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Learning Opportunity

Does the Atlantic City experience offer guideposts for other jurisdictions?

Learning Opportunity

It was the perfect storm: a severe economic downturn, quality competition in feeder markets, and a possible smoking ban that would decimate the market even further. Yes, we’re describing Atlantic City circa 2007, but today it could describe many jurisdictions across the country and the world.

The severity of any of those items may differ, but the impact can be just as difficult, and what you may have thought was specific to Atlantic City could land on your doorstep if you are not vigilant.

Tony Rodio is president of Tropicana Entertainment. He was elevated from a similar position overseeing the Tropicana in Atlantic City by his boss, Carl Icahn. Rodio says he’s seen the same kinds of things happening at other properties owned by Tropicana Entertainment.

Even before Atlantic City was hit with the perfect storm, Lake Tahoe was a victim of two of these items—tribal casinos in Northern California, and economic struggles in Northern Nevada.

“When tribal casinos were permitted in Northern California, it devastated Lake Tahoe. And you couldn’t find a more beautiful spot in the country,” he says. “But convenience gaming dried up because you surrounded San Francisco and Sacramento with tribal casinos. If you have convenience gaming in your feeder markets, you’re going to lose a big chunk of your business. When Ohio approved gaming, Indiana dried up. In Lawrenceburg (where Rodio once ran the Argosy casino), the place has lost 65 percent of its business.”

Rodio says there’s very little a jurisdiction can do when its feeder markets are attacked.

“We’d like to think that Atlantic City could have done more to protect itself, but there was no way,” he says.

Kevin Ortzman, the president of Caesars Atlantic City, missed the beginning of the crisis, but he thinks something could have been done.

“I wasn’t here at the time, but I think we could have better understood the competition in the feeder markets,” he says. “I would have made sure I really understood that product offering and how I could differentiate the product I’m offering to give them incentives to drive the extra hour.”

With high tax rates in the surrounding states, Atlantic City casino executives became complacent, confident that the competition couldn’t match the benefits of playing on the Boardwalk. But they didn’t realize that, in Pennsylvania at least, casinos were allowed to write off marketing expenses—comps, cash back, etc.—and were therefore on a level playing field. It was a mistake they quickly came to regret.

Government Interference

If the problem were only the competition, most experts feel Atlantic City could have limped along. But the government kept throwing up hurdles in front of casinos since they were introduced in 1978. First it was unreasonable regulations, red tape and governmental interference in business decisions. 

Bob Griffin leads Trump Taj Mahal, and was in charge of three Trump casinos when he arrived five years ago. He says the state government’s plan to “rescue” the failed Revel project was an example of not letting the market take its natural course.

“When I got here, the Revel project was dead,” he says. “The owners decided it was better to walk away from $1.2 billion than to continue to invest. The government had a different idea. If the patient has cancer, let’s give it more cancer. We had Republicans and Democrats all working together to keep Revel alive. And it didn’t work. Revel was a disaster, separate from how they performed as an operation. Just the fact that they were incentivized to enter the market had devastating effects on the Atlantic Club, Trump Plaza and the Taj. And they couldn’t survive in that environment.”

Griffin says the “refund your losses” promotion that Revel started during the busy summer season only made things worse.

“Try to compete with that during the summer!” he says. “That was a major mistake that should never have happened.”

Atlantic City government wasn’t any better, says Griffin. The bloated bureaucracy demanded more and more revenue.

“They killed the goose that laid the golden egg,” he says.

He blames the property tax rate imposed by the city. The casinos were taxed on the value of the properties at their peak. With revenues plunging more than 50 percent since 2007, Griffin says his property was overvalued by 2,000 percent.

“Last year, we paid more in property taxes than we did in interest payments, and we had a 14 percent loan with Carl Icahn,” he says.

But the city is on a losing streak when it comes to tax appeals. Just last month, the Borgata won a $60 million refund after an appeals court upheld a decision to lower the city’s valuation of the casino retroactively. In the past, this has led to the city raising tax rates and starting the process all over again.

“It’s a never-ending cycle, the way the city is being impacted,” he says. “The value of our properties is going down, so we’ll file tax appeals because they’re not worth as much as they used to be. And as the value goes down and revenue goes down, they increase the rates and our taxes go back up again, and we’re back to filing appeals. It’s a vicious cycle, and we’ve got to stabilize the rate.”

A bill currently before Governor Chris Christie would stabilize those rates over a five-year period, in exchange for the casinos pledging not to appeal. This would give the city time to get its budget under control and give the casinos a predictable expense. If successful, it should lead to more capital improvements in the properties and possibly new investments overall.

But the city isn’t the only problem. The New Jersey Casino Reinvestment Development Authority was established in the early 1980s, designed to use casino “reinvestment”—an additional 1.25 percent contribution of gross gaming revenues—to revitalize Atlantic City. Over the years, the fund was raided by North Jersey politicians in violation of its stated goals. Now, the money is dedicated to the city, but the CRDA (“Creeda,” as it’s called) is now a super agency, responsible for everything from redevelopment to meetings and conventions. Its quasi-public arm, the Atlantic City Alliance, funded by a $30 million annual contribution from the casinos, was recently disbanded, leaving marketing of the city up in the air.

Like most government agencies, Griffin says CRDA is a mess.

“Working with CRDA is like working in a wind tunnel,” he says. “For five years, you keep walking forward and then you turn around and you’ve only gone three feet.”

Griffin grudgingly acknowledges that CRDA has been responsible for some good things.

“It’s easy to point out CRDA’s failures,” he says, “but they have also had a lot of successes. The problem is we’ve just about run out of time. There’s not much left.”

Ortzman is more complimentary, perhaps because CRDA contributed about $20 million toward a new $100 million meetings and conventions facility at Harrah’s Resort.

“We’re ecstatic about our meeting space at Harrah’s. We really believe that convention center will be the catalyst for Atlantic City. We’re going to bring in the non-gamer—men or women that work for big corporations that have that corporate credit card. They want to wine and dine their customers, and we have to have a product that will satisfy them. And we’re seeing that.”

Ortzman says Caesars has booked more than $20 million of business into that facility, and he thinks it will be a game changer.

“I would define it as successful if we see Borgata, Tropicana… any of our competitors… build a similar facility,” he says. “Because now we’re really starting to build that critical mass in a $16 billion market in the Northeast, of which we currently get an infinitesimal share.”

Griffin agrees that meetings and conventions could be the answer in Atlantic City.

“They’re paying for their rooms. They’re paying for their F&B. And we do get some gambling dollars out of them,” he says. “Some conventions are better gamblers than others, but we’ll get some gambling from all of them.”

Rodio believes this concentration on conventions should have happened sooner.

“The convention business is now something we’re all going after,” he says. “If we could have ramped up this aspect more quickly, maybe we wouldn’t have gotten hurt so badly. Same thing with all the non-gaming attractions. But we couldn’t have done anything to keep the convenience gambler.”

Non-Gaming Goods

Paul Steelman is a native of Atlantic City, where he first made his mark as the gaming industry’s pre-eminent architect. He has returned to the town many times over the years, and recently joined forces with Philadelphia developer Bart Blatstein to transform the former Pier at Caesars into the Playground, a multi-faceted entertainment/dining/retail experience. The centerpiece of the project is “T Street,” a music row comprised of half a dozen nightclubs that will recreate some of the world’s most prestigious entertainment avenues, like those found in Nashville, Austin, New Orleans, Memphis, Hong Kong and other cities.

“Atlantic City used to be the capital of music,” Steelman says. “New York and Kentucky Avenues were lined with clubs that offered live music… The 500 Club was famous. So if we can bring a little of that back, I think we’ll have succeeded. If we take things that were a success at one time and adapt it for today, it can work.”

He says music is a natural move for Atlantic City since it is so deeply ingrained in the city’s history.

“The AC market was missing out on the live music scene,” he says. “We’ve always struggled with this. The ‘Rat Pack’ kind of lounge we built in the ’80s and ripped out in the ’90s. Now, with all the music streaming services, there’s a lot more bands looking to be discovered. They tour more, they charge less, so we’re trying to be agile and take advantage of the best that’s out there.”

Steelman says pricing is an advantage that Atlantic City can use, but first there needs to be some understanding how that can apply right from the arrival in the city.

“Parking has always been an issue in Atlantic City,” he says. “Since Resorts paved all those lots and charged $25 to park, to free parking, to the time they decided parking should be a revenue generator by taxing it, it’s been an issue. Look, parking is 75 percent of the entertainment decision. Why do you think we build beautiful parking garages in Las Vegas that are free, easy to access and to depart? I think parking should be free in Atlantic City, and that would make a huge difference.”

Ortzman says the city is changing.

“Atlantic City is undergoing a transformation,” he says. “We’re moving from a gaming-centric model to a non-gaming hospitality market. We do that by adding compelling product appealing to a demographic that is more experience-based, rather than simply satisfy a gaming itch.”

Griffin believes that pricing is important, but there are other issues that often come first.

“All operators are cognizant about pricing,” he insists. “But when you close down a number of properties in town, you’ve taken lots of rooms offline. So the demand for the remaining rooms goes up, along with the pricing. And when I have to pay a Local 54 worker $20 to clean a room, that cost gets built into the price, so there’s not a lot of wiggle room.”

Rodio agrees that room pricing varies widely.

“It comes down to supply and demand,” he says. “There’s a huge demand for these rooms on the weekends, so we have to grab that revenue when we can. The demand isn’t there mid-week, so rooms will be cheaper.”

Ortzman is repositioning the Wild Wild West casino that is part of Bally’s as a value-oriented facility, with cheaper food and drinks, and lower-limit table games.

“We have this new demographic that we’re all trying to learn about: the millennials,” he explains. “They are looking for a social experience, which is not necessarily gaming-centric. So we’re going to create an environment where if they want to gamble a little bit, that will be available to them. We’re going to have $5 tables, which do not exist today, low-priced drinks, the appropriate music for virtually every demographic, and it’s going to be right on the Boardwalk. So we’re cautiously optimistic that this will be very successful.”

Mounting a Challenge

Most experts agree that a negative perception follows Atlantic City around. The media focuses on the bad news instead of pointing out the changes that have moved Atlantic City forward. And an ongoing debate about adding casinos in North Jersey—and other areas of the state—threatens to derail any progress the city has made.

Ortzman says he understands the reasoning behind the plan, but it would be devastating to Atlantic City.

“There’s no doubt North Jersey would like to be able to capture some of the business that’s going to Bethlehem, New York and Philadelphia,” he says. “They want to recapture those New Jersey residents who are now going there. But as a consequence, we’re going to lose those New Jersey residents that are still coming to Atlantic City, so that would be catastrophic for us. We’ll do everything we can to try to convey common sense that this would not be additive to Atlantic City.”

Suggestions that some of the tax revenues from any North Jersey casinos be dedicated to Atlantic City would make sense, says Rodio.

“If it even should happen, the industry in Atlantic City should be able to reap the benefits of that,” he says. “Our first choice would be to keep the industry solely in Atlantic City. There are many other industries that employ hundreds of thousands of people in North Jersey, and to take away one of our biggest advantages is grossly unfair.”

Griffin isn’t concerned in the short term, because there isn’t a consensus among North Jersey politicians about how it would be implemented.

“I think we’re three years out from a referendum, and I think the people who are going to stop it will be the politicians who are behind it in North Jersey,” he says. “They can’t even agree on the tax rate, so how are they going to agree on the number of the casinos and the locations? I don’t think they’ll be able to work together.

“If they were able to unite behind a proposal for a single casino in the Meadowlands and everyone would be able to share in that, I think that’s something the voters of New Jersey would get behind. But with all the politicians fighting for their piece of the pie for their hometowns, I don’t think that will pass.”

Roger Gros is publisher of Global Gaming Business, the industry's leading gaming trade publication, and all its related publications. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its fourth edition. Gros was named "Businessman of the Year" for 1998 by the Greater Atlantic City Chamber of Commerce, and received the Lifetime Achievement Award from the American Gaming Association in 2012.