point total redeemed for gift cards, prizes or, with a wink, cash.
Internet sweepstakes cafés have proliferated in states like Florida, with mixed enforcement efforts by county and local municipalities. Lately, though, the trend has grown in other Eastern and Midwestern states. According to the American Gaming Association, Florida has more than 1,000 internet sweepstakes cafés, with states like Ohio and North Carolina hosting booming markets of their own. The AGA estimates that more than two dozen states contain the sweepstakes cafés, with Bloomberg Business Week estimating national revenue exceeding $10 billion in 2011.
A few states, like Pennsylvania, have passed laws specifically outlawing the cafés as illegal and unregulated gambling. Elsewhere, legality of the businesses wavers back and forth in a grey area.
The AGA’s position is that the establishments, carrying names like “Jackpot Cyber Center” or “Jackpot Café,” are essentially small casinos operating completely without revenue taxes, gaming regulations or safeguards to ensure the integrity of the games. “According to the cafés that are reaping unregulated profits, this elaborate masquerade is not gambling, but a sweepstakes,” reads the AGA’s white paper on the internet sweepstakes phenomenon. “According to every appellate court that has decided a case involving similar games, it is incontestably gambling.”
(The AGA’s white paper on the internet sweepstakes phenomenon is now available on the organization’s website, www.americangaming.org.)
“Cafés siphon gambling revenue from state lotteries and state-licensed gambling businesses such as commercial casinos and racetracks, thereby reducing the funds that go to public education, health and social programs,” reads the white paper. “Yet cafés pay no gaming taxes whatever. Cafés need not exclude underage gamblers, nor are they required to give their customers information about compulsive gambling counseling options.”
The white paper also outlines legislation and enforcement efforts that have already taken place, and legal arguments against it under various state laws. It is being sent to state lawmakers and gaming regulators across the country.
It remains to be seen whether the internet sweepstakes trend continues to grow in 2013, or whether a turnaround can be achieved by the efforts of AGA, state lawmakers and law enforcement. “Some local law enforcers have made it a priority to shut down the internet sweepstakes cafés, while others have not,” reads the AGA white paper. In places where the law has been enforced, there are setbacks on the judicial side—one Ohio judge ruled that “the business activity is not gambling” in the case of internet cafés shut down in Cleveland.
Subsequent lawsuits and appeals in that case are ongoing, but the overall legal battle does not appear to be headed to a swift conclusion in Ohio or any other state. The new trend to watch will be how the proliferation of the cafés—there are already lobbying groups representing the owners—keeps pace with the efforts to stop them.
5. Web of Influence
Digital marketing and social media get the gaming message out
When you can touch your customer on a daily basis, everything is right with your business world. And that’s the opportunity that digital marketing presents to casino executives. Whether it’s Twitter, Facebook, YouTube or Flickr, or some of the up-and-coming sites like Pintrest, Instagram or Tumbler, casinos can now stay in contact with their customers 24/7. But the challenge is how to do it without becoming intrusive or annoying.
Web-based technologies are helping bricks-and-mortar casinos boost income by allowing them to engage with customers near and far on an instantaneous, moment-to-moment basis. Sophisticated digital marketing systems are now part of the infrastructure of the world’s casino companies, enabling them to keep loyalty-club members apprised of special deals, discounts and entertainment at multiple properties.
Caesars Entertainment, for example, promotes its products, services and events across 60 online and mobile websites. A hilarious promotional push by Jimmy Kimmel, which aired in March, featured the late-night TV host talking up Caesars’ Total Rewards to tattooed prisoners in the big house.
“The more you use the card, the more you earn—it’s practically like stealing. You guys like stealing, right?” said Kimmel. And Total Rewards, he murmured to a burly inmate from behind bulletproof glass, might let the guy get front-row seats to Celine Dion in Vegas—if he ever got out.
Digital capabilities also have led to unusual alliances. In March, Caesars expanded its loyalty program to allow users to also receive rewards by shopping at some 500 U.S. retailers including Best Buy, Target, Apple and 1-800-FLOWERS. MGM Resorts International has reached marketing agreements with such companies as Royal Caribbean, Avis car rentals and SLS Hotels.
MGM Resorts was also lauded for digital marketing excellence at the Internet Marketing Association awards in September, winning in the Facebook, Twitter, YouTube and website categories. Among the smart marketing features used by MGM: a joint campaign for Mandalay Bay, Luxor, Excalibur and New York-New York called “The Neighborhood;” social media sweepstakes that let patrons win tickets to big events; and an Aria app that notifies poker players via text message when their live game seat becomes available.
GGB’s Sherpie Social Media Awards, announced in October and administered by Masterminds, demonstrated the creativity and innovation necessary to make the successful connection digitally to customers. The winners demonstrated that successful digital campaigns include wit, humor and personality, combined with prizes, up-to-the-minute information and two-way communication that makes the customers feel like they are part of the equation.
For all the sophistication of digital marketing and its capacity to deliver news and information almost as it happens, at least one marketing director recently griped about its limitations. Rom Hendler, chief marketing officer for Las Vegas Sands Corp., told Ad Age that he’s still working to employ better data-tracking technology at the company’s properties in Las Vegas, Pennsylvania, Macau and Singapore. His goal: to track consumer marketing programs as efficiently as Amazon, which has famously mined consumer data to both serve its customers and stoke revenues. “I want to understand every customer, track spending and calculate profitability,” Hendler said. “The technology isn’t as strong as I would like it to be.”
Give it a minute, Rom.
6. Climbing the Mountain
For many companies and tribes, management of debt will be crucial
It seems like another age, but it was just a few years ago that casino companies were caught up in the mentality of the development boom, and investors were awash with money.
The result was a combination of real estate development bubble and leveraged buyouts that burst into the worst financial crisis of our times, and mountains of debt held by companies.
Those mountains of debt are still there, whether it’s the $20 billion-plus that Caesars owes in part thanks to its leveraged buyout, or the $13 billion-plus that MGM Resorts owes in part thanks to developments like the $9 billion CityCenter.
The result for both companies has been red ink on the bottom line that continues to this day.
Nor were they alone. Las Vegas Sands came close to disappearing. Wynn Resorts built a literal Encore to its Wynn Las Vegas and saw $2 billion in investment create no value.
WYNN and LVS, however, have more than recovered, in large part thanks to their huge successes in Asia, and for WYNN because it didn’t over-borrow.
The boom-then-bust also resulted in numerous ownership changes as bankrupt properties went into the hands of lenders, a process still occurring as witnessed by the just-completed purchase of LVH, the former Las Vegas Hilton, by Gramercy Capital and Goldman Sachs Mortgage Co.
But there are other phenomena happening as companies have emerged from the other side, and they spell opportunity for investors.
A number of companies are now in position to dramatically pay down debt, and in the process reward shareholders with dividends, while putting themselves in position to invest in growth.
This case was most powerfully outlined a few months ago by Goldman Sachs analyst Steve Kent.
Las Vegas Sands and Wynn Resorts could change the way investors think of casino stocks, given their potential cash flow generation that could go to share repurchases and dividends, Kent said.
Historically, casino operators have aggressively invested excess cash in new properties and upgrading existing ones, resulting in capital expenditures of 16-30 percent of revenues over the past decade, Kent noted.
But WYNN and LVS are in position to change investor perceptions and become growth and income stories, Kent said.
LVS, for example, will have $975 million left over this year after paying $826 million in dividends and $1.418 billion in capital expenditures. But by 2020, that could grow to $4.385 billion.
Plus, its leverage ratio, which peaked at nine times in 2007, will disappear by 2014.
Wynn should have $777 million excess cash flow this year, rising to $2.522 billion and a leverage ratio around one time by 2014.
Kent made his calculations before third quarter earnings were released, so those numbers would be tweaked now. But his thesis was confirmed when WYNN released its third quarter results. The company declared an $8-a-share special dividend and doubled its annual regular dividend to $4 a share.
Further, WYNN intends to continue growing dividends as profit grows, and as long as dividends have favorable tax rates, CEO Steve Wynn said.
LVS CEO Sheldon Adelson said the same.
The potential for strong balance sheets extends to others, such as MGM Resorts.
Having survived the financial crisis by several years of negotiating various arrangements with lenders, MGM now has the opportunity to refinance debt over the next two years at savings that some say could reach $140 million a year.
Further, it has some of the same dynamics that Kent outlined for WYNN and LVS.
Felicia Hendrix of Barclays Capital estimates that when MGM opens its casino in the Cotai section of Macau in 2016, it can generate $638 million in EBITDA to add to the company’s expected $732 million.
And, between 2013 and 2022, MGM China can generate $8.1 billion in dividends, of which $4.1 billion could go to the parent company.
That is a lot of money for debt reduction, thus even more interest savings, or for expansion to further increase cash flows.
The current conservatism about debt has brought about other changes. The most notable is that no new multibillion-dollar projects have been built in the U.S. in recent years.
Projects today are either more modest, or more focused. Caesars in Las Vegas, for example, is building a $550 million dining and entertainment complex called the Linq along the Las Vegas Strip.
The project, which includes rebranding and remodeling some surrounding properties, promises to generate a high return without high risks.
Caesars also is a leader in another trend—partnerships.
Caesars’ casino projects in Ohio, Maryland and, prospectively, Massachusetts, all involve partners. In the case of Massachusetts, Caesars will own as little as 20 percent of the $1 billion casino planned in Boston. Suffolk Downs will own the rest.
There also is what hoteliers call the asset light model. In these cases, other investors take on the risk of financing and owning a project while companies like MGM lend their brands, reservation systems, player loyalty programs and other support, and sometimes manage non-gaming properties.
Such arrangements mean earning less money per project, but they also mean no borrowing, resulting in high profit margins and, important today, no debt.
—Frank Fantini, Managing Editor, The Fantini Report
7. It’s a Gamble
Are non-gaming amenities worth the investment?
With increased competition for the gaming dollars in almost every region of the world, casinos need amenities that set them apart from their rivals. Sometimes that can be a larger casino or private gaming parlor. But more often than not, it has nothing to do with gaming. Restaurants, spas, golf courses, shopping, entertainment, special events… casinos have learned what their customers respond to, and they deliver.
But opinions differ on whether casinos should chase the non-gambler—customers who enjoy the amenities but don’t gamble substantially. One school of thought says that if a customers is willing to buy those non-gaming amenities at market price, the casinos should be happy to sell them.
The opposing view is that the casino business model is designed for gamblers. Amenities should only be developed for the enjoyment of those core gamblers, and attempting to attract non-gamblers distracts casino marketers from their primary function, building gaming revenue.
At last year’s RD&E Conference—Retail, Dining and Entertainment in the Gaming and Hospitality Industry in May—a showdown of marketing experts took both sides of the argument.
Randy Fine, the managing director of the Fine Point Group, was of the opinion that if a customer is available, casinos should not discriminate between a gambler and non-gambler.
“A good casino marketer will consider the value of every customer and reward them accordingly,” said Fine. “What’s the difference if you make money on them in a restaurant or at the gaming table?”
A big difference, according to marketing guru Mike Meczka, president of MM/R/C Inc.
“The profit you make on a concert ticket or a restaurant meal is infinitesimal compared to the profit you make from gaming,” he says. “These properties are built around the concept of gambling and are engines for gaming profit, so you are not using them to the highest purpose when you try to attract the non-gambler.”
Whatever your viewpoint, casinos are expanding the non-gaming amenities into areas previously not considered. Food events—wine festivals, food truck carnivals, ethnic celebrations—are popular special events that are almost guaranteed to bring in new customers.
Special entertainment options like featuring stars of reality TV shows, hot authors or professional poker players, mixed with meet-and-greets, have become another trend.
While the celebrity chef is old news, partnerships with popular local restaurants are becoming fashionable. The Hash House A Go Go in Las Vegas, the White House Sub Shop in Atlantic City, and Chickie’s & Pete’s in Philadelphia have all established venues within casinos to extend their brands and attract their regular customers.
So now that everyone has gambling, are the non-gaming amenities the way to set yourself apart from other casinos? The answer clearly is yes. What is still to be determined, however, is how to operate those amenities to the best and most profitable purpose.
8. Adjusting the Focus
How the role of surveillance is changing in the modern casino
During the final debate of this year’s presidential election, candidate Mitt Romney attempted to fire a shot across the bow by revealing that the U.S. Navy has fewer ships now than it did in 1916. But the shot backfired when Barack Obama delivered a rare gotcha moment and responded with, “We also have fewer horses and bayonets.” The president then went on to add, “The question is not a game of battleships where we’re counting ships—it’s what are our capabilities?”
One of the biggest misconceptions (or a cleverly crafted perception) is that when it comes to casinos, everything is being watched. The truth is that while most stuff is being recorded, hardly anything is being watched in surveillance anymore. In an average-sized casino, there maybe two or three people responsible for monitoring up to a 1,000 cameras a shift. That’s less than 0.3 percent of cameras being monitored.
So why even have surveillance people? Well, interesting enough over the last decade, surveillance people once focused primarily on game protection have become every manager’s friend (or foe?). Surveillance is increasingly being relied upon to investigate customer claims of wrongdoing or to help assist managers with employee issues.
The expanded role of surveillance has provided much added value to the organization as a management tool. But has it come at a price? The bean counters would probably say no. It hasn’t cost the organization a dime. The biggest cost of running a surveillance operation is labor, and we didn’t add one FTE. However, most surveillance managers would probably say the cost has been time—time that could have been spent preventing or detecting activity that potentially costs the organization big moolah.
Moving forward, the question and challenge for surveillance managers is: How do you balance the increasing needs of your organization with what you’ve got, while at the same time keeping your eye on the prize? The answer is better organization.
New-age surveillance managers around the world are moving away from the traditional approach of running a monitor room. Surveillance is taking a more risk-based approach and dividing the department into specialist teams focused on what management has carefully assessed as the actual real threats to the business today.
Surveillance employees are being assigned the responsibility along with the job title, description and specialized training to focus on specific areas where revenue streams and fraudulent activity is on the increase, such as the bars, restaurants, retail stores and player club operations. The casino operation has not been forgotten. In fact, the focus has been broken down to specific areas such as table games, slots and finance areas. This approach is a departure from the old-school way of putting people with limited training in front of a TV screen and hoping they would see something, or what I call the “Baywatch tower” approach.
The idea started in the Asia-Pacific market and is slowly catching on in the U.S. Born primarily because of the sheer volume of gambling in the region and the need for prioritizing resources more effectively, the new surveillance organization structure makes sense for the U.S. market because of the evolution of the traditional casino into a fully integrated resort. Casinos are now much more than gambling houses. Although game protection is essential, general revenue protection is the bigger sombrero now being worn by surveillance.
The benefits of specialization are numerous. A casino surveillance operation on the Las Vegas Strip recently introduced a specialized gaming intelligence unit to focus on special projects. In their first three months, they identified areas of improvement that could save the company hundreds of thousands of dollars a year. By focusing on the big picture instead of just picking the low-hanging fruit, they continue to identify ways in which the company can improve its business and bottom line.
—Willy Allison, President, World Game Protection
9. Tribal Trust
Obama’s win means more progress toward off-reservation casinos
The re-election victory by President Barack Obama ensures the Department of Interior will continue to facilitate efforts by American Indian tribes to reacquire and place in trust status ancestral lands lost over generations of failed federal paternalistic policies.
But it’s not likely much of the newly acquired lands will be for gambling, as pending applications at Interior for new lands for casinos have shrunk to 14. California remains the battleground state for off-reservation gambling with four of the applications.
It’s also unlikely tribes will get Congress to legislatively “fix” a 2009 U.S. Supreme Court ruling that has hindered Interior efforts to place lands in trust for Indian tribes not “under federal jurisdiction” with passage of the Indian Reorganization Act of 1934.
“I think the chances are minimal that it happens this year,” says Paul Moorehead, a government affairs expert with Drinker Biddle and Reath LLP.
A handful of senators oppose a congressional remedy to the court ruling in Carcieri v Salazar without amending the Indian Gaming Regulatory Act to limit new casinos off existing reservations. Many tribes are opposed to amending IGRA.
After an unofficial moratorium on land/trust applications under the Bush Administration, Interior in the last three-plus years has been credited with working around Carcieri limitations to process 952 applications involving nearly 180,000 acres. Only 11 applications involved casinos.
“In terms of land into trust the Obama administration has made good strides,” Moorehead says. “Under Bush there was a problem with not only with the delay in the process, but getting them to make a decision.
“They did make some decisions that were favorable. But just getting a decision for many tribes was the problem.”
Newly appointed Assistant Secretary for Indian affairs Kevin Washburn said he generally supports Interior policy on placing land in trust, for gaming or otherwise.
“I think I’m mostly comfortable with the policy decisions the department has taken in this area,” Washburn told GamblingCompliance.com. “I don’t think you will see dramatic changes.”
Off-reservation tribal gambling expansion was fueled by pre-2008 investors and exceptions to IGRA statutory prohibitions against post-1988 casinos, primarily newly recognized and restored tribes and tribes acquiring new lands through congressional actions or land claims.
The economic downturn and market saturation has diminished off-reservation gambling proposals, although debt-plagued states, counties and municipalities have encouraged newly recognized and restored tribes to establish casinos in an effort to generate tax revenues and jobs.
“When the economy was great and people had money flowing around, they could throw a million at something and say, ‘Hey, if it hits I’m going to make $50 million. If it doesn’t I’ll be out a million, but I’ll write that off,’” says John Tahsuda, principal of Navigators Global, a Capitol Hill consulting firm. “That was the kind of money backing these deals. To a large degree that money has disappeared.”
There are 14 applications with Interior from tribes seeking to place land in trust for casinos, down from a high of nearly 40 in the early months of the Obama administration.
“A large number of those have been resolved,” Tahsuda says.
Off-reservation gambling, however, will likely remain a hotly contested issue in California, which has the largest number of federally recognized tribes (109) and the largest statewide gambling market, with 61 tribal casinos generating some $7 billion in annual revenues.
The issue erupted last summer, when Governor Jerry Brown upheld Interior’s decision to place newly acquired land in trust for casino projects by both the Enterprise and North Fork rancherias. Both projects were 36 miles from the tribal headquarters.
The casinos were opposed by California Senator Dianne Feinstein and Cheryl Schmit, who predicted the decisions would lead to other tribes establishing casinos off existing reservations.
A number of tribal governments also opposed the rulings, contending they created unfair competition and violated a tacit promise made in a 1999 constitutional amendment ballot initiative that Indian gaming would be limited to existing trust lands.
“If these actually go through and get built, this could kick open the door big-time for more casinos everywhere. The Bay Area would not be safe; nowhere would,” Schmit told the San Francisco Chronicle.
Those familiar with the process contend Schmit’s fears are unfounded.
The four pending land/trust applications in California are vastly different from North Fork and Enterprise.
Los Coyotes is seeking to establish a casino in Barstow, more than 100 miles from its San Diego County reservation. The Soboba Indians are seeking to annex land adjacent to their San Jacinto reservation. The Manzanita Tribe wants to build a casino in Calexico, and Cloverdale Rancheria is seeking to develop a casino in nearby Cloverdale.
Federal law requires Interior to consider off-reservation land/trust applications, which are often successful if projects are deemed not to be detrimental to local communities and approved by the governor.
“Under IGRA it is left to the governor to make those decisions in respect to the state’s policy,” says Bryan Newland, counsel to Interior’s assistant secretary of Indian affairs.
Jacob Appelsmith, consultant on Indian issues to Brown, says the administration will not continue the Schwarzenegger policy of seeking tribal revenue to alleviate a budget deficit.
“The governor and I have said, for several years now, we believe the best policy for tribal gaming revenue is that the primary beneficiary would be the tribes, but the beneficiary along with them should really be local people,” Appelsmith says. “That’s the counties. That’s the cities.”
10. Letter of the Law
Regulatory reform continues to have a positive impact on the gaming industry
A case can be made that the success of the modern gaming industry can be directly tied to effective regulation. The expansion of the industry beyond Nevada was only possible once that state proved that gaming could be conducted in a safe and transparent environment. The rigid regulations imposed in New Jersey cemented that fact, but also served to strap a squeaky-clean industry with unnecessary burdens.
That was an acceptable encumbrance when times were good, but when the economy went south for the gaming industry starting in 2007, the weight of unneeded regulations threatened to sink the industry in some states and jurisdictions.
Reactions from regulators were swift and encouraging. In Nevada, costs were reduced without impacting integrity. The state technology lab has been replaced by private labs that provide quicker and more efficient service. In New Jersey, a total revamp of the regulatory structure eliminated most functions of the Casino Control Commission and moved them to the Division of Gaming Enforcement. The CCC is now used primarily as a licensing body. Atlantic City casino executives are effusive with praise about the improvements in the system. Other jurisdictions have had similar experiences.
In the meantime, a regulatory reform task force established by the American Gaming Association has been working with regulators, operators and suppliers.
Dick Haddrill, the chairman of the AGA, as well as the CEO of Bally Technologies, says his company spent almost $20 million in compliance last year.
“This, of course, is money well spent if it protects the integrity of our business, and the vast majority of gaming regulations are necessary ones that do just that,” he says. “But regulators and operators agree there are some outdated regulations that have become unnecessary and are onerous for all.”
AGA President Frank Fahrenkopf explained why regulatory reform is so important in introducing the AGA’s program earlier this year.
“From changes in the way games are played, where they are played and how payments are made, to the new technologies that make business operations and communications more efficient, these advancements and changes have and will continue to require new or updated regulations,” Fahrenkopf said. “The AGA looks forward to working with regulators and operators to draft improvements we can all agree on.”
At last year’s G2E, the AGA released a white paper that contained 10 recommendations to states considering regulatory reform. Just some of those points included an indeterminate term license or at least a minimum of five years, the extension of universal license applications, license waivers for investors of less than 25 percent ownership of gaming companies, elimination of unnecessary regulatory filings, elimination of minimum internal control standards and others.
The report concluded, “A healthy, vibrant gaming industry requires a healthy, technologically savvy regulatory sector. Because gaming regulation is so extensive and costly, it is essential that it be evaluated constantly to ensure that it is not deadening initiative or loading unnecessary costs on the industry, which must compete for customer dollars against a broad range of entertainment options (movies, live performances, restaurants, etc.) that face much less regulation.”
11. Turning the Tables
Why the convergence of slots and tables will advance the casino
The dominance of slot machines in the U.S., Australia and elsewhere in the 1980s and ’90s turns out to be an anomaly. Slot machines themselves were long considered mere amenities to keep the wives of the high-rolling table game players busy while their husbands were playing in the early days of legal casinos.
The return of tables in the U.S. began ironically with the younger generation. When the Hard Rock casino in Las Vegas opened in 1995, owner Peter Morton added many more slot machines than he did tables, reasoning that the video game generation would be more interested in the flashy new slots than in stodgy table games. It turned out that the video-game generation liked the personal interaction they found at the table games.
Of course, table games never were diminished in Asia, where they always have been the dominant form of gaming, and most likely always will be. The vast expanse of tables at every Macau casino relegates slots to smaller segments of the casino floor.
And here’s where it gets interesting.
Like in the U.S., when slot parlors were introduced at racetracks and parimutuels, operators in Macau are now using electronic table games to get around a table-game cap imposed by SAR regulators. The limitation on live tables has encouraged operators to install the electronic baccarat, blackjack and roulette to serve customers who either can’t find seats at the tables or can’t afford the high limits that most tables in Macau feature.
An interesting thing has happened, however. Players seem to like the electronic versions of the game, sometimes called electronic gaming machines (EGM). There are very few racino or slot parlor jurisdictions that have not approved tables these days. And upon legalization, while there necessarily has been a replacement of electronic table games by the live games, not all of them have disappeared.
Players of electronic table games seem to enjoy them because they are generally free from the intimidation factor you find at live table games. If they are beginner players, they can learn the games without the comments or dirty looks from fellow players. And that lower limit is another factor that keeps them coming back to the EGMs.
But EGMs aren’t the only thing driving the increase in interest for table games. New technology is making the games more eye-catching and more “slot-like” with scoreboards, bonuses and exotic variants of traditional games. As was always the case, however, these kinds of games have to deliver more revenue than the traditional games can offer.
Operators seem to have abandoned hope to convert slot machine players to table players or vice versa. There is an ongoing realization that these players are devoted to their favorite games and that moving them from one to another isn’t necessarily desirable.
So increased efforts are being made to expand the appeal of table games, but few casinos are opting to give the players better odds. The exotic variants of the games actually add to the house edge, so efforts to institute better rules for the players have not taken hold.
The spread of “Strip” rules in blackjack is not helping. Colorado casinos recently asked for approval to offer the 6-5 blackjack payoff now common on the Strip. And most casinos now hit soft 17s, further eroding the players’ chances.
But even with mostly unfavorable rules, the tables are growing and their attraction continues to expand as more EGMs bring more players into the fold.
12. Tech Marches On
Technological trends highlight the merger of slots and systems
Technology trends come and go, but for 2013, one in particular stands out as the most fast-growing: the merger of systems and slot machines on the casino floor.
The trend first manifested itself through networked bonusing offered through the system products of major slot manufacturers, notably Bally Technologies and International Game Technology.
This year, Bally will continue to roll out the second “Virtual Racing” product available for its networked iVIEW Display Manager system and Elite Bonusing Suite of networked loyalty reward games. Virtual Racing NASCAR is an enterprise-wide bonus system that allows players who qualify by earning a certain number of points to pick from eight famous NASCAR drivers for a race played out on picture-in-picture video either on the face of the slot monitor or a service window. Those picking the winning car split a cash prize.
Bally will continue to combine enterprise-wide events like these with individualized bonuses sent as loyalty rewards to players.
IGT’s Advantage system contains networked bonusing events of its own, like “Game Pulse,” which uses a player’s historical play data to suggest new games when the player inserts a card in one game (a variation on the Amazon “If you ordered this, you may like this” suggestions). “Team Challenge” allows the operator to split carded players on the floor into teams for an impromptu competition—a side game chosen by the casino, involving card-cutting, video bowling or any variety of other games—with bonuses to the winning “team.”
“Auction Auction” allows the operator to offer merchandise prizes on which players can “bid” using their club points, as a side game right at the machine. “Tournament Manager” automates the classic tournament. Any number of other random bonusing events can be designed by the operator.
Konami Gaming is unveiling an entire suite of loyalty-based bonus games of its own, through the new “Synkros” improvement on the Konami Casino Management System. Included in the new Synkros system are loyalty-based awards ranging from individualized games to enterprise-wide tournaments.
(Tournaments themselves are evolving this year, thanks to instant-tournament products like Multimedia Games’ “TournEvent.”)
Other technology trends to watch this year include the use of online and mobile applications to promote the games of land-based casinos. Aristocrat Technologies is one of the companies taking the lead in this area, with its “nLive” casino application already providing a free-play online casino through the website of the Maryland Live! casino. Expect more in 2013.
All the major slot manufacturers are experimenting with mobile platforms, and together with operators, adding new functionality for casino staff and new play opportunities for casino customers in Nevada, where gaming on mobile devices is permitted in casinos. These platforms are one more step toward goals of manufacturers to make their content available on a variety of media.
Finally, no list of technology trends would be complete without mentioning the slots themselves. Skill-based bonus events, motion chairs from WMS, new 3D technology (including holograms from Interblock) and other developments make the slot floor a hotbed of new trends.
Of course, that development has been ongoing for a couple of decades.