Atlantic City casino gambling

For a couple of years I was an adjunct at Rutgers business school.  I worked on a course where teams of MBA students provided management consulting services for actual companies.  For one project, one of my teams interviewed a pizza parlor owner about the key characteristics of his restaurant that attracted business.  He said:  good food, extensive menu, fast service, friendly staff, tablecloths on the tables.  These enabled him to get customers from as far as 7-8 miles away from his store.

How close was the nearest competitor?   …15 miles away.

All of the attributes he named may have been important to get any customers to his restaurant, but it’s hard not to think that distance is key to defining his market area.  That’s true of any generic bricks-and-mortar business.

…which brings us to Atlantic City.

That beach resort has had its annual gambling revenue cut in half since competing casinos began to open in neighboring Pennsylvania in late 2006.  Additions in Maryland and Delaware haven’t helped, either.  The issue is the same as with pizza. Absent some incredible attraction (think:  Las Vegas), the average gambler will typically choose the closest casino to patronize.

The response of government in New Jersey to the competitive threat has been quite odd, in my view.  It hasn’t been to build up the city as a resort destination or to improve transportation access.  The main thing I’ve seen has been the attempt several years ago to help yet another casino, the Revel, to open, adding new slot machines and table games to a market already awash in overcapacity.

Potential good news is that, after the closing of four casinos (Atlantic Club, Revel, Showboat and Trump Plaza) in 2014, the market appears to have stabilized.  Even online gambling is perking up, having brought in $16+ million in April (although this is still a far cry from the $80 million average monthly take the state had been touting when online was legalized).

The other side of the coin is that Trenton is again “helping” Atlantic City by opening the door to building two new casinos in northern New Jersey.  Local voters will vote on proposals later this year.  Maybe the idea is to stabilize the state’s gambling tax revenue at any cost.  But nothing seems to me more likely to snuff out a nascent recovery in AC than this.

 

Atlantic City gambling–withering on the vine

history

Casino gambling was legalized in Atlantic City in the 1970s.  The faded beach resort became an instant darling of US gamblers and of Wall Street (not two mutually exclusive sets)  …at least until the world worked out that there were no hotel rooms, the  weather got really cold in the winter, and the Garden State Parkway could only take so many cars before turning into a parking lot.  Only the first of these warts was easily fixable.

Steve Wynn was the first to smell the coffee, selling his Golden Nugget and returning to Las Vegas to begin building  today’s Las Vegas Strip.

Nevertheless, Atlantic City gaming revenues continued to grow, slowly, peaking in 2006 at $5.2 billion and declining steadily since.

today

The Star Ledger recently reported that last year Atlantic City was edged out by Pennsylvania (which legalized casino gambling in 2004) as the second-largest casino market in the US.  Both had yearly gambling revenues for 2012 of slightly more than $3 billion.

Atlantic City has clearly been damaged badly by Pennsylvania casinos.  But the Star Ledger notes that PA gambling revenues would have been higher had it not been for western the western part of the state encountering competition from a new casino in Cleveland.

the future 

Governor Christie may not have been happy when the Atlantic City mayor urged residents not to evacuate to higher ground in advance of Superstorm Sandy.  Nevertheless, that hasn’t stopped several recent developments aimed at making Atlantic City gambling more attractive (and therefore more tax-generative).

These may be a glimpse into the future for casinos in the US.  They are:

1.  The Borgata, the most successful Atlantic City casino, will begin to offer in-room video slot machine and poker gambling through TV.  The next step will apparently be allowing mobile gambling on the Borgata wi-fi network using smartphones and tablets for all casino guests while on casino property.

2.  Governor Christie, in vetoing an internet gambling bill passed by the legislature, said he would approve it if minor modifications are made.

3.  The New Jersey Casino Control Commission, the toughest regulator in the country, seems to be hinting that it could reconsider its ban of MGM International from casino operations in the state.  MGM lost its license to operate in New Jersey and was forced to divest its 50% interest in the Borgata (it’s in a trust) in 2010 because it would not sever its ties with Pansy Ho, whom the regulators determined was linked to organized crime in China.

implications

Governor Cuomo of New York appears to be very susceptible to the blandishments of the Lim family of Malaysia, which wants to build a Las Vegas-style casino somewhere (anywhere?) in NY.  Massachusetts is now considering proposals for building casinos as well.  So it seems like competition will intensify in coming years, not lessen.

Gambling revenue is a straightforward function of GDP.  Without strong GDP growth, the success of new gambling venues will depend almost completely on cannibalizing revenue from other locations.  We can see this clearly in Pennsylvania vs. New Jersey.

Innovation will be driven by the states losing market share.  Legalizing internet gambling seems to be the clear next step.  Weakening requirements to obtain a gambling license looks like another possibility.

Nearby destinations will likely be hit the hardest, but regional developments can’t be having a positive effect on Las Vegas visitation.