Cheating Slots in the 21st Century

At a meeting recently, an associate asked me about a slot scam that had taken place in 2014. The case was reported by Wired Magazine in February in intriguing detail.   The described incident took place in St. Louis where a man played slots for two or three days always winning, but never winning enough to require an employee to verify the jackpot.  Further investigation led to a team of Russians working casinos around the United States and in other countries.  They worked the same type of slot machines each time – Aristocrat Mark IV and certain models of Novomatic machines.

According to the Wired article, the scam began when Russia outlawed most forms of gambling. The ban forced many owners of slot machines to sell them to whomever was willing to buy them.  Characteristically of the post-communist Russian economy, opportunists saw the used slot machines as a chance to attempt to reverse engineer the games.  In the process, those talented, but under-employed computer engineers discovered a little known fact; random number generators are not truly random.  If you can “see” a large enough segment of data from a slot machine’s random number generator you can find a pattern.  The engineers found those patterns in the Aristocrat and Novomatic games.  An individual could not recognize the pattern as it developed because that required a computer. However, an individual could carry a cellular phone and send the results displayed on the screen of a slot machine to a computer in Russia.

The computers in Russia could analyze the data and send the correct response to players in far off St. Louis or an Indian casino in Southern California.  So, back to my associate’s question. The Russians appear to be laying low in this country – or maybe they have been too busy with elections, credit cards or bank databases to play slot machines – but they have not retired.  In April, the Straits Times reported on an incident that took place over a three day period at both the Marina Bay Sands and Resorts World Sentosa.  The facts were like those in St. Louis with some of the detail flushed out more completely.   The team may have as many as 25 members and is broken into smaller units.  Each unit has a “master” and that person gets 15 to 25 percent of the winnings; the individual players get 10 percent, the remainder is sent back to Russia.  Players are recruited and trained in Russia before being sent out to play.

Thus far only two manufacturers and two models have been hit.  However, that doesn’t mean there are not others that are vulnerable and it doesn’t mean that there is only one team operating in the world.  The issue is a bit unnerving; it indicates that slot machines are not as secure as was once thought.  It turns out that random number generating is not completely random; in fact, the Wired article used the term “pseudorandom” to clarify the difference between truly random number generating and the process used by slot machine manufacturers in modern slot machines.  Exploiting a discernable, non-random pattern is not necessarily a new way to cheat a slot machine. Years ago, a former IGT engineer used a similar system to play keno slot machines in the Midwest. He could, like the computer in Russia, recognize a pattern that indicated an upcoming jackpot.  The industry is lucky that it has happened, to our knowledge, so seldom.  But casino slot machines are not the only place a non-random, random number generating system can be found.

Eddie Raymond Tipton, former information security director of the Multi-State Lottery Association, which runs Powerball and Mega Millions, was convicted of rigging jackpots in Colorado, Wisconsin, Iowa, Kansas and Oklahoma.  Tipton, with his brother and friends, traveled to different states to hit a jackpot; he knew the dates on which some number patterns would be “drawn.”  This week, Tipton is promising to explain to regulators how he was able to predict the lottery outcomes.  That will be a big help, but it will not solve the problem.  The underlying problem is one without a simple solution.  Our entire economy, not just gaming, is dependent on computer technology.  That makes us vulnerable to other computer technology that can “hack” into our system and either manipulate the data or decode it.  It happens daily. This week hackers released data they had stolen from a casino in Canada; it contains the personal information of the casino’s best players.  As serious as that is, it is not as serious as the hackers who recently stopped the English National Health System in its tracks and disrupted dozens of other government and private business around the world.

Everything we own and depend upon is in one way or another tied into the internet and thus vulnerable to others using the same system.  Pacemakers, furnaces, refrigerators, televisions, cars, banks, hospitals, slot machines and lotteries are all hooked up in one big happy bundle.  In a simplistic and nostalgic way, I think I preferred slot machines that could be breached with a screw driver.  A slot cheat could go home with a couple hundred dollars, but no one could make the whole world come to a complete stop or empty slot machines and bank accounts with a cell phone and a computer.  With all of our technology we are much less secure than we were before we had it.  We might be richer, happier and healthier, but we are not more secure.

Every Casino’s Nightmare is Here!

Our worst nightmare has happened; a casino in the Philippines was the target of an armed attacker.  In a world dominated by real and imagined terror attacks, everyone is worried about the potential of an attack in their immediate environment.  As London reels from yet another attack, most cities are trying to devise security plans to protect their citizens.  Particularly at risk are public gatherings like the concert in London or popular meeting places as in Paris.  The first major attack on a casino took place in the Philippines on Friday, June 2nd, when an armed man walked into Resorts World in Manila. Before it was over 37 people were dead and many others suffered harm from smoke inhalation or in a panic induced stampede while attempting to escape.

ISIS claimed responsibility for the attack and praised the martyr for his brave death.  Casinos all over the world started to think seriously about terrorism. Lawmakers in the Philippines are set to begin an investigation into the tragedy.   Regulators in Macau called all the gaming operators to a meeting to discuss increasing security.  Las Vegas had already begun planning to install “bollards” – posts designed to prevent cars from driving onto sidewalks. The Mississippi Gaming Commission issued guidance requiring casinos to submit active shooter response plans. We are certain to see more responses from individual casino operators and from state and national governments and industry regulators.  A series of recent events has pushed the level of angst worldwide to new heights.  In some places fear has reached the point of hysteria; in Turin, Italy 1500 people were injured in a stampede when the crowd at a soccer match “was taken by panic and by the psychosis of a terror attack.”  No one knows exactly what happened, but officials think people heard a loud noise and immediately assumed a terrorist attack was underway. Like the gamblers in Manila they panicked and attempted to flee, killing each other in the process.

The fear is understandable. Just one day after the incident in Manila, three men in London armed with knives entered two different restaurants shouting jihadist messages and proceeded to stab as many people as possible. The knife attacks followed attempts to run down pedestrians on London Bridge; in all, seven people were killed and 48 people were injured in the attacks.  Where will it end?  British Prime Minister, Teresa May says “enough is enough.”  Fine words, but what can be done to stop this seemingly endless stream of assaults on our culture and lives?

We call it terrorism, but that is not always the case.  In Manila the masked man turned out to be a former employee of the Philippine Department of Finance.  He was a gambler who had incurred a very large debt.  In his attack he did not shoot anyone; the injuries and deaths were all from smoke or the stampede.  The smoke came from fires the man set as he moved through the casino collecting about $2.3 million in gaming chips.  In the end he fled to a hotel room, set himself on fire and then put his gun in his mouth and pulled the trigger.  He was not a terrorist, just a deranged person who committed irrational acts that injured and killed other people.

The unhinged, lone assailant is just as common as the terrorist yelling, Allah Akbar.”  On May 26th, in Portland Oregon one such man stabbed and killed two people when they interrupted his verbal assault on two Muslim women riding a city bus. In Charleston South Carolina, a 22 year-old white man shot and killed nine African Americans during a prayer service.  In Orlando, Florida a disgruntled former employee killed five of his former co-workers and then killed himself. The man in Portland wanted to protect Americans from Muslims; the one in South Carolina wanted to protect the white race from the black race. The man in Orlando wanted to punish people he blamed for losing his job. Remember Columbine High School?  Two students attacked their school, killing 13 and wounding 20 more.  Clearly, Islamic terrorists are not the only threat to our society, nor are they necessarily the most pressing threat.  Irrational people who are willing to kill and die to express their hatred are the real threat. Sometimes they can be declared terrorists as they were in London, but at other times the killers are motivated by nothing more than anger and a desire to cause pain.

All public gathering places, including casinos, are going to become more closely regulated.  Las Vegas and possibly Atlantic City are considered the prime targets for attention-seeking terrorists.  However, in truth all casinos are targets.  The man who wishes to get revenge on his wife by killing her and her family in a public place could choose a casino.  Any bigot might seek targets in the local casino and of course the disgruntled gambler is most certainly going to target the source of his pain, a casino.  Years ago, I remember an angry gambler tried to drive his car through the front door of a casino to punish someone for an imagined wrong.  At the time, it was it was terrible occurrence, but in today’s world it would almost be a joke, a caricature of horrendous things being perpetrated by people without compassion or a sense of social justice.

The attacks that kill or injure people are all horrific, but the impact does not end with the slaughter, it continues long afterwards.  Much as 9/11 changed flying forever, the more recent attacks threaten to permanently change our culture.  Since that fateful day in 2001, I have lost my freedom of speech in airports.  I cannot challenge any official or policy; if I do I can be taken off a plane or denied boarding and arrested.  I fear the same thing will happen to all public speech.  Excluding the man in Manila, the other attackers referred to here had been very vocal.  They had openly expressed their anger, hate and desire to harm others.  Each time an incident has occurred, there have been calls for investigations and lawmakers righteously say “something” has to be done.  The easiest first step is to arrest all of those people making inflammatory and dangerous statements.

The event in Resorts World was a terrible tragedy and one that will very likely alter casino gaming in ways we cannot begin to imagine.  I see two changes that almost certainly will be implemented in some jurisdictions.  First, casinos will be required to maintain lists of “do not allow” people. Incidentally, meeting the requirements will require video surveillance with face recognition technology and armed guards at the door checking IDs.  Secondly, some jurisdictions will require metal scanners and other screening devices will be placed at all entrances; rather like the governmental buildings in the aftermath of 9/11.  We are locked in a frightening dilemma between individual freedoms and public safety.  And that, my friend, is my worst nightmare and it is just starting.

A Not So Grand Bargain

The Illinois legislature is attempting to devise a compromise budget bargain that will satisfying both political parties and the governor.  The state is in a two and half year budget crisis that started when Governor Bruce Rauner vetoed the first budget of his term in office in 2015. In fact, no budget has been approved during his administration.  There are some observers who believe there is hope this year, but there are only a few days left in the legislative session.  Much has been written about the backroom, closed door negotiations between the state’s Democrat and Republican lawmakers as they try to reach a compromise that satisfies both parties and addresses the issues important to the Republican governor.  He has said he will veto anything that fails to meet his criteria.  The compromise is being called “The Grand Bargain” and as one might expect, it includes some grand plans for new casinos in Illinois.

“There is a grand bargain being negotiated. I believe new revenues through the casino are part of that grand bargain, and I’ve said I’m open to whatever package can move the needle to a balanced budget, and I’ve said I’m open to local control. So the answer is, if that came as part of a package, I could be supportive of that,” Governor Bruce Rauner said.

Calling the bargain “grand” is rather grandiose as the term connotes some truly Grand things such as the Grand Bazaar, Grand Canal, Grand Place and numerous Grand Hotels.  The Turks started building the Grand Bazaar six hundred years ago; the Grand Canal is as old as Venice. The Grand Place in Brussels began as a market in the 12th century and the hotels for the most part were creations of 18th and 19th century culture.  It is difficult for me to put a political bargain in Illinois in that category.  However, I suppose for those waiting for the state to pay up it would at least be a grand bargain if they get their money.  Illinois currently has $14 billion in unpaid debts because it is operating without a budget.

For the gaming industry, the important elements in the compromise include as many as six casinos, one of which would be in Chicago with another possible in Springfield.  A new and lower casino revenue tax is being suggested which might help the existing industry.  But if Illinois ends up with six additional casinos, a tax break is not going to make up for the revenue lost to those new casinos.  I see no upside to the expansion for the state’s casinos; in the aggregate the state would probably have more total revenue from casinos.  However, the grand bargain’s potential for success does not hinge on the casinos; it is dependent on meeting Governor Rauner’s criteria.  The Republican governor is a first term politician and a businessman.  Bruce Rauner ran on a turnaround platform promising that for any budget to receive his approval it must freeze income and property taxes, change collective bargaining and prevailing wage laws, increase sales tax to areas currently not taxed, consolidate local government bodies and impose term limits.  Thus far it has been a contentious and bitter battle for ideological control between the governor and the lawmakers.

“The governor may have underestimated just how strong the Democrats’ resolve was not to turn their backs on their traditional allies, as well as the Democratic leaders may not have appreciated how strongly the governor felt about trying to impose some of those turnaround agenda items in exchange for a tax increase,” Jak Tichenor, interim director at the Paul Simon Public Policy Institute at Southern Illinois University at Carbondale said. Decatur Herald & Review, 5-21-17

The governor has indicated he is prepared to finish his term in office without a budget.  He is willing to make the issue the centerpiece of his campaign for re-election and in the process blame career politicians, insiders and unions for the deadlock.  Rauner and one other man provided nearly all of the funding for his last campaign and have already put up a reported $100 million for his re-election efforts.  The ability to self-fund the campaign makes him far more independent than most candidates.  The budget has become a very high stakes game that some think is more like Russian roulette than poker.  I can see nothing grand in the making and in particular I can see no grand outcome for the existing industry in Illinois.  The Grand Bazaar has lasted for six hundred years because it has something for everyone.  The Grand Bargain has little of value for anyone and is not likely to survive even one legislative session.

 

Up, Up and Away – Maybe

The revenue crisis in Macau seems to have ended.  Gaming revenues have been rising for nine months after plunging for twenty-six months.  Until May 2014, casino revenues in Macau had increased month over month for ten years, peaking at $45 billion.  Up to that point there seemed to be no limit on gaming’s growth in Macau.  And then seemingly out of the blue, China decided to rid itself of corrupt officials.  Instantly, casino revenue started to fall as the high-rolling gamblers from Mainland China disappeared.  In retrospect, it seems Chinese government and business officials had been taking illegally gained money from the mainland to gamble in Macau.  To make matters worse, the Chinese economy which had been growing nearly as dramatically as Macau’s gaming economy stalled.  The downward spiral in Macau continued until August 2016 and then as abruptly as the trend began, it stopped and started to reverse directions.

Revenue has risen every month since last August.  At first, no one was willing to say the downward trend had stopped.  However, with each passing month casino operators, professional analysts and government officials have gained confidence in the upward trend. Nobody has been more confident than Lawrence Ho.  He thinks gaming is coming back, all the way back to 2013 levels. Recently Ho said, “Definitely within the next five years, it will grow back to a $45 billion gaming market.  And that’s just the gaming alone, because the non-gaming part is significant.” Ho is the chairman of Melco Resorts, a former partner of James Packer and the son of Stanley Ho, the grandfather of casino gambling; he also has two sisters with senior management positions in Macau.  Ho is Chinese and grew up in Macau and in gaming; he was there when the Macau reverted to Chinese control and he was one of the first recipients of the new licenses in 2003. All of that makes him an expert on gambling in Macau, so it would be foolish to dismiss his opinion offhand.

However, not every experienced observer and insider sees the same rosy future as Ho.  Pansy Ho, a sister, has some grave concerns about an industry built increasingly around non-gaming tourism.  Besides President Xi of China’s policy to eliminate corrupt officials, his government has been adamant that Macau must move past gambling and become an international tourist destination.  To meet that mandate all of the casinos currently under construction and those finished in the last three years have spent billions of dollars each on creating full resorts with hotels, convention facilities, a wide range of restaurants, entertainment and special tourist attractions.  Pansy says making those amenities pay for themselves is not easy.  One of the companies with which she is associated, reported significant losses in its hospitality division.  Ms. Ho thinks the city will to need to find “its own methodology” in diversification because the current one is not working.

The worst part of the campaign against corruption is probably over.   However, there are some dangling issues that connect the current situation to the crackdown and suggest it is not over yet.  In April, a former mainland provisional governor named Chen was removed from office.  The prosecutor in the case used language that suggests there is an unstated political agenda involved in the process.  The prosecutor said “Chen was politically climbing to power, economically insatiable and morally bankrupt. Even after the 18th CPC National Congress, he still showed no sign of restraint and [his wrongdoings] were of a grave nature.”  It is the kind of demonizing language that characterized the purges of Cultural Revolution.

Another indicator that all is not well beneath the surface can be found in the activities of the Commission against Corruption.  The commission has become very visible; in every meeting of officials in Macau a commission representative is present; including meetings with Chinese officials, international tourism gatherings and local cultural functions. There is a press announcement, at least weekly, concerning a new or an ongoing investigation into wrongdoings. I do not know what that means, except it seems like an implied threat.  Reading between the lines is a highly specialized skill in China.

Zhang Dejiang, the Chinese official responsible for oversight of Macau and Hong Kong, was in Macau in  early May.  Zhang stayed three days and made a number of appearances, making a speech each time.  He had one very constant theme saying over and over that government officials and lawmakers needed to commit to the “One Government, Two Systems” policy.  He suggested a loyalty pledge is in order and reiterated that all concerned should become more familiar with the meaning of the policy.  Attempting to read between the lines, it sounds more like a threat, a promise to punish misbehavior rather than a pat on the head for a job well done.  Regardless of the true meaning of his words, he had an instant impact on gaming.  Analysts gave Zhang credit for a decline in revenues during his visit.

In the midst of the turmoil of the last three years, several new properties have opened. The market may be expanding, but all the casinos within the market are not necessarily sharing in the good times.  In fact, recently I came upon an interesting story in the Macau Daily Times.  It suggests that for some properties these are not good times.   According to the article, City of Dreams, one of the latest multi-billion-dollar resorts to open, is having weekly drawings for free airline tickets.  Three times a week at 8 pm gamblers get a chance to win a “Travel without Limits” ticket, allowing them to travel as much as they want for a full year.  Now, I don’t know about your experience, but in mine, drawings like that take place when business is slow.  Oh, and I forgot to mention, City of Dreams is owned by Lawrence Ho’s company.   Regardless of City of Dreams and drawings, gaming revenues in Macau are moving up significantly.  The way the revenue trend in Macau reversed is very rare.  But everything about Macau is rare and different.  The gaming industry has never seen anything quite like it and today it may be up, up and away and tomorrow it could be down, down and down.

A City and an Industry in Transition

The casino industry has changed dramatically since the 1980’s when I worked at the Comstock Hotel and Casino.  In those days, Reno was a vibrant, growing and expanding casino market; it was the number three gaming market in the country after Las Vegas and Atlantic City.  The picture is very different today; most of the casinos from my day have closed up shop and the buildings have been repurposed.  The surviving casinos have one thing in common; they are now part of national corporations.  Those still open and operating are no longer tied exclusively to Reno or as Gary Carano said, “We don’t have all of our eggs in one basket.”  Carano is the CEO of Eldorado Resorts, which as of May 1, 2017, owns 19 casinos in 10 states. That corporation is a far cry from the Eldorado Casino that opened in Reno in 1973 with a few hundred slot machines and 282 rooms.

On May Day, Eldorado Resorts completed its purchase of Isle of Capri.  That purchase was the most recent in a string of mergers and acquisitions over the last few years including the Silver Legacy and Circus Circus in Reno in 2015, a merger with MTR Gaming in 2014 and an earlier purchase of Hollywood Casino in Shreveport, Louisiana.  In the process, Eldorado Resorts has risen to number six on the list of gaming corporations as ranked by the number of casinos operated.

Thirty-five years ago, the Carano brothers and I were competitors in the casino core of Reno.  There were over 20 casinos within the downtown area competing for the 5 million tourists who visited Reno annually in the 1980’s.  Each of us tried to differentiate our casino from the others with promotions, food specials and gaming tournaments.  The Eldorado concentrated on quality and targeted a more sophisticated table game and restaurant customer.  Except for Harrah’s, the other casinos targeted slot players.  The Eldorado introduced higher quality restaurants, higher limit games, upgraded hotel rooms and renewed with a more elegant décor.  Only Harrah’s competed directly with the Eldorado by offering comparable products.  Competing for those customers requires constant reinvestment. If everything is not well-maintained with the most up-to-date rooms, restaurants, slot machines and entertainment, customers go elsewhere. Long ago, Harrah’s threw in the towel as Reno was no longer worth the investment.  As to those other casinos, the slot players found a slot machine closer to home in an Indian casino.

The number of people visiting Reno has been decreasing yearly since the advent of Indian gaming.  As the number of Indian casinos in Washington, Oregon and California increased, the number of tourists coming to Reno dropped.  In 2017, that number is closer to 2 million than at the peak in the late 1980’s when nearly 6 million visitors came to town.  The result is easy to see; today there are only seven casinos where once there were twenty.  It has been clear for a long time, that if you have only one casino in downtown Reno, you probably will not remain in business.  There are exceptions in the greater metro area.  The casinos catering to local business in their immediate vicinity, such as the Atlantis, Peppermill and the Gold Dust West have done well over the years.  But Reno’s economy has also evolved.  It has moved being driven by gaming to an economy is built around technology.

The Reno casino industry has changed a great deal in the last thirty years, but the overall gaming industry has changed even more. The Eldorado succeeded by expanding into other markets.  It is the only successful strategy thus far for a downtown Reno casino; actually it is the only truly successful strategy in the country.   In today’s competitive environment, a casino company with an operation in only one jurisdiction faces a very uncertain future for several reasons.  A single event such as a flood, hurricane or regional recession can spell its doom.  Half of the casinos that have disappeared in Reno in the last 20 years did so as a result of the disastrous flood of 1997.  It was the proverbial straw that broke the casino’s back.

Additionally, there is an even larger threat, the gaming expansion in neighboring states.  An increase in casinos in adjacent states always reduces the base of regular customers.  That is what casinos in Pennsylvania did to Atlantic City and Indian casinos did to Reno.  The problem is not unique to Atlantic City or Reno; in 2017, no single jurisdiction can withstand significant expansion on its borders. The casino gaming industry is transitioning from a local into a national industry.  It is now dominated by a handful of major corporations.  Those corporations are the only ones able to survive the ups and downs of individual jurisdictions. They have ready access to financing and thus the ability to maintain highly competitive individual properties and to compete for licenses in new jurisdictions.

The Eldorado survived the decline of Reno and joined the ranks of the big guys.  It survived because it expanded, but also because in Reno it maintained its commitment to quality.  The Eldorado continued to reinvest here while the rest of us failed to do so.  Maybe it was because we did not have enough cash flow or maybe it was because our vision was too narrow.  Today, the Comstock has no casino, no restaurants and no retail, just condominiums. But, if you want to invest in Reno, I think there are even a few units available or you might buy some stock in Eldorado Resorts.

The Reno-based company closed on its acquisition of Isle of Capri Casinos, adding 12 more properties to its portfolio and creating a larger regional gaming business worth $1.7 billion. Eldorado acquired Isle of Capri for $23.00 in cash per share or 1.638 shares of Eldorado common stock. Eldorado first announced its plans to acquire the company last year. The acquisition adds to a growing portfolio for Eldorado Resorts that includes properties in Nevada, Louisiana, Ohio, Pennsylvania and West Virginia. In addition to its Reno Tri-Properties, which include the Eldorado, Silver Legacy and Circus Circus, the company also owns Eldorado Shreveport, Scioto Downs, Mountaineer and Presque Isle Downs.  The acquisition of Isle of Capri further expands the list to 19 total properties in 10 states, which now also include Colorado, Missouri, Mississippi and Florida. Jason Hidalgo, Reno Gazette-Journal, 5-2-17

A Battle Begins in Earnest in Oregon and Washington

On Monday, April 24th, the Cowlitz Indian Tribe’s casino opened.  Impatient crowds chanted Open! Open! Open! during the formal ribbon cutting ceremony.  The crowds had been lining up for hours waiting for the doors to open and the state police reported an 8-mile long traffic jam of cars waiting to get into the property.  The casino that produced those crowds was not cheap to build; it cost over $500 million and was financed by the Mohegan Tribe of Connecticut.  The tribe and its backers expect 4.5 million people to visit the casino in the next twelve months.  The eager gamblers have been waiting for months, but the Cowlitz Tribe has waited much longer.  Getting to opening day took a long time. One of the tribal leaders said the process had taken 160 years; that is how long the tribe has been trying to develop a successful relationship with the federal government.

The Cowlitz Tribe claims a 12,000 year history in the area.  The tribe did have a legal relationship with the United States after 1906, but did not have a ratified treaty. The tribe received formal recognition 2000; in of 2015, its 152-acre reservation was taken into trust and construction on the casino began in December.  Even with recognition and a reservation, the Cowlitz still had to fight a series of legal battles.  The nearby town of La Center, the City of Vancouver, Clark County, the Confederated Tribes of the Grand Ronde and a group called “Citizens Against Reservation Shopping” filed a lawsuit to appeal putting the land into trust.  The suit claimed that because the tribe was not recognized and did not have a reservation in 1934, it was not eligible to establish a reservation for the purpose of operating a casino.  A federal judge disagreed.  The plaintiffs filed an appeal, but lost.  At that point, most of the litigants withdrew, but the citizen group persisted until the case ended when the Supreme Court refused to hear it.

The opponents based their claims on the question of the tribal legitimacy.  In their argument, the Cowlitz Tribe was just shopping for a place to put a casino and had no ancestral claim to the region. And besides that the casino would harm the card rooms in La Center and Grand Ronde’s Spirit Mountain casino across the border in Oregon.  The card rooms are hardly big business, but they are important to the budget of the town, contributing $3.1 million to the city annually.  Two of the city’s four card rooms have closed already and the other two are not optimistic about their futures.  La Center is worried about its ability to fund basic services without the card room cash.

The impact on the casinos in Oregon is expected to be much larger.  Spirit Mountain has projected a $100 million revenue loss due to the new casino.  Chinook Winds, operated by the Siletz Tribe of Oregon, will also be impacted by the Ilani Casino.  Chinook Winds and Spirit Mountain have shared the Portland market for over twenty years.  Spirit Mountain is the closest to Portland and thus generates more gaming revenues. But the loss to Chinook Winds will still be significant. Both tribes are heavily dependent on casino revenues. In addition to those two, the Oregon Lottery is also projecting a $100 million revenue loss, primarily from its VLTs.  That revenue loss will be very important to everyone in the state.  Next to income tax, the lottery is the second largest source of revenue for Oregon.  So, while the crowds outside of Ilani were chanting Open! the management teams in the card rooms, casinos and lottery were wiping away their tears and getting to work on their marketing plans.

 The result of those marketing plans will be a serious battle for Portland’s gamblers.  Portland has a population of 600,000 and is Oregon largest city, just a touch smaller that Washington’s largest city, Seattle.  A city of that size can support a considerable amount of gambling, but there is a limit and most observers believe the new casino will bring the total casino capacity to that limit.  It will be a long time before we can fully assess the impact of Ilani on the market.  But using the numbers projected by the lottery and Spirit Mountain, one might speculate that the market will have reached saturation, in fact surpassed it.  If that is true, the lottery and the existing casinos will be very hard pressed.  In the worst case scenario, the new casino will also suffer.  Like any casino, Ilani must generate enough cash to service its debt. That might be easy to do if there were less competition, or even if the competition were less well-heeled.  However, that is not the case.

At the end of a recent column I used the phrase, “the process of market adjustment will begin in earnest.”  I meant by it, that when a market reaches saturation a very painful process of market adjustment must take place.  Think about Atlantic City over the last ten years. At first the casinos just downsized, reducing the number of slot machines and employees and cutting any other expenses they could to match cash flow.  When that failed to solve the problem, some managed to find new buyers with more cash to invest, while others were forced to close.   Spirit Mountain and Chinook Winds have the cash to invest in improving their casinos to fight marketing wars.  The Oregon lottery can add more units and at the same time upgrade its product.  Unlike an Atlantic City casino that fails, they will not close their doors.

The only operations that are likely to fold are the two remaining card rooms in La Center.  They are just too small to fight the 500-pound gorilla; the others will fight back with whatever resources they can muster.  That effort will force Ilani to spend more on marketing and promotions thereby reducing the cash available for debt. It will be a vicious cycle; none of the opponents will surrender as a conventional casino might.  The situation will be worth watching because it will give us a glimpse of the battles that are coming in other jurisdictions.   As casino gaming continues to expand, most jurisdictions are nearing saturation.  At that point, when there is more casino capacity than a market can support, a war will ensue.  In those wars, casinos will fight each other in a very expensive battle for every gaming dollar.  As Atlantic City has demonstrated, not every casino will survive the fight.

An Update on the Current Status of Gaming Expansion Legislation

With one quarter of 2017 in the books, it is a good time to look at the state of gaming expansion in the country.  As of the middle of April, eight states – Pennsylvania, Alabama, New Hampshire, Illinois, Connecticut, Florida, Texas and South Carolina have bills or initiatives to expand gaming. The bills vary a great deal and the prospects of a bill passing into law are very different in each state.  Often the most relevant fact in forecasting a bill’s chances of succeeding is the history of gaming legislation in the state.  Texas, South Carolina, Arkansas, Alabama and New Hampshire are states with a long history of failed gaming legislation and conflicted views of gambling in general.

In New Hampshire, the house has rejected a casino bill 19 times.  But, Senator Lou D’Allesandro, the sponsor of this year’s bill, has hope because bills allowing for keno and online purchase of lottery tickets did pass recently.  He believes the people of the state fully support his proposal to permit two casinos and he thinks it’s possible that the state legislature might also be in favor.  After all, if you can buy a lottery ticket or play keno, why shouldn’t you be able to go to a casino?

Texas is much like New Hampshire in one sense; bills to permit gambling in the Lone Star State are as common as prairie dogs.  But Texas is very different in another way.  Except for the lottery, Texas does not have gambling, it just isn’t legal where the stars at night are big and bright.  The most common form of illegal gambling is slot machines – in Texas called eight-liners.  There are thousands and thousands of them scattered around the state, but the only time they make the news is when a county sheriff arrests an operator and confiscates the machines. There can be as many as 200 or 300 slots picked up in one of those raids, more than in some casinos in South Dakota and Colorado.  There are also the special cruise ships – not the big, fancy international kind that ply the high seas – but ships specially designed as casinos to operate off the coast of Texas. Over the weekend, the newest one off Galveston ran into a buoy; fortunately the damage was mild and there were no injuries.  The bill under consideration in Texas this year deals with fantasy sports, nothing very controversial, but it is still likely to run into the moral objection: “Gambling is not allowed deep in the heart of Texas, no siree.”

South Carolina is another conflicted state, gambling is illegal, but existent in the form of slot machines in backrooms.  Without even a nod toward those illegal slot machines, regularly some lawmaker will propose allowing full-fledged casinos within his/her constituency to solve some particular budget problem.  This year the problem is crumbling roads, but the rest of lawmakers, like their counterparts in Texas, will likely effect disdain for the sin of gambling.

Arkansas also belongs to the small group of states that pretend gambling is unfit for polite society, but of course permits it to exist.  Horse racing is very popular in Arkansas and people like to make wagers on the outcomes.  However, legalizing any other form of gaming in the state is very difficult. So far this year the attorney general has rejected four petitions that sought to place the issue on the ballot in November.  Alabama is also not likely to pass any gaming legislation this year, even though it has a new governor. The lieutenant governor became governor when the “love gov” was forced to resign.  Neither the former nor the present governor supported any expansion of gaming. Although a bill authorizing fantasy sports has just passed the House of Representatives.

Connecticut, Florida, Pennsylvania and Illinois are debating legislation to expand the casino industry currently operating in the state.  These issues are not moral, simply monetary.  In both Connecticut and Florida the issue is more complex because it includes Indian gaming.  Due to competitive pressures from Massachusetts, the Pequot and Mohegan Tribes, each of which operates a casino in Connecticut, have joined forces to open another casino near the border with Massachusetts.  Their legislative efforts fueled a discussion to open the process to other bidders for a license; in particular, MGM wants to be allowed to bid.  As MGM is the proximate cause of the tribal effort for a third casino in Connecticut, the waters have become quite muddy.  The tribes pay the state 25 percent of the their slot revenue and no one wants to lose that money, but they also do not want to miss out on the potential for a significant license fee from MGM.

Florida has yet to renew its compact with the Seminole Tribe and lawmakers are using the opportunity to push additional gaming that is important to their constituents.  As is the case in Connecticut, the existing Seminole casinos are extremely important to the state financially.  At the point the compact had expired, the Seminoles had paid the state a billion dollars for the exclusive privilege of operating table games.  For the lawmakers to protect the Indian casino revenues while satisfying the non-Indian casinos is not an easy proposition.  And, they have only three weeks before the end of its session to reach a compromise. At the very least, one might expect some agreement on a compact with the Seminole Tribe will be reached before the lawmakers leave town.

That leaves us with Pennsylvania and Illinois; both states have budget deficits and are motivated to find new revenue sources.  Pennsylvania is exploring online gaming, slot machines in a variety of locations and fantasy sports. The additional money from new gambling sources is already written into the budget, so one can anticipate something will pass.  The question of course is what?  That question is extremely important to the twelve casinos operating in Pennsylvania.  Online gaming might benefit the casinos, but slot machines certainly will not.  However, the health of an already over-taxed industry is not at the heart of the matter.  Money is all the lawmakers and the governor are measuring at the moment.  Rather short sighted in my opinion; some forms of expansion are more likely to reduce the revenue the state currently receives from gambling than increase it. But then, no one in Pennsylvania asked my opinion.

And then there is Illinois, a state with a two year-old budget stalemate and an insatiable appetite for cash.  In the past, every time the governor of Illinois decided he needed more cash for his agenda he looked to gambling.  The most recent was the addition of VLTs intended to provide $50 billion for major construction projects.  The law passed in 2012 and the growth of the number of establishments, VLT units and revenue has been astonishing.  In March of this year, 5,932 establishments with a total of 25, 911 VLTS generated $119.2 million in revenue – just $11 million shy of what the state’s ten casinos generated in the same month.  The proposals on the table now are for fantasy sports and more casinos – possibly as many as five.  Chicago is one of the sites being suggested; it certainly would be a plum for the company that got the licenses, if a private company does.  The city of Chicago wants to keep that license for itself and that would create an interesting dilemma.  A casino license in Illinois is expensive.  First there is a flat fee of $100,000 and then $30,000 for each gaming station.  If the city of Chicago received a license would it be exempt from those fees?   That money would be an important part of the picture, but the bigger issue is the casino tax.  The state’s tax rate is high, short of Pennsylvania’s 55 percent, but still larger than other states.  The effective rate in Illinois is probably closer to 45 percent, but that is still a hefty burden for a casino operator to bear. It becomes much heavier if more casinos are permitted, further dividing the gambling pie, which has already been halved by the addition of the VLTs.  But, who cares as long as the state makes more money, right?

By the end of the current legislative sessions, I think that Pennsylvania, Connecticut, Florida and possibly Illinois will pass legislation to expand gaming in some form.  As the industry reaches full maturity and even saturation, the positive impact on national and regional markets will get smaller and smaller, while the negative impacts get larger.  The expansion will continue until there are no more opportunities and then the process of market adjustment will begin in earnest.


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