What does saturation look like? Update – February 2013


Recently, I posed a question: “Have all the good things been taken?”  In that piece I argued that all of the good opportunities for further expansion of gaming are gone. The implication was the American gaming market was nearing a point of saturation – full, no more room for new product.  That is just a step away from a gaming market that is over saturated – meaning too much product; something has to give and some will have to go away if any are to is survive and make a profit.  It is probably too soon to write about the subject, except the numbers for January are painting an even darker picture.

Of course, saying the gaming market has reached saturation is just my opinion.  It is clearly not the opinion of many others.  Take for example the following examples; Iowa, where regulators and a number of communities are discussing at least one additional license in the state; in Illinois, the mayor of Chicago and a host of others would like to add more casinos to that state; in Pennsylvania the gaming commission is now reviewing six proposals for another casino in Philadelphia; the governors of Nevada and New Jersey are pushing online gaming for their state, as are the lottery director in Delaware and Iowa; Ohio is set to open its fourth casino, when the state is built out there will be seven racinos and four casinos; Maryland is accepting bids for a fifth casino, this one in Prince George; a major Indian casino is under construction near San Francisco; and Massachusetts is bustling along, preparing to license casinos in that state.  That is not all of the current expansion activity in the country, but it is enough to give one a flavor of the issue.

So, regardless of how I might think about saturation, there are more than enough people who see additional opportunity to keep expansion going; and in their rush to expand they may be pushing the industry off the cliff of saturation into a swamp of over-saturation.  Although none of the politicians, regulators and would-be casino operators that are in that push read anything I write, I still think I am obligated to present a bit more evidence for my case – that this is a time for caution not wild expansion.

The evidence: The state of Illinois has started to report the amount of revenue generated from slot machines in bars and other free-standing, non-casino locations. In January, slot revenue was almost $10 million in Illinois.  Admittedly, $10 million is not much.  However the total casino revenue was just $123 million – a decline of 3 percent over January 2012.  Of that $123 million, $32 million comes from Rivers Casino.  Rivers is the newest kid on the block and the one that is eating the other kids lunch.  Rivers is getting 26 percent of the market, much of its revenue has been taken from the other casinos.  Combine Rivers with the slot machines revenue and the casinos in Illinois have some serious challenges ahead.

The slot machine roll out is just beginning; when there are 15,000 or more slot machines in the state and the 5 or 6 more casinos, the expansionists would like, Illinois will be a very difficult place to operate a casino. The state will probably generate more total gaming revenue.  That may be good for the state, but will any of the individual operators (except the bar owners who do not have a significant investment in the slot venture) be profitable?  Some will, but many will not. The general manager of the Grand Victoria casino in Elgin, testified at a city council meeting dealing with the authorization of slot machines in bars in Elgin.  He warned the council members of the potential impact of slot machines on the casino and the revenue it provides to the city; he said within two years he believes every community in Illinois will have authorized slot machines.  He did not threaten anyone; he simply predicted a future where the gambling dollars will be spread very thinly – too thinly for every operator to make a profit and continue in business.

Revenue at the metro-east’s two casinos fell in January from the previous month and from a year earlier, as it did at most of the state’s other casinos.  Meantime, video gambling at bars, veterans clubs, fraternal clubs and truck stops continued gaining steam. Statewide, the slot and video poker machines took about $9.78 million from players in January…Combined, revenue at the state’s 10 casinos was $123 million in January, a drop of 6.8 percent from December revenue of $132 million and down 3 percent from January 2012 revenue of $127 million.  The new video gaming machines at bars and other establishments had a net income, statewide, of $9.78 million in January. The video games’ net income, statewide, was $7 million in December. Brian Brueggemann,Belleville News-Democrat, 2-12-13

The evidence: Atlantic City, everyone’s favorite whipping boy these days, is in a crisis; revenues in Atlantic City’s casino were down 13 percent in January.  Atlantic City is entering its 7th consecutive year of decline, in fact if revenues were to decline 13 percent for the entire year, 2013 gaming revenues would be approximately half of what they were in 2006 when casinos started to open in Pennsylvania.  Just one year after it opened, Revel the $2.8 billion casino the governor hoped would reverse Atlantic City’s fortunes, appears headed for bankruptcy. It ranks next to last in revenue generation; not what was predicted for the most expensive casino the city has ever seen. Revel cost double what Borgata cost to build and has more than twice its debt.  Borgata is the market leader and most successful casino in town. There might never have been room for two billion dollar casinos in Atlantic City, but with the revenue cut in half there is much less room than there was in 2006.

 Revel Entertainment Group LLC, whose operating subsidiary runs the casino and carries roughly $1.2 billion in debt, hired law firm Kirkland & Ellis LLP and investment bank Moelis & Co. within the past week, the people said. Discussions on how to address the debt are at an early stage and decisions haven’t been made on next steps, the people said. Revel has been bailed out by investors several times since opening in April and this month revealed it had amended a credit agreement for the fourth time and hired Alvarez & Marsal, a turnaround firm that helps companies conserve cash and restructure operations. The casino took in less than $8 million in revenue in January, according to state figures released Monday. Revenue dropped 19% from December, making January the second-worst month for the casino since it opened. Mike Spector/ Alexandra Berzon/ Heather Haddon, Wall Street Journal, 2-12-13

The evidence: Ohio is the latest state to open casinos.  Ohio will get its fourth casino in March; one racetrack with slot machines opened a year ago.  Six more “racinos” are authorized in the state and will open slowly over the next couple of years. There has been much talk about the impact of the Ohio casinos on casinos in Detroit, Indiana and Pennsylvania; casinos in all three states are reported serious revenue declines which have been attributed to Ohio casinos. That was to be expect, but less expected has been the disappointing revenue from the three existing Ohio casinos.

The Ohio casinos are current generating about half of revenue for the state that had been forecast by the governor and state legislature when the casino referendum was proposed.  That means the individual casinos are generating much less than their investors anticipated, which, in the long run, may lead at least one of the casinos into the same court that is currently beckoning Revel in Atlantic City.   And that is before the last casino opens and much before the impact of 6 addition racinos.  It is not looking good, guys.

Four years ago, while voters were considering allowing Las Vegas-style gambling in Ohio, state officials predicted the four proposed casinos would take in as much as $1.9 billion a year after all were in operation. But a new estimate says that estimate could be cut in half, drastically reducing taxes paid to the state. A biennial budget that Gov. John Kasich proposed Monday projects that the casinos will have $957.7 million in gross revenue for the fiscal year that begins July 1. Deputy Budget Director Frederick Church said the figure rises to slightly more than $1 billion in the fiscal year that starts July 1, 2014. Thomas Ott, Cleveland Plain Dealer, 2-5-13

Back to my original question: what does saturation look like?  This is what it looks like.  Too many casinos, too much money invested in each and too few customers to go around.  That is what we have now in Pennsylvania, Illinois, Indiana, Ohio, Maryland, New Jersey, Connecticut and Delaware.  That is the January update.  Every month is likely to bring in more economic evidence; but as I said, the people pushing the expansion are not following the argument, they are too busy pushing forward.

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