From Monopoly to Pac Man: Coping with Competition

With casinos in dozens of states and more in the pipeline, operators are bracing for a fight. And what about the "casino in the air," internet gaming?

From Monopoly to Pac Man:  Coping with Competition

For years, the casino industry in the United States was limited to Nevada and Atlantic City, and the business was remarkably resilient; from 1970 until the start of the economic downturn in late 2007, Las Vegas experienced just one blip in casino revenues, in the year following the September 11 terror attacks. During that turbulent time, the numbers dropped a single percentage point.

Today, nearly half of the states in the U.S. have legal casinos, and almost all offer some kind of wagering. Increased competition has turned the two-jurisdiction game of Monopoly into a version of Pac Man, with Pennsylvania gobbling up New Jersey, California gnawing away at Northern Nevada, Massachusetts poised to take a bite out of Connecticut, and so on. And more contests are shaping up as state governments hunt for additional tax streams.

On this broader playing field, it’s fair to say not all players will remain competitive. In Atlantic City, once the nation’s second largest gaming market (now ranked third behind Pennsylvania), observers routinely bet on which of a handful of aging properties will close next. (The first answer came last month: The Atlantic Club.) In Delaware, competition from Maryland has proven so fierce that the state’s three casino operators asked for a 6.5 percent reduction in the gaming tax (instead, Governor Jack Markell offered a one-time $8 million payback split three ways, which one analyst likened to “applying a Band-Aid to a bullet wound”).

Doomsday predictions aside, this industry is nothing if not inventive. Smart operators undoubtedly will find ways to not only survive but flourish by improving their houses, expanding their holdings, diversifying their operations and in some cases, neutralizing competition by partnering with would-be competitors. And the smartest will throw a lasso around virtual gaming and figure out how it can work to their advantage.

Ready to Rumble

In June 2007, Mohegan Sun in Connecticut was going strong. In its 10th year, the mammoth tribal casino in Uncasville posted third-quarter gaming revenues that beat the previous year by almost 16 percent. Gross slot revenues were up 17.8 percent, and tables were up 12.3 percent.

What a difference a recession makes. The combination of a weak recovery and new competition has changed everything at Mohegan Sun, which recently endured a 19-month slide in year-over-year slot win, followed by a modest bump in August. Revenue has plunged 28 percent in the past five years, from a peak of $10.6 billion in 2006-07 to $7.6 billion in the fiscal year that ended June 30.

“For a long time it was just us, Foxwoods and Atlantic City (in the Northeast),” says Mitchell Etess, CEO of the Mohegan Tribal Gaming Authority, which operates the casino. “We knew it wouldn’t last forever.”

While gamblers are spending less per visit due to the straitened economy, they also are migrating to newer casinos closer to home. Many Mohegan Sun diehards, particularly those who live in Massachusetts, have switched their allegiance to Resorts World in New York City, the Aqueduct racino that’s been breaking records since it opened in 2011. When Massachusetts opens up in the next few years, Mohegan Sun and Foxwoods could forfeit an additional 15 percent in revenue, according to a report in Hartford Business. And at that point, Resorts World, the Genting slot parlor that’s done gangbuster business from day one, may also have to tighten its belt.

In an end-run strategy, Mohegan Sun and Foxwoods vied for one of three Class III licenses in the Bay State, proposing billion-dollar developments in Milford and Palmer, respectively; both were shot down by voters last fall.

“We’re trying to expand our footprint and get in additional jurisdictions,” says Etess. “We have Pocono Downs (in Pennsylvania). We own 10 percent of Resorts in Atlantic City. We’re pursuing the license in Palmer and will continue to look at other things such as a management company”—

including operation agreements with Indian tribes in Washington state and Wisconsin.

‘More Attraction than Casino’

That’s not all. Mohegan Sun is also a contender for Philadelphia’s second casino license, to be awarded in the coming months. It also got a jump on the game in New York. Last November, voters there approved Governor Andrew Cuomo’s casino expansion plan. MTGA had already partnered with developer Louis Cappelli to build a casino at the old Concord Hotel on Kiamesha Lake. It’s “the gold buckle of the Borscht Belt,” says Etess, a member of the famed Grossinger family of Catskill hoteliers.

Once again, the tribe’s No. 1 competitor in the Catskills is the Mashantucket Pequot tribe, now working with Muss Development to develop a resort on 500 acres in Liberty, New York.

New York, Philadelphia and Massachusetts are “the cherries on top” of the Northeastern casino market, says Etess. But the Mohegans are also working overtime on their flagship property, adding a $65 million retail development due to break ground this winter.

“What we’re doing is building more of an attraction than a casino,” explains Etess. “We have the biggest concert venue in the world, which has kind of become the entertainment center for this part of country. We own a basketball team (the Connecticut Sun of the WNBA). We’ve increased our restaurant product. We built a golf course nearby. We’re combating competition by complementing our destination. But I like to think we’ve been preparing since day one as far as having a great guest experience, a great players club program, and building up customer loyalty.”

With multiple properties, the operator can now offer special deals and discounts to entice Connecticut customers to Pennsylvania and Atlantic City, and vice versa.

Not to be outdone, Foxwoods, which posted its first year-over-year revenue gain since December 2011 last September, is working on a $115 million retail outlet center. The 300,000-square-foot facility provides “entertainment for the non-gambling spouse,” according to Steven B. Tanger, CEO of Tanger Outlets, which also runs a successful outlet corridor in Atlantic City.

Both strategies are designed to protect and build market share, an ever more precious commodity in the casino business. 

The Tipping Point

Of five applicants for Philadelphia’s second casino license, Mohegan Sun’s planned Market8 development has already won praise from the city’s deputy mayor for economic development. Alan Greenberger has called the proposed project at the once-vibrant retail corner of 8th and Market, which includes a hotel tower and lower-level retail component, a potentially “transformative project for the city.”

Is Greenberger overstating his case? There are already four casinos in the immediate vicinity: SugarHouse, the city’s first gaming hall on the Delaware River; Harrah’s Philadelphia, also on the waterfront but located in the city of Chester; Parx, a 20-minute drive from the city; and Valley Forge, a small Category 3 casino near the historic battlefield in Chester County. Though Pennsylvania has collected more casino taxes than any other state in recent years—$5.4 billion from 2009 through 2012—revenues were flat during fiscal 2013. Can the region support a fourth property?

“There hasn’t been slot growth in Pennsylvania for many months,” says Wendy Hamilton, general manager of SugarHouse, which is privately owned. “I’m waiting for someone to show me that Philadelphia can sustain another license.”

SugarHouse, built on the site of a former Jack Frost sugar refinery, is in the midst of a major renovation, not necessarily as a hedge against future competition—the second Philly casino is at least several years away—but to “give the existing building a fresher feel,” says Hamilton. “We’re replacing all the surface finishes, redoing carpets, blowing up the bathrooms, replacing all of that.” It is also embarking on a long-deferred expansion that will add a parking garage, new restaurants and a banquet hall as well as add slots, tables and a new poker room.

“We’re very small for this market, and we don’t have a lot of the amenities people are used to in a gaming experience,” says Hamilton. “We can’t get those things fast enough.”

She seems frankly aghast at the push for new casinos in a flat market.

“Anyone with an understanding of economic forces can look at complete lack of slot growth in the area and wonder why it’s a good time to add another casino,” says Hamilton. “Competition is good for everybody, but we have enough of it—we’re already on our toes, delivering the best possible product at the best possible price.”

Domino Effect

Frank Fantini, of Fantini Gaming Research in Delaware, agrees that Philadelphia and Atlantic City are “pretty well saturated,” but adds there is “a fair amount of virgin territory” still to be mined in the Northeastern U.S.

“The new casinos in Massachusetts should do very well, and obviously that’s going to hurt Connecticut and may also have an effect on New York,” says Fantini. The Baltimore-Washington metro area has “significant room to grow,” and developers are wasting no time delivering new product

This year, Maryland Live! in Hanover, which enjoys a virtual monopoly in its market and routinely beats the nearest competition (in Perryville, Maryland and Charles Town, West Virginia) will go head-to-head with the Horseshoe Casino Baltimore, a Caesars Entertainment property under construction on the city’s south side, near M&T Bank Stadium and the Inner Harbor.

An MGM gaming hall, planned for National Harbor, Prince George’s County, will “tap an underserved market in terms of the District of Columbia and northern Virginia,” says Fantini. “But that’s not good news for the Charles Town and Delaware casinos, which are the most likely losers as Maryland casinos expand.”

Among the hardest-hit operators companywide is Penn National Gaming, which operates Hollywood casinos in Perryville, Maryland and Charles Town, West Virginia, and also has struggled with new competition in the Midwest.

“Their Hollywood casino in Lawrenceburg, Indiana is down 30 percent since the Horseshoe opened in Cincinnati,” says Fantini. “The same is true of the Argosy Riverside in Kansas City, Missouri, which suffered the greatest losses to the Hollywood casino on the Kansas side.” The irony, Fantini says, is that Penn National owns 50 percent of the Hollywood Casino at Kansas Speedway, which is decimating its property in Missouri. In this case, owning the competition isn’t working out in the company’s favor.

“It’s shifting a dollar from one place to get to 50 cents from another place—well, they do have the management contract so they probably get 70 percent of the cash flow—but it’s a loss,” says Fantini. “That’s been the pattern with Penn National,” which has modified its earnings outlook for the year from $2.56 to $1.37 per share, and revised its revenue forecast from $3.14 billion to $2.98 billion for the year.

The Fix

In 2004, the Great Recession was unimaginable, and casino competition at current levels may have seemed unlikely. But even then, the Mohegan Tribal Gaming Authority had the foresight to anticipate the challenges of today. According to that year’s annual report, the tribe realized that its rate of growth would be “difficult to sustain with just a single property.

“With the increasing competitive pressures caused by the impending spread of gaming throughout the Northeast,” the report went on, “we have developed a diversification strategy that will allow us to take advantage of the expanding national gaming market.” At the time that strategy included the acquisition of Pennsylvania’s Pocono Downs and a plan to “assist other American Indian tribes throughout the country in the development and management of their own casino projects.”

The smart approach for today’s operator is certainly proactive and in some cases, defensive, says Fantini. “Of course you’re always trying to grow your business in any industry, but when you see potential competition you’ve got to turn that into opportunities.”

He cites the case of Pinnacle Entertainment, which lost some revenues at its Belterra casino in Indiana to new casinos in Ohio, but has responded by buying the River Downs racetrack in Cincinnati, which will reopen as a racino this year. The company has also bought a majority stake in a racetrack near San Antonio, Texas. So if Texas ever legalizes casino gaming—a notion that sends shudders through adjoining states that have clustered casinos along the Texas border—a racino at the location could offset probable losses at the company’s properties in Lakes Charles and Shreveport, Louisiana. “They’re hedging their bets,” says Fantini.

The X Factor

And what about internet gambling? It got off to a sluggish start in Nevada in 2013. At one point, the first online providers out of the gate—Station Casinos’ Ultimate Poker and Caesars Entertainment’s World Series of Poker—shared a meager pool of just 500 players. Does virtual gaming have the potential to unseat physical plants? Right now, no one knows.

The first months of iGaming in New Jersey have been positive, and other states are watching that nascent internet industry and the smaller one in Delaware—the first jurisdictions offrering all casino games online—for effects on the brick-and-mortar operations.

“We are obviously interested in seeing how it works out,” says Etess, “but I’m not feeling it will be a big minus for the bricks-and-mortar casinos.”

“We think about it a lot,” says SugarHouse’s Hamilton, “and have hired some capable people whose job is to be on top of it, understand the competitive risk and make sure we’re ahead of the curve. I don’t think it will ever take the place of coming to the casino, but it makes the peripheral amenities all the more important. But for people who just like to game without the amenities, well, they can sit at home in front of their tablets.”

Financial consultant John Restrepo of RCG Economics in Las Vegas says the answer likely lies somewhere between the old-style gambler—that 50-something slot player—and the generation that follows, aka Generations X and Y and the millennials.

“Look around on the Strip,” he says. “You won’t find them sitting in large numbers on the casino floor; they’re hanging out at the restaurant and lounges—everything but sitting in front of a slot machine. The question as they get older is will they still want to be online all the time, with the kind of isolation that comes with using a phone or tablet?

“Will they desire more human interaction?” says Restrepo. “Is this a generational thing or a true technological sea change, where people are not going to sit in casino as they did in past? It’s hard to say if online gaming is going to compete with bricks-and-mortar or just add on to it.”

He notes that Amazon, the mega-online retailer, is now “going in reverse,” opening physical stores to satisfy the need of consumers for both types of interactions. “Right now the focus is online,” says Restrepo, “but over time it will probably be a blend of both. Assuming online gaming is legalized across the U.S., over time those who innovate and include an online component to their properties will do just fine.”

Which brings to mind a remark made in 2010 by Steve Perskie, former chairman of the New Jersey Casino Control Commission, who weighed in on the perceived competition between Las Vegas and Atlantic City.

“A lot of what was going on in Las Vegas in the late 1970s and early 1980s was in response to what was going on in Atlantic City,” said Perskie. “Everyone was saying, ‘Las Vegas isn’t concerned about Atlantic City, but Caesars is putting an ocean in.’ What Atlantic City wound up doing was helping Las Vegas to improve itself. It pushed the industry to be creative.”