Thursday, July 16, 2009

Analysts Skeptical Of States' Gaming Initiatives

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This installment of The Tribes In The Media is a Reuters article on the future of gaming.

States see $ sign in gaming, analysts skeptical
By Joan Gralla
July 15, 2009

NEW YORK (Reuters) - Staring at the video lottery terminal at New York's Yonkers Raceway, Diane sighed as $300 was reduced to $20 in less than a minute.

"I don't want my son to know; that's all the money I had," she said.

Diane and her friend Frances, two middle-aged gamblers, are core customers of the Empire City casino. Its 5,300 slot machines are a source of revenue for the state of New York which also wants to turn Long Island's Aqueduct Racetrack into a "racino" by adding thousands of slots.

A growing number of U.S. states are considering legalizing slots to try to generate revenue to plug budget gaps, even as the recession has hurt the country's gaming industry.

The warning signs for New York and other states considering expansion into gambling to fill their coffers is illustrated by Las Vegas, where the "win" -- the money a casino collects from gamblers minus the winnings it pays out -- has fallen for 17 months through May.

Gambling is just one revenue source for many of the 50 states but the money can add up quickly. Connecticut, for example, has garnered $5 billion from its two Native American casinos since they opened in 1993.

The problem for states is not merely a lack of demand among middle-aged and senior players. Diane comes to play about once a month and would come every day if she could afford it.

The question states are asking is whether younger players will find slots, reincarnated as video lottery terminals, as alluring as older players, and whether the new "Transformers" -- consumers who have morphed into savers during the downturn -- will return to gaming with their previous fervor.

Craig Parmelee, a Standard & Poor's analyst, said it could take three to four years for consumers to resume spending freely enough to rekindle gambling revenues.


The Empire City casino, owned by the Rooney family, owners of the Super Bowl football champion Pittsburgh Steelers, said a new marketing effort had countered the downturn's effects.

All but about 40 cents of every $5 plunked into the video lottery terminals is returned to gamblers, Marketing Director Ryan Murphy said.

New York state collects about 66 percent of that 40 cents in taxes, while the lottery and breeder purses get another 7 to 8 percent, Murphy said. So the casino keeps about 10 cents.

The proliferation of new sites has put states at risk of cannibalizing one another's revenues. After years of failed attempts, Maryland legalized as many as 12,000 lottery terminals, partly to block Delaware, Pennsylvania and West Virginia from siphoning off gamblers.

Other states, including Kentucky and Ohio, are reviewing whether to legalize slots as neighboring Indiana has done.

Analysts, eyeing falling revenues around the country and ill-timed expansions in Las Vegas, Atlantic City and at some Native American casinos in Connecticut and California, said there might be too many venues or that growth may be limited.

"The pie will expand somewhat but the pieces of the pie will become smaller," said Michael French, a PricewaterhouseCoopers analyst based in Philadelphia.

The high cost of travel and Congress's criticism of corporate junkets hit Las Vegas especially hard. California's high jobless rate has also hurt.

Nevada Gaming Control Board Spokesman Frank Streshley saw some signs of relief, however: weekend gamblers were coming back, although they were spending less.

"Where the problem is, it's midweek," he said. Whether conventions, a major source of business, return will not be known until autumn.


Lottery ticket sales typically hold up during recessions as people want a shot at the big time. But it remains unclear how long the recession will choke gambling by the majority of players who are not high rollers.

Milton Pedraza, CEO of the Luxury Institute in New York, said that unlike the truly wealthy, people whose net worth was a million dollars or less may be hard to win back.

"Those people are gone -- and maybe forever," he said.

Ron Kurtz, an American Affluence Research Center principal in Atlanta, disagreed, saying gamblers would return once stock, credit and job markets recovered.

"Americans have a relatively short memory when it comes to adversity," he said.

Analysts agreed casinos would have to offer increasingly sophisticated video games to lure younger clients; other strategies include games based on television shows, such as "Deal or No Deal," and nightclub entertainers.

Joseph Tindale, a gerontology professor at Canada's University of Guelph, said casinos may have to "keep mutating" to woo younger clients. His research showed they preferred card games with friends or over the Internet, even if just for play money.

States may license slots only to find themselves weighing whether to next add table games, from dice to Baccarat.

Pennsylvania already has felt the pressure.

Just weeks after the May opening of a casino on the site of the headquarters of the former Bethlehem Steel, Innovation Group consultants from Denver told legislators that table games could create more than 16,000 jobs and raise nearly $1 billion of revenue by 2012.

That may be tricky to manage. Just getting approval from legislatures and voters for slot machines can take years; so can going from slot licensing to construction, Parmelee said.

Securing financing is tougher.

"The lending industry is certainly not getting in line to make loans to casinos these days," Parmelee said.

Some states have other potential gaming strategies. Hawaii's legislature proposed taxing Hawaiians who play other states' lotteries or "contests of chance." Delaware is hoping to add betting on football to its lottery by autumn.

(Additional reporting by Franz Strasser and Ciara Linnane; Editing by Howard Goller and James Dalgleish)