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Gaming's Marshall Plan

The recovery from the deep recession will result in a different-and maybe stronger-gaming industry

Gaming’s Marshall Plan

The tentative signs of economic and financial recovery that for the gaming industry began to appear and accelerate in the second half of 2010 are clearer and stronger now.

The new year began with the lowest initial jobless claims seen in a long time, gaming revenues and hotel rates steadily growing, and fatter paychecks for all thanks to the tax bill enacted in December.

So it’s up we go, barring a u-turn.

But it’s probably not up so fast or with as much zest as in that now long-gone halcyon era before financial collapse and recession.

Indeed, much like Europe after World War II, the now-quiet and sunny days reveal the wreckage of the recent havoc—unfinished, multibillion-dollar mega-resorts jutting skyward like Fontainebleau in Nevada and Revel in Atlantic City, the bared steel girders of Echelon, the pan-flat lot along the ocean where Pinnacle was to erect a dream tower.

And then there is the quieter, less-obvious damage—resorts still open, but investors and lenders wiped out, or their wealth massively reduced. And inside the properties, fewer employees serve more sedate guests and, we’re sorry to observe, buildings of some companies are frayed from several straight years of pinching pennies that continues.

So, like Europe more than 60 years ago, the rebuilding begins in a world where much of the power has shifted.

No longer is Las Vegas the center of the gaming world. The capital it remains, but the power has moved to Asia, where cash flows are now counted in the billions rather than hundreds of millions.

Nor is gaming elsewhere in North America limited with Nevada and Atlantic City at each end, and a handful of riverboat states in the middle.

Every year, gaming spreads further, whether qualitatively—like the table games that have popped up in Middle Atlantic racinos—in brand-new land-based casinos in Ohio and Maine, or, as is about to happen in the restaurants and clubs of Illinois, a few VLTs in many places for a collective huge addition.

The proliferation isn’t limited to North America. Indeed, the growth is even more rapid elsewhere, such as in Latin America, where Brazil looms as a market that can be as big as all the other burgeoning markets combined south of the border.

It is not far-fetched to believe that gaming will be ubiquitous, with jurisdictions without gaming more as the exception than the rule.

While casinos spread, racetracks continue to disappear or slash dates off their meets—either way a reduction of capacity.

And there is no reason to doubt this trend will continue as the sport of kings retreats into a much smaller place in our culture and in the wagering industry.

And dog racing? Might as well say good-bye to the greyhounds altogether.

And then there is the internet, having grown out of its infancy and becoming something of a strapping teenager about to enter adulthood.

Within a few years, we suspect, internet gaming will be as common as the brick-and-mortar variety, which, itself, will be much more common.

 All the while, the word convergence will be applicable, because the revolution isn’t really internet gaming. That’s just the most common device by which electronic gaming is delivered today. It’s really e-gaming, and it has powerful potential to interact with the brick-and-mortar world of casinos. The World Series of Poker and first steps at mobile betting in Nevada are just the nascent examples.

This new landscape will require a different kind of business model and a different kind of manager, and will create entirely new investment opportunities and risks.

Throwing up ever-more-expensive buildings and expecting a 20 percent return on investment won’t happen anymore in North America. That is still happening with remarkable achievement in Asia, and there are dreamers like Sheldon Adelson who can see it continuing for many years to come.

But in more competitive, or less dynamic markets, casinos as businesses—and investments—will become much more like hotels or restaurants or beach resorts. Differentiation will have to be on price and experience and superior location, not on “we have it and you don’t,” so customers from the have-not jurisdictions just pour in.

Already, we see that two of the strongest stocks coming out of recession have been those of the two public casino companies that specialize in creating experience, though each in a somewhat different fashion—Las Vegas Sands and Wynn Resorts.

In other words, in more mature markets, casino companies will have to evolve to more mature models—wow people with differentiators where they can crank out steady cash flow and, in casino parlance, grind out returns to shareholders.

Frank Fantini is the editor and publisher of Fantini’s Gaming Report. A free 30-day trial subscription is available by calling toll-free 1-866-683-4357, or online at www.gaminginvestments.com.

 

 

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