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Big Numbers

The scale of the casino industry has changed dramatically, which is good news and bad news

Big Numbers

As the gaming industry enters a new year, it is time to reflect on just how much it has changed and how much more change will affect investors in the future.

Perhaps the biggest change is simply size, and the resulting Law of Big Numbers. The other major changes we see are globalization, cannibalization and technology.

The Law of Big Numbers

Casino companies are much bigger today.

No longer does the opening of a riverboat casino or even a Las Vegas mega-resort dramatically move the needle for big operators.

It now takes huge increases, such as the two mega-resorts of Singapore, which will generate nearly $7 billion in gaming revenue, to make a big impact on a company’s bottom line.

A decade ago, a few hundred million dollars might have doubled the size of a company. Today, it’s just an incremental gain for many of them.

Companies like Las Vegas Sands and Genting now look for multibillion-dollar opportunities to grow appreciably, thus their focus on legalizing gaming in Florida, Japan, India, Korea and the like.

Twenty percent annual growth, and 20 percent returns on investment, get harder as the revenue base gets bigger.

One result was seen in the last recession. Unlike previous downturns, casino stocks followed other consumer discretionary stocks down.

Previously, casino operators grew independent of the broader economy on waves of gaming expansion in a world of unmet demand.


In the United States, gaming proliferation still means opportunity, but no longer is a new casino a slam-dunk to transform penny stocks into mid-size entertainment companies.

Indeed, cannibalization has become an expansion theme. The calculus today is not just how much revenue and return a new casino can generate, but how much business it will take from competitors.

The new Penn National casinos in Ohio, for example, are clearly positives for that company, but how much will their gains be offset by the business Pinnacle’s new Baton Rouge takes away from Penn’s Hollywood casino when it opens next year?

And how much is Pinnacle’s Belterra in southeast Indiana hurt by new Ohio casinos?

The poster child for cannibalization is Atlantic City, which has suffered monthly revenue declines for more than three years, and which is down around 40 percent from its 2005-2006 peak.


Is it the sure road to prosperity, or gaming’s version of The Proud Tower?

To say that the numbers projected for international expansion are compelling is an understatement.

Look at Las Vegas Sands’ Singapore property. Estimates are that this one casino will generate $1.8 billion in EBITDA next year. The biggest companies—in their entirety—didn’t do that a decade ago.

And the prospects assuming more global gaming expansion are just as stunning.

We know the potential: 1.3 billion Chinese, 1.2 billion Indians, Japan the third largest economy in the world, and so on.

Over the past five years, international gaming revenues have risen at an annual compounded rate of 15.4 percent. The United States has declined.

Look at projected annual growth in gross domestic product of 7.5 percent in Asia and 6 percent in Latin America vs. 4.2 percent in the U.S. and Canada.

Las Vegas Sands CEO Sheldon Adelson has said there could be a dozen Macaus internationally.

But nothing is certain, and the world outside of North America and the United Kingdom has been unpredictable in every region in the lifetimes of many now alive—Nazism and World War II in Europe, the Communist revolutions in China and Eastern Europe and the destruction of Imperial Japan are all examples.

The Soviet Empire once appeared permanent and unassailable. It crumbled in months.

History writer Barbara Tuchman wrote The Proud Tower some years ago describing the internationalization of the late 19th and early 20th centuries that everyone was certain had changed the world forever and for the better.

It dissolved into the hideous trenches and epidemics of World War I that, in turn, led to the Communist tyrannies and to World War II.

We would be wise not to think that a government-granted license to print money in a casino today can’t be taken away tomorrow.


Internet gaming and integrating functions from accounting to promotion to player development into slot machines are well-known.

And the revolution continues, with the likes of mobile gaming, and IGT introducing cloud computing to what previously was the slow advance of server-based gaming.

And technology is now fast advancing in the most conservative space—table game pits.

The revolution in table game electronics will continue in all of its aspects—e-tables, hybrids with live dealers, side bets, bonuses, progressives, and the kinds of accounting and player tracking systems long familiar on slot machines.

New technology is often touted as a way to get more money from players—promotions at the slot machines, more hands per hour at e-tables.

But the real value for brick-and-mortar casinos might be in efficiencies—lower marketing costs by focusing on productive players and lower personnel costs with e-tables and hybrids are examples.

Finally, technology allows more people to gamble while eroding the prohibitions against it.

Consider poker. It was new television camera technology combined with the internet that made the World Series of Poker prime-time TV and minted millions of online poker players.

It was the 2006 law against financial transactions facilitating online gambling that created an uproar among American poker players and was the catalyst for what many expect to be the inevitable legalization of internet poker. And after that, other internet gambling, including sports betting.

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