Industry Snapshot: Casinos and Gaming

After a slump in the wake of 9/11 and the economic slowdown 2001-2002, the casino and gaming industries have posted notable growth, generating total revenues of approximately $75 billion in 2004, largely composed of income from wagers on sports betting, slot machines and lotteries.

While gambling machines continue to provide the highest revenues for the US market, non-gaming operations such as restaurants, hotels and retail stores are an increasingly vital source of industry profits. The potential legalization of online gambling would create a growth sector, triggering massive expansion within the industry, with Internet gambling already predicted to generate $1 billion in the US. Many of the leading players are developing online alternatives in anticipation of this change.

Over the past few years, several state legislators have allowed large scale increases in gaming activities in order to boost tax revenues. However, the gradually improving US economy has reduced state budget deficits and accordingly, the tide to expand gaming to raise government revenues has declined. Regulation regarding the classification of casinos as financial institutions and increasingly stringent rules to tackle problem gambling are also slowing growth within the industry, pushing up operational costs whilst removing an important sense of anonymity from the industry.

Leading US players include International Game Technology, MGM Mirage, Harrahs Entertainment, Wynn Resorts, Caesars Entertainment and the Mandalay Resort Group. MGMs pending $4.8 billion takeover of the Mandalay Resort Group is set to create the largest casino resort company in the world, controlling approximately 50% of the hotel rooms on the Las Vegas Strip. If the Federal Trade Commission approves the deal, the combined company will surpass number one ranked Caesars Entertainment and number two-ranked Harrah's Entertainment in annual sales.

Key Issues

Gambling Addictions - The American Gaming Association has introduced an industry wide code of conduct for responsible gaming, committing members to a broad set of policies regarding problem gambling. In response, Caesars has employed a company-wide ban to keep self-declared and company-identified problem gamblers from playing in any of the company's properties whilst Nevada regulators are reviewing a number of technical aids aimed at limiting the amount of money or time spent playing slot machines.

Restrictive Legislation - Casinos are now classified as financial institutions by federal definition, not only to counter money laundering but also to target terrorists. The introduction of legislation to facilitate the procurement of financial data from casinos is an effort to aid the FBI in preventing terrorist money laundering initiatives. Increasing numbers of reports and augmented tracking measures will increase operations costs whilst the declining capacity to protect casino customer's privacy could eventually have an impact upon revenues.

Retail Growth - Around 36 million tourists spent an estimated $2.9 billion on shopping in Las Vegas in 2004, resulting in a massive rush of companies eager to open a retail outlet along the famous strip and capitalise on these incredible revenues. The Forum Shops within the Bellagio hotel produced average annual sales of $1,471 per square foot in October, well above the industry's national average of $345 and the mall was recently expanded to 685,000 square feet, accommodating elegant designers such as Harry Winston, Pucci and Celine, each clambering to retail goods in this lucrative market.

Significant Trends

Changing Revenue Sources - Many of the world's largest casino operators continue to funnel billions of dollars into existing markets as, ironically, gambling becomes less important to the bottom line. Non-gaming operations including restaurants, hotels, retail stores, and attractions now represent a large quantity of casino sales. Both Park Place and Mirage Resorts (a subsidiary of MGM Mirage) have upped the ante in recent years by opening $700 million casino/hotels -- Paris Las Vegas and Biloxi, Mississippi's Beau Rivage, respectively, featuring upscale shopping, fine dining, and entertainment.

Online Gambling - Gambling companies are seeking to attract new gamers through a combination of outlets, including the Internet. Internet gambling is illegal in the US, although legal loopholes have allowed notable growth to occur within the sector. Around 650 pirate gambling sites, based primarily in Gibraltar and the Caribbean, generate $1 billion in annual sales, with an estimated two million Americans now betting online. In reaction, several major players are exploring online gaming alternatives in anticipation of legalization with Harrah's Entertainment currently developing virtual casinos.

Innovation - Alongside conventional reel machines, video slots are in growing demand, especially in smaller local markets, where players prefer the lively animation and extra bonuses associated with video games. It is estimated that video slots currently enjoy 60% coverage outside of Las Vegas. Casinos are also exploring cashless slots, paying players with vouchers that can be cashed or used in other machines, increasing efficiency on slot machine floors and enhancing revenues.

Any market values given in this article have been calculated using the total revenues generated from all forms of online and traditional betting on sports, lotteries and slot machines, gambling in casinos or bingo halls and restaurants, hotels and retail stores operating within casino grounds. Market values represent net winnings for all operators and depending on the type of game and its location, net winnings are typically 15-20% of the total bets wagered.