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Money for Nothing?

Over the summer, in connection with my story in this issue about Atlantic City, I had two separate interviews that made me think about why people and institutions invest in the gaming business

Money for Nothing?

Over the summer, in connection with my story in this issue about Atlantic City, I had two separate interviews that made me think about why people and institutions invest in the gaming business. It’s something that we should all consider, because without that investment, gaming could become the next bowling, which was a huge sport in the 1950s but has become a truly secondary activity.

Bob Boughner, the CEO of the Borgata in Atlantic City, talked to me, in a wide-ranging discussion about the future of Atlantic City. We discussed what investors expect when they put their money into a casino property (not just in Atlantic City, but anywhere). Boughner is one of the smartest operators in the business. His vision was to expand the market for Atlantic City by building something that it didn’t have before, which Borgata and later the Water Club became.

“No one wants to take their money and put it into an investment that is low or significantly lower than they would without having to take any risk,” he said. “I have great respect for the people who put up the money because they are taking an enormous risk. That risk is mitigated by healthy market conditions and a competent and qualified management team.”

Boughner was speaking specifically about Atlantic City, but his comments could certainly be applied to every gaming jurisdiction.

My second interview was with the new guy in town, Kevin DeSanctis, who is building the Revel casino on the Boardwalk. In June, he told me he was quite discouraged last winter about obtaining the remaining financing he needed to complete the hotel, which is still under construction. But as you can see by the story on page 6, there has been some movement in acquiring that last piece.

DeSanctis explained how the “risk” factor was an important element of his proposal, but explained how his company had “de-risked” the final stages of construction by controlling costs in the initial stages. He also said that the business model hasn’t been altered that much, which was somewhat curious, given the state of the Atlantic City gaming economy.

Staying with the Atlantic City example for a moment, I could never understand why anyone would invest money in a Donald Trump-branded casino. The Trump casinos have now declared bankruptcy for the third time, with few if any of the investors recovering even their original investment. And Colony Capital may be forced to give up its two Boardwalk casinos because it simply paid too much for them.

And that brings us up to the present day. The future investors in the gaming industry aren’t going to want to take the risks that have burned many investors in the past. Prior to the recession, the “build it and they will come” philosophy seemed to be pretty sound. Now, not so much.

I believe for the next decade we will be undergoing a re-evaluation of the model for the casino resort. We’ve probably seen our last billion-dollar property for some time. Maybe in total, properties in the future will cost more than $1 billion, but the initial stages probably won’t cost more than a few hundred million dollars, and then those stages will have to be a proven success to justify expansion.
 

We also have to see if the buying patterns established by our customers prior to the recession will hold up. Many respected experts say that the wild and extravagant spending that characterized those roaring times will never return. If your regular customers never return to the frequency of visits that they had prior to the recession, what does that do to your business model?

Vegas business models are already smashed to smithereens. When CityCenter opens in December, it will further stress the market, and who knows what will happen? Even now, hotels that were built with the expectation that they’d get a $300 average per night at a 90 percent occupancy rate are getting less than half that with a similar decrease in occupancy. So what does that tell us about the future?

Investors are the hope for the future of the gaming industry.

But to attract those investors, we have to remove the uncertainties that currently dog the gaming industry. We need to operate efficiently and effectively, and make smart use of the existing facilities. We need to market intelligently and develop, once again, a base that will respond to the excitement and service that we provide on a daily basis. We need to show investors that the risk will be well worth the reward. 

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.

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