from sayonara to Cy Young

It isn’t that long ago that the US authorities were hunting down and arresting the owners of internet gambling websites, accusing them of Ponzi scheming and assorted other bad stuff.

Yet, late week the state of Nevada legalized internet gambling. New Jersey may not be far behind. In fact, the Borgata hotel/casino in Atlantic City has begun to offer in-room gambling through the TV set.  It plans to expand soon to gambling through mobile devices like phones and tablets that are hook into the wi-fi network on its grounds.

What’s changed?

The gambling market in the US is saturated, that’s what.

There’s already too much casino capacity in the domestic market (arguably, ex Las Vegas). And there’s more on the way, as new casinos open up in Massachusetts, New York, Florida and who knows where else. Yes, these new venues do attract a few people who’ve never gambled before. But to a large degree they take business away from casinos in neighboring states. Just look at Atlantic City.

I’m going to write about this topic in two posts. Today, I’ll cover some general principles. Tomorrow, I’ll write about the stock market implications for the casino industry in the US.

1.  saturation

Early in my career as an analyst I heard a pithy statement of basic marketing from a hotel executive who was explaining why his company—and the whole industry in the US, for that matter—was diversifying from mid-market hotels into new areas, like luxury and no-frills offerings. He said: “ You don’t start selling chocolate ice cream while the market for vanilla is expanding. You only do it after the vanilla ice cream market matures.”

What’s stuck with me through the years is that if you see a company deviate from what it’s always done successfully, it’s a very good bet the traditional business is nearing the end of the line.

That’s what’s happening here.

Nevada is by a mile the biggest gambling state in the union; NJ is #3, having just been surpassed by its neighbor, Pennsylvania.  I can’t imagine that the legislature in either state would be legalizing internet gambling without the encouragement of the major casino operators.

2.  self-cannibalization isn’t good, but it’s the best alternative

Yes, the advent of online gambling means that some people—we don’t know how many, or how much revenue they represent—will gamble online rather than go to a casino. My guess, which isn’t worth much, is that poker will be the first game to feel the effects of online competition, and the one most deeply hurt.

Online revenue is money that will be lost to the casinos. The corporations that own the casinos have two basic choices:

–they can either pretend online gambling isn’t going to happen, or do everything they can to oppose legalization. In either case, they suffer the full revenue loss. Or,

–they can get out in front of the trend, establish their own online operations and recapture at least a portion of the money they stand to lose. Maybe they’re lucky and end up net winners. But even if they aren’t, unless they completely botch their online operations they’re better off than by ignoring the issue.

3.  real estate doesn’t go away quickly

Hotels, including casino resorts, typically last many decades.  Once they’re built in an already saturated market, overcapacity is the order of the day until/unless the market expands to absorb it.

Casinos are particularly tenacious, because operators can increase table game gambling capacity simply by changing the little table betting limit signs.  Though a more expensive proposition than a $5 sign, slot machines can be swapped in or out quickly.

Structures do age, especially if management doesn’t continually spend on refurbishment.  A hotel, for example, may start out as  Marriott.  If the owners decide at some point to run it to maximize cash, they stop refurbishing.  The hotel may may then become a Great Western, then a Knights Inn…  Ultimately, it will be converted into, say, a nursing home and disappear as a hotel.  But that process can take twenty years or more.

More tomorrow.