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Best of Ken Adams

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Quick-takes: The month's trends in a glance - July 2008

1 August 2008

TAKE ONE

Gaming in the United States has matured; growth into new markets is slowing as there are fewer new jurisdictions available for expansion and revenues are flat or declining in the face of a challenging economy. We are all feeling the rising price of gasoline, the tightening of the credit market, a falling stock market, increased unemployment, falling consumer confidence, and an endless series of doom and gloom news stories about the economy. Most of those conditions are true worldwide, except for the availability of new jurisdictions and the ability of existing jurisdictions to continue to grow. China and India are two of the driving forces in the world economy and both have been expanding; every year millions and millions of Chinese and Indians enter into the consumer economy with disposable income. Gaming is one of the places those new consumers are turning with their new money. Predictions of a worldwide gaming industry with revenue of $155 billion are surprising only if you have not been watching Macau grow or observing Singapore and other Asian countries and cities fight for a share of the Chinese consumers' disposable income. The growth of gaming revenue in other, more mature jurisdictions tied to developed, rather than developing, economies will be slower, much slower. A friend of mine has suggested it is time to change the traditional model from growth to no growth and adjust all of our strategies accordingly.

Global gambling revenue is estimated to pass $155 billion in 2012 after growing at an annually compounded rate of 6.5 percent per year, according to a PricewaterhouseCoopers LLP report released Wednesday. Gambling revenue is expected to rise from nearly $114 billion in 2007 because of new casinos and upgrades to existing ones around the world, the report said. The annual report by the financial consulting company identified the Asia Pacific region as the world's fastest growing gambling region with new resorts in the Chinese enclave of Macau as well as Singapore and Thailand helping generate increases of 15.2 percent annually. Revenue from the Asia Pacific region will hit $37.2 billion in 2012 compared with $18.3 billion in 2007. Total gambling revenue in the United States will remain well ahead of other regions, growing at 4 percent annually from $60.3 billion in 2007 to $73.3 billion in 2012, the report said… Atlantic City was seen generating $4.74 billion in 2012, down from $4.94 billion in 2007. New casinos as well as licenses for online gambling and sports betting in the region encompassing Europe, the Middle East and Africa are expected to drive revenues in the region up 4.9 percent a year from $30.3 billion in 2007 to $38.4 billion in 2012. Gambling revenue in Canada is seen rising to $6.2 billion from $4.6 billion, while in Latin America, revenues are expected to climb to $514 million from $297 million. The report said revenue from U.S. tribal casinos would increase to $33 billion in 2012, up 4.5 percent per year from $26.5 billion in 2007. Regional U.S. casinos outside of Nevada and Atlantic City, not including tribal casinos, were seen gaining 5.3 percent a year to $20.6 billion, while global sports betting was seen rising 7 percent per year to $7.6 billion in 2012. (Oskar Garcia, Business Week, 6-19-08)

One has to wonder what they are thinking at the headquarters of Columbia Sussex. Actually one has to wonder if there is a headquarters or if anyone thinks at all. Every week brings a new story of mismanagement and a lack of understanding of federal or state regulatory law. They certainly don't seem to have heard of the tests for fair treatment and equality that are commonly applied; so when they treat two workers differently from all others, and those two had applied for family leave under federal law, it is as if the federal law did not exist for the company: "They were the only two employees who had their schedules changed and the only two employees who had recently taken FMLA leave," the complaint states. The stockholders were not content to leave the decisions of the company in the same hands as before; they forced a change in the CEO and a majority of independent directors on the board of directors. Includingthe new CEO, that gives the "outsiders" 4 out of 5 votes on every issue.

A man recently fired by Casino Aztar has filed a federal complaint alleging violations of the Family and Medical Leave Act. He is accusing his supervisors of harassing him for taking time off to adopt a child. Dennis DuCiaome of Newburgh worked at the casino from November 1995 until he was fired this spring. His employment there began when he was hired as a floor supervisor and later was promoted to pit manager in April 1999. But according to his complaint in U.S. Southern District Court, the trouble began June 14 when DuCiaome applied for qualifying leave in order to complete the adoption of a special-needs child in California…One month later, DuCiaome claims that he was passed over for a promotion, even though his tenure and qualifications put him in line for the position. The complaint states that another employee at the casino was told DuCiaome did not receive the promotion because "Dennis is going on FMLA and we do not want to promote someone who is going on FMLA for a month." (Kate Braser, Evansville Courier Press, 6-3-08)

Tropicana Entertainment Holdings, LLC has announced the formation of a new Board of Directors to help restructure the company and shape its long term strategy. The five-member Board is made up of three outside directors; company President Scott C. Butera, who has been named CEO and will report to the Board; and William J. Yung, who stepped down as CEO this week but remains on the Board. The new outside directors are executives with substantial financial restructuring and regulatory experience. (Business Wire, 6-7-08)

Buying at the crest of a wave is bad timing; it is bad timing if you were buying tulips, stocks in 1928, dot com stock in 2000, real estate in 2006, or casinos in 2007. The lesson is always painful, but it comes too late to save anyone from the losses that foster learning. It is rather like the Big Brown story. By post time of the final race of the Triple Crown, everyone knew Big Brown would win, and they bet their knowledge. Big Brown didn't win; a 30-to-one horse did. It is the same with real estate and the stock market. By the time everyone knows who and what will win, and bets accordingly, the odds are very bad and chances are the winner will be someone or something the majority of people had never heard of, much less bet on.

Casino bonds are generating the worst returns for investors as companies from Apollo Management LP's Harrah's Entertainment Inc. to Herbst Gaming Inc. risk bankruptcy under the weight of their debt. High-yield, high-risk casino bonds, which returned 10 percent during the last recession in 2001, are the biggest losers this year, according to Bank of America Corp., as consumers get slammed by record gasoline prices and the worst housing-market slump since the Great Depression. The debt has lost 4.4 percent, compared with junk bonds' average return of 1.4 percent. Until the latest economic slowdown, casino bonds had gained a reputation for being recession-resistant, said Bruce Monrad, who manages $1.2 billion of below investment-grade debt at Northeast Investment Management Inc. in Boston. "It was very much viewed as a safe haven,' Monrad said. "If indeed the industry is less recession-proof than we were thinking, it would not have been a good time to lever up,' as did Las Vegas-based Harrah's and Station Casinos Inc., he said. Northeast owns bonds of Trump Entertainment Resorts Inc., the Atlantic City, New Jersey-based gaming company led by Donald Trump, which have lost 26 percent in the last year, data compiled by Bloomberg show. Monrad said he isn't interested in buying Harrah's or Station Casinos bonds because ``they just have too much debt.'…Herbst Gaming, operator of 8,400 slot machines in Nevada, stopped paying interest last month, Tropicana Entertainment LLC and Greektown Casino LLC filed for bankruptcy in May and bond prices show Harrah's and Station Casinos, which piled on more than $25 billion of combined debt in the past year to go private, are also at risk of default. (Caroline Salas, Bloomberg, 6-3-08)

The stock market is in a downward spiral, so now everyone is betting on losing and cashing out, which is pushing prices down further. Fundamentals don't matter and operating results don't matter. All that matters is the feeling of fear and panic. The sky is falling – I heard it in the chicken yard and I know it is true. Cycles of new casino construction followed by increased revenue in Las Vegas have followed each other since the end of the Second World War. But the same cannot be said about the belief in Vegas's ability to grow and attract new players. With each expansion cycle come the naysayers who are convinced that "this time" Vegas has expanded too much, developers have spent too much, and the whole experiment will fail. Someday, those naysayers may indeed be right, but thus far, 60 years into the Strip development, they have been wrong – every time.

With the increased cost of a tank of gasoline equivalent to the cost of a few cocktails, fewer tourists are driving to Las Vegas. With airlines cutting back flights to town, it will be harder to fill hotel rooms. And the Strip has grown posh, making it less attractive to the masses. But that barely touches on why gaming stocks have lost more than $50 billion in value since their peak last year, when Vegas was hot, financing was easy and gaming outperformed most sectors of American business. The bigger reason for the plummet is found halfway around the world, where profits by Las Vegas operators in Macau are disappointing some investors simply because they're not as sky-high wild as they were initially. And back home, investors wonder whether Las Vegas is finally overbuilt. Those are among the observations of a trio of portfolio managers who have followed the gaming industry for more than a decade. We asked them to explain what has happened to gaming stocks and what's on the horizon. Their conclusion: The gaming industry has a bright future — mostly beyond Las Vegas. (Liz Benston, Las Vegas Sun, 6-5-08)

Type in the names Packer and Midas on any internet search engine and you'll find hundreds of references where they crop up in the same sentence. Invariably written by those desperately keen to ingratiate themselves with the country's (once) richest man, the "Man with the Midas touch" stories have only ever contained a passing reference to the truth. Even when James's father, Kerry, was at his peak, mistakes were made, and in the early 1990s some nearly catastrophic errors came close to unraveling the entire empire. Yesterday it became a little clearer just how tough a time James Packer is having as the international financial system continues to labor under the weight of the worst credit crisis in history. First, Challenger Financial – the financial services company in which he is the biggest shareholder – confirmed itself as a major victim of the recent market meltdown, slashing its earnings forecasts to just $20 million from last year's $255 million. Then Crown Casinos announced it and its partners had pulled the pin on a $5.2 billion Las Vegas casino and hotel development that was to be so big that airlines were complaining it would interfere with aircraft movements…Late last year Crown spent $US1.75 billion for three casinos on Las Vegas's suburban outskirts and a racetrack in Pittsburgh - more blue-collar than blue-chip investments. And it owns 19.6 per cent of the privately held Fontainebleau Resorts, which is building a new $US2.9 billion ($3 billion) Las Vegas casino. Add two Australian casinos, nine in Canada and the huge commitments to a Macau casino joint venture with the Ho family and you have a company that, while geographically diverse, is heavily exposed to just one industry and a fickle one at that. (Ian Verrender, Brisbane Times, 6-5-08)

This does not mean that revenues and profits always go up in a linear fashion – they don't. There are times when Vegas, just like other gaming jurisdictions, suffers slowdowns and even declines in revenue. There was a gas crisis in the 1970s coupled with astronomically high interest rates; there have been other stock market declines that impacted personal spending; and the granddaddy of disasters, the terrorist attack of September 11th. All caused gaming operators to rethink operations and prices. The result was, and still is, lowered room rates, cheaper buffet prices, and other marketing devices to increase the number of customers. There is a price for that kind of marketing: reduced margins. The marketing wars that follow downturns in the economy are as regular and predictable as the growth and expansions cycles – they do not define the industry, they are simply responses to the current conditions. We should be asking ourselves, "How long will this economic cycle last?"; not, "Is this the end of gambling on the Las Vegas Strip and the beginning of the failure of all gaming companies?"

Some Las Vegas casino operators and analysts are hopeful that the economic downturn will bottom out by the end of the year and rebound again by the time several major hotels and condo towers are expected to open by late 2009. Bond rating agency Moody's Investors Service has another outlook, which it released Wednesday in its most negative report yet on the Las Vegas Strip. Moody's analysts say this downturn will have a more negative effect on earnings than the period following the Sept. 11 terrorist attacks and will dampen earnings for the next 12 to 18 months. While that seems hard for many to believe (witness many fewer layoffs and the simple fact that travelers are still free to travel) Moody's offers an able argument, already hinted at by analysts and economists. "Las Vegas largely sidestepped trouble by using price discounts to lure skittish travelers," the report said. "Now, with consumers' anxieties centered on their economic well-being, that strategy is unlikely to be as effective. Las Vegas operators are preparing for an extended period of weak demand will have to turn to other levers, such as reduced capital spending or less aggressive financial policies, to hold up through the next year or more." (Liz Benston, Las Vegas Sun, 6-13-08)

With less people coming to Las Vegas and with locals having less money to spend, there are more opportunities for you to take a vacation right here at home. Hotels are helping with discounts for Nevada residents, making weekend get-a-ways stay-cations. This is a really rare time. The gaming win is down 5-percent over this time last year and visitor volume is down. That means local dollars are worth even more to people on the Strip. The signature at MGM Grand for instance has just started offering what they call the in-town escape just for locals. It's a little different too, with non-gaming, non smoking towers – steep discounts on pool admission, spa treatments and cabanas…"Truly believe that this is a new trend now, especially here in Las Vegas. We have a lot of rooms available in this town, and it is going to be more of a need now because again rubber tire traffic, especially from California, is going to be diminishing as the gas prices continue to soar," said Frank Idris, director of room operations. (Ky Plaskon, Eyewitness News, 6-13-08)

Taxicab company operators and drivers are seeking the rate increases and fuel surcharges because rising gasoline costs have cut into revenues. In addition, ridership through May is down 1.83 percent from a year ago, which Walker blamed on the sagging tourist market. The cost of catching a cab in Las Vegas this summer may increase because of rising gasoline prices. The Nevada Taxicab Authority will ask its board of directors to implement a temporary 25 cents per metered mile fuel surcharge to cover higher gasoline costs…Under the proposal, the fuel surcharge would be revisited by the board in January and could be extended, increased, decreased or eliminated. However, if the average cost of a gallon of unleaded fuel rises to $5 a gallon for five consecutive days, the board can consider additional adjustments to the fuel surcharge. (Howard Stutz, Las Vegas Review-Journal, 6-13-08)

A battle royal – Colorado casinos were forced to go smokeless on January 1st. Colorado certainly wasn't the first state, nor the last, to ban smoking in most public places, including casinos. Every time the legislation is introduced, the local casino industry makes an argument that not allowing smoking will have disastrous effects on casino revenues and the taxes the casinos pay to the state. This year Illinois and Colorado are demonstrating the truth of those claims as revenues are off 15-20 percent. To offset the impact, casinos in both states are lobbying for lower taxes, expanded opportunities, and other measures.

There is one major difference between the Colorado law and those of most other states – Colorado left a loophole in its law. The Colorado law makes an exemption for cigar bars. To qualify a cigar bar had to exist in 2005 and have over $50,000 in tobacco sales. From the first day the legislation took effect, one small casino in Black Hawk claimed the exemption as a cigar bar. None of the other casino seemed to give the idea much thought, and most built some kind of an indoor-outdoor place for gamblers to go to smoke. The areas had no outside entrance or exit, so the players would not leave when they went to smoke.

But as time has progressed, the casinos in Cripple Creek have felt the pressure of the economy. Cripple Creek is an hour's drive each way from Colorado Springs, where most of the customers live. The casinos in Cripple Creek are much smaller than the casinos in Central City and have smaller profit margins. A 15 percent drop in gross revenue leads to a much, much larger drop in net revenues as fixed expenses, such as utilities, rents, and debt payment, do not decrease and represent a larger percentage of revenues than those same expenses do in much larger casinos. These factors plus a new casino opening in May have led to more casinos claiming the "cigar bar" exemption.

In spite of a state smoking ban requiring Colorado's casinos to be smoke free as of Jan.1, 2008, a fourth casino is illegally allowing indoor smoking. Of the three casino-permitted cities in CO, casinos in Black Hawk and Cripple Creek are allowing indoor smoking, claiming they are cigar-tobacco bars and exempt from the spirit and letter of the law…The law is very clear because it requires a "cigar-tobacco bar" to first meet the definition of a "bar" which operates primarily for the sale and service of alcohol beverages. Casinos aren't in the primary business of selling alcohol as most of it is given away to gambling customers. "Casinos are primarily in the business of selling gambling. Therefore, all of these casinos are violating the law," added Steinberg…Complaints have been made to local law enforcement yet none of the casinos have received citations for violating the smoking ban. (Press Release, 6-10-08)

The City of Cripple Creek at first said it would not, in fact could not afford to, enforce the law, but then decided it should and could and issued a $200 citation to each casino. The state gaming regulators said it wasn't their job to enforce the legislation either, but if the casinos got enough citations from the city, then maybe the state would question their suitability, as casinos must "obey all federal, state and local laws." The issue will get its first hearing in July, but it is likely this will continue for a while, unless gaming regulators decide when a gaming operator breaks a law and decide that it is indeed their job to enforce the law.

The revenue results for May were not as bad as they were in previous months. Actually New Jersey, Michigan, Connecticut, Iowa, Indiana, Louisiana, and Missouri all had increases in revenue – and so did Pennsylvania, Macau, and New York.

Atlantic City May casino revenue was up 1.6% to $415.3 million. (Reuters, 6-10-08)

Colorado May casino revenue was $63.9 million, down 8.7% from 2007. (Associated Press, 6-20-08)

Detroit May gaming revenue rose 16.5% to $123.1 million. (Gaming Industry Weekly Report, 6-17-08)

Connecticut casino slot revenue rose 3.7% in May. (Gaming Industry Weekly Report, 6-23-08)

Illinois May gaming revenue fell 14.1% to $142.7 million. (Gaming Industry Weekly Report, 6-17-08)

Indiana May gaming revenue rose 0.9% to $222.7 million. (Gaming Industry Weekly Report, 6-17-08)

Iowa May gaming revenue rose 13.2% to $128.2 million while same store revenue was up 7.5%. (Gaming Industry Weekly Report, 6-17-08)

Louisiana May gaming revenue rose 6.7% to $235.2 million with same store revenue up 5.7%. (Gaming Industry Weekly Report, 6-17-08)

Macau gaming revenue in May was about $1.16 billion, up 31% from May 2007. (Gaming Industry Weekly, 6-9-08)

Missouri May gaming revenue rose 13.4% to $153.6 million but on a same store basis was up 2.1%. (Gaming Industry Weekly Report, 6-17-08)

Mississippi gaming revenues dropped 1.3% to $236.8 million in May from $239.9 million in 2007. (Mary Perez, Biloxi Sun Herald, 6-20-08)

New York revenue rose 21.8% in May to $98 million. Win per slot per day rose to $214 from $181 a year ago. (Gaming Industry Weekly, 6-9-08)

Nevada April gaming revenue was down 5% to just over $1 billion. (Reuters, 6-10-08)

Pennsylvania May gaming win rose 96.1% to $151 million. 7 casinos are open now compared with 4 last year. Same store revenue rose 22.4%. (Gaming Industry Weekly, 6-9-08)

Ken Adams

Ken Adams is the principal in the gaming consulting firm, Ken Adams and Associates. Formed in 1990, Ken Adams and Associates specializes in information, analysis, and strategic planning for Indian tribes, casino operations and gaming manufacturers.

Ken spent over 20 years in the hotel-casino industry, prior to founding Ken Adams and Associates. He held the positions of: Director of Casino Operations, Casino Manager, and Keno Department Manager. During this time, he developed numerous innovative marketing and customer development programs and systems for evaluating casino performance. Some of those programs, such as slot clubs and tournaments, have become industry standards.

Ken is also actively involved in gathering and disseminating information that is important to the gaming industry. He is editor and publisher of and the Adams' Report, a monthly newsletter specializing in identifying trends in casino gaming, regulation and manufacturing, the Adams Daily Report, an electronic newsletter that provides electronic links to the key gaming stories of the day, and the Adams Review, a special report distributed by Compton Dancer Consulting that provides editorial commentary on gaming trends.
Ken Adams
Ken Adams is the principal in the gaming consulting firm, Ken Adams and Associates. Formed in 1990, Ken Adams and Associates specializes in information, analysis, and strategic planning for Indian tribes, casino operations and gaming manufacturers.

Ken spent over 20 years in the hotel-casino industry, prior to founding Ken Adams and Associates. He held the positions of: Director of Casino Operations, Casino Manager, and Keno Department Manager. During this time, he developed numerous innovative marketing and customer development programs and systems for evaluating casino performance. Some of those programs, such as slot clubs and tournaments, have become industry standards.

Ken is also actively involved in gathering and disseminating information that is important to the gaming industry. He is editor and publisher of and the Adams' Report, a monthly newsletter specializing in identifying trends in casino gaming, regulation and manufacturing, the Adams Daily Report, an electronic newsletter that provides electronic links to the key gaming stories of the day, and the Adams Review, a special report distributed by Compton Dancer Consulting that provides editorial commentary on gaming trends.