Revel bankruptcy, a sign of Atlantic City’s continuing gambling woes

Maybe this shows I’m just not so inspired this morning  …because it’s the last day of Spring?

As I was collecting data for this post, I noticed that the Revel casino in Atlantic City filed for Chapter 11 bankruptcy protection yesterday.  The pipe dream of Morgan Stanley master-of-the-universe wannabees, the Revel was supposed to be the upscale entry in a market that caters to little old ladies with buckets of quarters.  Not only was the concept suspect, but the timing was awful, coinciding as it did with the peaking of the seaside town’s gambling win in 2006.  Oddly, in my view, the state government pumped more than a quarter billion dollars into Revel in 2011 to help get it open.  That’s a half-decade after the numbers began to show that the last thing the existing gaming operations needed was more capacity.

Revel is actually the second AC casino bankruptcy in recent months.  Last November, the Atlantic Club (which was, once upon a time, the Golden Nugget) entered Chapter 11; in January it closed its doors.

Aggregate casino revenue for Atlantic City has been dropping steadily since the legalization of casino gambling in nearby Pennsylvania (casinos have since opened in Maryland, Delaware and New York.  More are on the drawing board for NY and Massachusetts).  The current run rate is slightly above half of the peak.

As I wrote about at the time, last year Trenton tried to breathe some new life into Atlantic City, which even in its weakened condition will chip in $150 million – $200 million in tax revenue to the state, by allowing online gambling.

Early predictions by the politicians were that online gamblers would boost aggregate casino win (the amount lost by gamblers) by $1 billion.  Microeconomically minded might observe that some of this new-found money might come from gamblers betting online instead of in the physical casinos–so it might not be a pure gain.  In addition, any redistribution might deepen the plight of any casino that didn’t offer an online option.

But, since the state tax on online gambling revenue is almost double that for onsite betting (15% vs. 8%), Trenton would likely come out a winner no matter what collateral damage might occur.

results so far

Through May, online gambling has generated $53.5 million in casino win, or about $10 million a month.  On the same measure, physical casinos are down by 6.5% year-on-year, or about $74.0 million.   …Ouch.

significance?

While it’s still early days, online gambling in New Jersey so far seems to be a bust for everyone except the tax collector.  So Las Vegas may have little to worry about.

Also, in the Northeast US at least, there appears to be a relatively fixed amount of money that people are willing to spend on gambling in the local area.  New casino openings–of which there are plenty in the pipeline–don’t appear to add much to aggregate demand, but rather mostly shift money from one pocket to another–and add to overall industry costs.  This implies continuing trouble for overbuilt areas like Atlantic City, or, eventually, any of the other states that are adding capacity.

 

 

 

online gambling in the US

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.

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.