resort fees and revolution – dangerous imitations

Little in the business news measures up to the importance of what is happening the Libya or any place else in the Middle East.  However, all of us are still living our daily lives and that means we are working. I spent a part of every day reading about the gaming industry,  surveying the news looking for significant news items, developing trends or major changes in the gaming business landscape.  In general, this year, unlike the events in the Middle East, has been a continuation of last year – ever increasing competition at both the individual casino and at the jurisdictional level and a slow, if not, depressed economy.  There are budget discussions in most states like those in Wisconsin, although not quite as acrimonious, every state needs to reduce its expenses and increase its revenues; and many states are looking at gaming for new revenues sources.  Within the individual gaming companies, the same events are taking place that are taking place in the state legislatures – that is looking for ways to reduce expense and to generate new revenue sources.

MGM is one of those companies that needs to do both, reduce expenses and increase revenue; MGM is one of those companies, like Harrah’s and Station Casinos, that has exceptionally high debt incurred at a time when the economy was in high gear and growing – now like those two it has to service that debt in a weakened economy. Again like its peers and state governments, MGM is also looking for ways to generate new sources of revenue.  In business, like in politics there are very few original thinkers – most just look around for what appears to be successful idea and copy it.  That is they copy as best they can by adapting it to their special circumstances – however sometimes the copying is also flawed by an incomplete understanding of the original idea or a poor execution of it.

MGM’s latest property CityCenter opened a year ago.  It was built at an estimated $10 billion (now valued at $4 billion) was not a copy of anything – it was intended to redefine Las Vegas and maybe all cities; its financing was comprised of very creative elements, 30 percent of its original cost was to be paid by the buyers of the luxury condos that are part of its massive presence on the Strip, another 30 or 40 percent was from Dubai Investments, also fueled by the expanding economy.   However, a major recession took the wind out of MGM’s condo sales, Dubai’s financing and the creativity out of its thinking.  The problems MGM faces are common to many industries and regions of the country.  In trying to resolve its issues, MGM looked outside the casino-resort box to the airline industry; it seems that since airlines have unbundled some of their services and begun offering them a la carte or at least charging for individual items – like checked baggage, snacks and preferred boarding status – the airlines are making more money.

MGM is charging for preferred check-out, reserved special accommodates like a king-sized bed or a non-smoking room.  It may work, I only know how I think about flying – I now try to fly on one airline only, Southwest, they don’t charge to check baggage and for the most part boarding preferences are determined by when you check-in, I carry my own food and water; in short I avoid all of the new charges. Were I booking a hotel in Las Vegas I would do the same.

There are a couple of differences between a Las Vegas hotel and an airline that may have escaped the notice of the MGM executives.  When I fly I often have to take which ever airline flies between the points of my travel; when I go to Las Vegas there are 200,000 hotel rooms to choose from – I don’t have to stay in an MGM hotel, nor am I forced to pay up to $8 a bottle for water or any of the other exaggerated costs that are becoming common in the hotel industry – bundled they are being called resort fees.  However, they are bundled, titled or priced to me they are simply exploitative and not likely to be a successful long term business strategy.

Trying to initiate someone else without understanding what or why they are doing it can lead to some serious and costly mistakes.  I listened to an interview with a demonstrator in Bahrain yesterday, he said they had learned their lessons from Egypt – stay in the square, demand change and be prepared to pay a price for change.  Only there are 80 million people in Egypt and 1.3 million in Bahrain – Egypt is a country with a rapidly increasing population and dramatically changing demographics.  It has been a “country’ for some 4000 years, Bahrain is a resent construct, the result of British colonialism and tribal politics.  An Egyptian “soul” or “spirit” resonates with all Egyptians – there is no equivalent underlying unity in Bahrain. Egypt has relatively little internal religious conflict, Bahrain has a religious divide at the center of its conflict.

The people in Bahrain demonstrating may be successful in their efforts – but they are like MGM – they lack the power of the size and therefore the force of necessity that the Egyptians have – the government had to deal with the people in Egypt, too many people had joined the efforts and without their cooperation in the economy the entire state of Egypt would have ground to a halt. The government of Bahrain may have a bit more independence from the people.   There are times when American Airlines can force me to fly in their skies and pay their fees – there are no times when MGM can force me to stay in its rooms and pay its fees. I don’t think the people of Bahrain have the power to force change.  At heart of all politics is power – in Libya the question of power seems very much up in the air, that is who has the most power. I would guess sitting in a square in Tripoli would not be a could model – just one more word of caution about how we choose the model we will follow.  In business there are issues of power – the electric company, the garbage company, the water company are examples – television and telephone used to be part of that – those companies can force me to pay their fees – the rest cannot, they have to please me to retain my custom.  That is always an important concept to remember in business – you can tell your customers what to do when they have no choice – if they have a choice they can tell you.  Mubarak lost his power to the tell Egyptians what to do, Gaddafi may lose his – MGM never had that power.  In Bahrain we don’t know yet where the power lies and therein as Old Willy said hangs the tale.



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February 2011
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