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The G2E Effect

Why the hottest products from gaming vendors won't be the only talk at this year's trade show.

The G2E Effect

Historically, the weeks and months leading up to G2E have been viewed as a time when stocks of gaming suppliers rose in anticipation of the new products to be showcased at the industry’s biggest event.

Sure enough, that pattern is repeating this year, but perhaps more as part of the general stock market recovery, and in anticipation of what is now widely expected to be a revived slot machine replacement cycle in North America starting next year.

Indeed, G2E has grown so large and busy that most companies now privately preview new products to casino customers, thus stealing some of the show floor’s thunder.

But there may be another reason to remember this G2E. It may be seen someday as coming at a milestone. One might even say that G2E 2009 is, for the gaming industry, being held in Year 1 BCC-Before CityCenter.

In fact, it might even be that when MGM Mirage begins opening CityCenter towers in December that the world will forever change for destination casino resorts, the companies that build them, and the investors who play them in so many ways.

CityCenter will kick off a round of openings of the most expensive casino resort ever built.

And while people have educated expectations, no one really knows until customers respond whether they will succeed financially in a manner that matches their spectacular architecture, plunge their owners into bankruptcy, cannibalize competitors into dire straits, or some combination of in-between results.

Whichever it is, we suspect it will have a profound impact on all the players, on Las Vegas and on the evolution of gaming internationally.

In Las Vegas, the $8.5 billion CityCenter, $4 billion Cosmopolitan and $3 billion Fontainebleau will add more than 13,000 upscale hotel and condo units to a market already suffering a surplus, especially at the high end.

In Singapore, Genting and Las Vegas Sands will soon open $4 billion bets that they can get a return on investment in an entirely new market.

These are all daunting amounts. Imagine, to get a 15 percent cash flow return, Cosmopolitan must generate $600 million in EBITDA, Fontainebleau $450 million and CityCenter $1.2 billion. That compares to the $478 million that history’s most successful casino, Bellagio, generated at its peak.

And they have to generate those numbers in competition with Las Vegas Sands and Wynn Resorts, not to mention MGM’s Bellagio, MGM Grand and its other upscale properties.

MGM CEO Jim Murren has said CityCenter will be so spectacular, creating such a unique resort, that people will be compelled to visit, making it a huge success and growing the Las Vegas market once again.

Further, given its cost and the other mega-resorts coming on stream, it will be a long time, if ever, before a true competitor will be built, locking in CityCenter’s preeminence far into the future.

There are doubters, of course. Though on one point, there appears to be consensus: Las Vegas won’t see new multibillion-dollar mega-resorts for maybe a decade or more.

But even if CityCenter succeeds, what happens to other properties, including sister resorts?

Already, some analysts have cut Bellagio’s estimated 2010 EBITDA below $250 million. And given the huge increase in room supply, the temptation for competitors will be to lower rates to compete.

With less debt, the casino industry might find it easier to ride out the competitive wars, but companies may be caught between a rock and a hard place, having to lower rates to compete but having to maintain rates to generate money for debt service, or having to further cut costs to maintain the finances to stay within lending covenants and risk losing business to competitors.

The phenomenon most often mentioned as probable is another round in the pattern of older properties moving down the food chain while some at the bottom just shut down. There is wide and open speculation as to who the candidates for demotion and demolition will be.

It also is likely that lenders for newer resorts find that the best way out is to take their losses and leave, allowing property prices to drop sufficiently so new investors can buy them cheaply enough to operate at a profit.

The arguments in Asia are less vociferous, and Wall Street analysts have been willing to project EBITDA numbers of $500 million and more for Marina Bay Sands and Resort World Sentosa.   

But not everyone is a believer. While Asia has plenty of high rollers, it is yet to be proven that there are enough of them, at least cultivated right now, to support the new mega-resorts, or to do so without cannibalizing Macau.

There also is argument that the restrictive rules governing Singapore gambling will undermine success.

But if Genting and Las Vegas Sands win their bets, the response may be more predictable than in Las Vegas: copy-catting.

Already, mega-resorts are rising in the Philippines. Other nations could follow-Taiwan, Japan, Korea and Thailand among them.

And the riches to be made from such big investments obviously are proving worth the risk so far.

So, at G2E this year, more will be discussed than the latest whiz-bang products. A major topic of speculation will be how this new era of destination resorts plays out.

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