Any Takers

Demand for gambling is driven by consumer income growth and state spending. The profitability of individual companies depends on efficient operations and effective marketing. Large operators have the financial resources to make significant investments in facilities and efficient computer operations; they may also enjoy cross-marketing opportunities. Small gambling facilities can thrive by catering to local residents, who may not be able to afford travel to such gambling centers as Las Vegas or Atlantic City. The US industry is concentrated: the top 50 gaming companies hold about 60 percent of the market. The casino hotel market is even more concentrated, with the top 50 US firms holding 90 percent of the market.

Gaming operators mainly provide a place or a means to play games of chance, where the odds of winning favor the "house." Popular casino games are slot machines (slots); video poker; and table games such as roulette, baccarat, blackjack, and craps (dice). The house take on slot machines varies, depending upon the denomination of the slot machine, but generally runs between 5 and 10 percent. The take on most table games may be higher, from 15 to 30 percent. State lottery games are mainly numbers games. State lotteries often retain between 30 and 40 percent of all money bet, according to the National Conference of State Legislatures.

The actual operation of a casino involves acquiring and servicing gambling machines, training and supervising dealers and cashiers, entertaining customers, and managing cash. Large game equipment manufacturers are International Game Technology and the Bally Technologies. Gambling operators are free to set the odds of winning at a particular game as long as they prominently post a pay schedule on the machine. Operating licenses for some casinos require the operator to pay the state a fee based on a percentage of gross revenues.

To attract and retain customers, some casino companies operate casino hotels that can accommodate large numbers of guests and that contain a variety of entertainment, restaurants, and retail stores in addition to the casino. A large hotel casino like the MGM Grand Las Vegas has about 6,000 hotel rooms, suites, and other accommodations; 2,000 slot machines; 150 table games; theaters; restaurants; bars; and a number of retail stores. Typically, around 70 percent of revenue at a hotel casino comes from the casino, 10 percent from food and beverages, 10 percent from hotel rooms, and 5 percent from retail stores, shows, and other entertainment. While the trend in recent years has been toward larger casino hotels in Las Vegas, the economic downturn of the late 2000s generally slowed casino construction in other markets.

Some casinos are located on land owned by legally designated American Indian Tribes. Although these Indian casinos are regulated differently, they are operated like other casinos, usually under third-party operating contracts with regular commercial casino operators. Typical operating contracts give the operator up to 40 percent of net annual revenue and extend for a term of five years or more. Although not directly regulated by the state in which they operate, Indian casinos must have a revenue sharing agreement ("compact") with the state.

States operate a variety of state lottery games, most of which involve guessing a randomly drawn number. "Instant games" let the gambler buy a ticket with a hidden number that can be revealed by scratching off the covering. About 40 states operate lotteries, with combined annual sales of about $20 billion. With a "take" between 30 and 40 percent, lotteries typically return less money to players than casinos do. To counter moral objections, some states "earmark" the proceeds of lottery operations for specific laudable social spending projects, like education. Lottery tickets are sold through special computer terminals that retail outlets rent from the state.

Slot machine operators collect information using electronic game monitoring units (GMUs). In addition to games themselves, the control of gambling operations relies heavily on computer devices and programs to take bets, print tickets, track revenue and payouts from individual machines, and perform various accounting functions.

Internet gambling, especially online poker, enjoyed rising popularity in the late 1990s and early 2000s despite federal laws designed to curb illegal online gambling and interstate wagering. The Federal Wire Act of 1961 has been used to ban online interstate gambling and wagering on foreign web sites, while the Unlawful Internet Gambling Enforcement Act of 2006 prevents banks and credit card companies from processing transactions with those sites. However, a handful of states have enacted legislation allowing real-cash online gambling within their borders, with Nevada being the first to offer legal online poker in 2013. Federal legislation has been introduced in Congress to streamline regulation of Internet gaming, which could boost the revenues of casino operations even while increasing competition with their bricks-and-mortar locations. Americans gamble about $6 billion on foreign gaming websites, according to Forbes.

Slot floors are becoming totally cashless through the use of ticket-in/ticket-out (TITO) technology. When cashing out, players receive a ticket that can either be redeemed for cash or be inserted into another slot machine for credits on the cash meter of the new machine. Server-based games allow casino operators to make changes to any slot machine on the floor through a central, secure computer server. Casinos are also embedding RFID devices in their chips to improve security and track players.

Promotional efforts for casinos and other betting attractions target regional customers, who typically live within a three-hour car ride of a betting attraction, and consist of radio ads and highway billboards. Television and print ads target vacationers who select "destination" resorts that provide a variety of entertainment and activities, such as Las Vegas. Many casinos play up their non-gaming entertainment, such as shows, shopping, celebrity chefs, and luxurious accommodations. States typically advertise lotteries through local billboards and radio spots.

Because most gamblers lose money, gambling operators try to make the losing fun, presenting gambling as entertainment that is worth the price. Casinos use player’s club programs to award gamblers points toward rewards, while allowing the casino to monitor the playing habits of individual gamblers, which helps them design individualized marketing incentives. Other incentives include “comps,” in which high rollers (bettors who spend a lot of money in a casino) are given free drinks, food, accommodations, or other perks to ensure their loyalty.

Casinos have to manage a large cash flow because players buy chips with cash and winnings are paid in cash. Receivables may be high because players may not pay their debts in a timely manner, or may not be able to pay their debts at all. Many casinos offer markers, or personal warranties that customers are good for their debts. Although most customers must settle up before they leave the casino, some companies may make allowances for certain players. Capital investments in buildings and equipment are high, both because gambling equipment is expensive and because casinos and casino hotels must frequently be refurbished to attract gamblers.

About $35 billion of annual revenue is taken in by commercial casinos, $25 billion by Indian casinos, and another $20 billion by state lotteries. (For gambling companies, "revenue" is the total amount bet minus winnings paid to gamblers.) Most casinos are small, limited by the size of the surrounding population.

US gambling operations are state-regulated. Until gambling was legalized in Atlantic City in 1976, casinos operated only in Nevada. In many states, casinos must be located on riverboats, a requirement that effectively restricts the size of operations. Regulation is largely aimed at preventing organized crime from association with the industry, which is attractive because of the large cash flow. State regulators must approve all games played, but gambling operators are free to set the odds of winning a particular game.

Indian casinos are regulated by the National Indian Gaming Commission (NIGC) under the Indian Gaming Regulatory Act (IGRA), which sets rules defining eligible Indian tribes, their relationship with states, and requirements for oversight of gambling operations.

Gambling in all forms generates more than $400 billion in revenue worldwide, according to Global Betting & Gaming Consultants (GBGC). As casino gaming and other forms of gambling continue to expand in new markets, specifically in Asia, the industry could exceed $500 billion in sales by 2015. Casinos and lotteries each account for about 30 percent of the worldwide gambling industry. Other popular forms of gaming and wagering include gaming machines outside casinos (20 percent), and horse racing and other wagering (10 percent).

The world's largest casino gambling markets include Australia, Canada, France, Macau, and the US. Major companies outside North America include GTECH (Italy), Tatts Group (Australia); Galaxy Entertainment and SJM Holdings (Hong Kong); and William Hill (UK). Some large US casino companies also have international locations or investments in overseas gambling operations.

Australia has a thriving gaming industry that includes casinos, lotteries, sports betting, and various forms of racing. Melbourne and Sydney are home to some of the country's top casino destinations. The lottery business includes both government-run games and those contracted to private operators. Macau, a special administrative region (SAR) of China, has become the world's largest gambling market thanks to heavy investment from both domestic and international casino developers.

Emerging markets in the Asia/Pacific region, including Singapore, Vietnam, the Philippines, South Korea, Thailand, and Taiwan, offer potential for future growth in traditional casino gambling. Japan is considering legislation that would permit casino gambling ahead of the country's hosting the summer Olympic Games in 2020. Major growth is also taking place within the online gaming sector. Interactive gambling is expected to exceed $40 billion in revenue by 2015, according to H2 Gambling Capital.

Expansion of Asian casino gambling markets could put additional competitive pressure on the rest of the global industry. Developers in markets such as Macau and Singapore are opening Las Vegas-style casinos to attract both local and international gamblers. Casinos in North America and Europe may face increased competition as they try to attract tourists from Far Eastern markets. The new Asian casinos may eventually attract tourists away from the US and EU countries.

Growth in interactive gaming could mean additional revenue for traditional casino operators that offer online games under established brands. Interactive gambling expansion could also mean new growth opportunities for markets such as Malta and Gibraltar that encourage online technology companies. The expanding online gaming industry may face regulatory challenges in some markets. Internet gambling on websites served by companies located in other countries is currently a contentious issue in the US.

Most employees in the gambling industry work at casino hotels as regular hotel employees, who provide housekeeping and janitorial services, work as servers, or provide security. Casino employees who work the gaming activities need licensing by regulatory authorities and require special training. The average hourly industry wage is moderately lower than the national average, although casino dealers get high pay.

Due to lower wages and a reliance on part-time employees, turnover in the leisure sector can be significantly higher than average. The injury rate for gambling industries is about 25 percent higher than the national average.

Industry Employment Growth Bureau of Labor Statistics

Average Hourly Earnings & Annual Wage Increase  Bureau of Labor Statistics

Quarterly Industry Update

2.16.2015

Opportunity: Support Grows for Legalized Sports Betting - The debate over whether to expand legal sports wagering in the US is gaining momentum following a record year for sports gambling revenue. While total earnings at Nevada casinos declined in 2014, the industry saw gains in revenue from sports betting, which reached $227 million, a bump of about 12 percent from 2013, according toThe Las Vegas Review-Journal. Illegal gambling is also on the rise: The American Gaming Association (AGA) estimates that about $3.8 billion in illicit bets were placed on the 2015 Super Bowl, compared to about $115 million collected legally by Nevada sports books. The gaming industry is asking Congress to crack down on unlawful gambling, which causes casinos to lose business. To recapture some of that lost revenue, some stakeholders are advocating for legalized sports wagering at the federal level, which proponents claim would generate new revenue for states, create jobs, and protect customers. Executives of two of the largest independent sports book companies in the US claim that expanding legal sports gambling would benefit the industry as a whole, and not just within Nevada. The AGA has not yet taken an official position on legalization and is gathering input from its members.

Industry Impact - Legalized sports wagering would generate a significant boost in revenue for sports book companies, which would welcome new business from customers who previously placed bets illegally. Some Nevada casinos are still evaluating the potential consequences of federal legalization, which would disrupt their effective monopoly on US sports betting.

11.17.2014

Challenge: China’s Casino Revenue Declines Sharply - Casino revenue in Macau, the gambling hub of China, fell by almost 25 percent in October 2014 compared to the same month last year, marking the largest decline in the territory’s history. Macau’s gaming establishments had been riding a five-year hot streak until recently, reaching a peak revenue of $4.8 billion in February, according toThe Wall Street Journal. But the industry’s fortunes reversed this summer after the Chinese government launched a widespread anti-corruption crackdown that led to fewer visits from wealthy Chinese VIPs. Other factors such as tighter visa restrictions and a slowdown in new resort openings may have also contributed to the downturn, which many analysts expect to worsen through early 2015. Casino resort companies have also taken a hit in the stock market, as the share prices of major companies including MGM China, Galaxy Entertainment, and Wynn Macau have each dropped more than 20 percent since the start of the year.

Industry Impact - Companies that operate casinos in Macau should be prepared for slower business in the months ahead, but some analysts predict the industry will bounce back with consumer spending on the rise and several new casinos scheduled to open in 2015.

8.25.2014

Challenge: New Jersey Online Gaming Disappoints - Hopes that online gaming would revitalize New Jersey's gambling industry so far have not been realized. Legalized by the state late in 2013, online gaming was expected to generate $300 million in revenue in its first year and provide a much-needed boost to struggling Atlantic City casinos. But as of mid-2014, online gaming in New Jersey had generated only $63 million; full-year estimates for 2014 revenue have been reduced to about $120 million, according to mgamingwatch.com. Meanwhile, casinos in the state continue to founder. In August 2014, the Revel Casino Hotel announced plans to close the next month amid poor revenue and a tough competitive environment, according to The Wall Street Journal. The Atlantic Club closed in January, and the Trump Plaza and Showboat casinos plan to shut down later in 2014.

Industry Impact - The struggles in New Jersey may result in more cautious gaming investment in states where gambling options are plentiful. More than half of all residents in the Northeast live within 25 miles of a casino, compared to 10 percent a decade ago, according to The New York Times.

5.26.2014

Challenge: US Could Be Oversaturated with Casinos - Some of the 39 US states that allow casino gambling have seen revenues fall recently. The reason? Industry watchers blame the decline on lingering effects from the late 2000s economic crisis and a growing nationwide glut of casinos, according to BloombergBusinessweek. Since 2007, gambling revenues on the Las Vegas Strip have fallen 4 percent; New Jersey revenues fell more than 40 percent. Gambling revenue is down more than 25 percent in Mississippi. In many cases, too many casinos are competing for too few gamblers. As a result, some casinos have simply closed their doors. Revenues dropped in February 2014 for the sixth consecutive month in the four largest Midwest gambling states - Indiana, Missouri, Illinois, and Michigan. So far in 2014, gambling sales in Las Vegas are down 12 percent. Additionally, experts note that gambling participation tends to skew blue-collar and middle-income, groups that are still struggling financially.

Industry Impact - Gaming companies may want to hold off on expansion plans until economic conditions improve, given falling US casino revenues and ongoing financial struggles among some key gambling demographics.

Critical Issues

Demand Linked to Economic Cycles - Gambling revenue is affected by the health of the economy, including the growth of personal income. During the recession of the late 2000s, casinos were hurt by the decrease in consumer spending and the tightening of credit markets. The latter affected the ability of companies to make capital improvements or expand operations. Las Vegas was particularly affected; the number of layoffs and home and business foreclosures in Nevada was among the highest in the US.

Dependence on Regulators - In states where gambling is legal, state commissions oversee gaming companies and have broad powers over their activities. State legislatures can easily raise tax rates on gambling machines. Continued industry growth depends on favorable legislation.

Business Challenges

Capital-Intensive - Companies have large capital investments in facilities and gaming equipment and usually a large amount of debt. Gambling companies routinely spend more than 10 percent of annual revenue on capital investments. To grow, companies typically need to raise substantial funds. Many companies have a high debt-to-equity ratio and are exposed to interest rate risk.

Competition from Internet Gambling - Although illegal except for horse racing in most states, Internet gambling involving offshore companies has grown rapidly in recent years. In 2011 the US Department of Justice issued a ruling that the Federal Wire Act of 1961 bans sports betting and but not other forms of online gaming. That decision paved the way for legal online gambling in the US. In 2012, Delaware passed legislation that legalized online gambling; Nevada and New Jersey passed similar laws early in 2013.

Bad Publicity from Compulsive Gambling - Gambling operators make most of their profits from regular gamblers, and much of their marketing is geared toward encouraging people to gamble more. To counter perceptions that they prey on compulsive gamblers, operators (including state lotteries) have more proactively addressed problem gambling, portraying compulsive gambling as a medical issue and funding treatment programs. In addition, many Americans object on moral grounds to the spread of gambling, perceiving it as a morally debilitating activity that also fosters theft, fraud, and other crime, and as linked to prostitution and drug use.

Business Trends

Capital-Intensive - Companies have large capital investments in facilities and gaming equipment and usually a large amount of debt. Gambling companies routinely spend more than 10 percent of annual revenue on capital investments. To grow, companies typically need to raise substantial funds. Many companies have a high debt-to-equity ratio and are exposed to interest rate risk.

Competition from Internet Gambling - Although illegal except for horse racing in most states, Internet gambling involving offshore companies has grown rapidly in recent years. In 2011 the US Department of Justice issued a ruling that the Federal Wire Act of 1961 bans sports betting and but not other forms of online gaming. That decision paved the way for legal online gambling in the US. In 2012, Delaware passed legislation that legalized online gambling; Nevada and New Jersey passed similar laws early in 2013.

Bad Publicity from Compulsive Gambling - Gambling operators make most of their profits from regular gamblers, and much of their marketing is geared toward encouraging people to gamble more. To counter perceptions that they prey on compulsive gamblers, operators (including state lotteries) have more proactively addressed problem gambling, portraying compulsive gambling as a medical issue and funding treatment programs. In addition, many Americans object on moral grounds to the spread of gambling, perceiving it as a morally debilitating activity that also fosters theft, fraud, and other crime, and as linked to prostitution and drug use.

Industry Opportunities

New Games - Because slots, video poker, and other machine games are essentially computerized video games, developing new games and formats is easy. Gaming manufacturers, such as Bally Technologies, tend to introduce several new models each year and often hire video game designers from the consumer video game industry. Although many new models are cosmetic variations on existing games, new games of chance are also being introduced.

Wide-Area Progressive Gambling Systems - Gambling machines can be electronically linked so that every bet on each machine contributes to a "progressive" jackpot until one player wins. Pooling the wagers from many machines allows bigger jackpots, which attracts players. Progressive systems are more profitable to the house than stand-alone machines.

Frequent Gambler Rewards Programs - Consolidation in the industry has been driven partly by operators' desire to market multiple gambling locations to a core of dedicated gamblers. Various types of reward programs allow loyal gamblers to accumulate credits for visiting other company casinos. Gamblers in other states, for example, are encouraged to visit flagship company casinos in Las Vegas.

Managing Indian Casinos - The proliferation of casino and other gambling operations, mainly on Indian reservations, has created opportunities for existing companies to sell their operating skills on a fee or percent-of-revenue basis to the new casino owners, who typically have no experience in casino management. Management operating fees of 25 to 35 percent of revenue are typical.

Emerging Markets - Rapid gambling revenue growth is Macau in recent years has prompted other countries in the Asia/Pacific region to consider the liberalization or expansion of gaming laws. Japan is exploring legislation that could establish casinos ahead of the 2020 Summer Olympics. Other countries in the region that are expected to be sources of future growth include the Philippines, South Korea, Thailand, Taiwan, and Vietnam.

Executive Insight

Chief Executive Officer - CEO

Expanding Operations While gaming revenue drives casino operations, visitors are increasingly attracted by larger properties with lavish entertainment, large hotels, and gourmet restaurants. As state laws have changed to allow gambling, casino operators have expanded into non-traditional gambling locales and grown bigger in existing properties, such as in Las Vegas and Atlantic City. Harrah’s and MGM have both increased their geographic reach and concentration in Las Vegas by opening new properties.

Supporting Industry Legislative Efforts The gambling industry is heavily regulated and future growth depends on favorable state legislation. Companies join industry associations to lobby state legislatures regarding tax rates on gambling machines, the size of operations, and requirements for gaming facilities to be offshore – riverboat gambling – and other issues. Las Vegas operators, fearing loss of the small-bet but high-frequency gamblers, are facing competition from landless tribes, as Indian casinos become a larger presence in California.

Chief Financial Officer - CFO

Raising Capital for Refurbishment Casinos need large amounts of capital to update and refurbish properties, add new facilities, and modernize existing ones. Companies rely heavily on the ability of resorts to generate enough cash to fund maintenance and future development. Companies incur large amounts of debt to fund major expansion or acquisitions.

Controlling Cash Flow  Gambling operations result in large inflows of cash, requiring special controls. Casinos have long used locked cash boxes on casino floors and independent workers to count currency intake. Companies use computers to monitor slot machine use and payouts, and enhance cash controls. Information systems are installed to analyze individual gaming machines and deviations from expected performance.

Chief Information Officer - CIO

Developing New Games  The public becomes bored with gaming machines and expects new models of slot and poker machines periodically. Companies use computer technology to develop video poker and wide-area games that connect several machines, allowing progressive payouts that are larger and more popular with the gaming public. Computer gaming machines allow gambling in places other than casinos. Many companies are installing cashless slot machines due to their increased reliability, decreased servicing requirements, and reductions in counting operations.

Improving Casino Infrastructure The infrastructure to operate major casinos is large and complex. Casino operations rely heavily on computerized programs to take bets, print tickets, track revenue and payouts from machines, and maintain historical data on machine performance. Companies have installed yield management systems to maximize occupancy and room rates at casino hotels. Some casinos have automated surveillance and security systems and integrated them with machine-monitoring systems.

Human Resources - HR

Training Casino Employees Employees working in gaming activities must be approved by regulatory authorities and require special training. Companies conduct intense gaming training that sometimes includes substantial on-the-job training under close supervision before new employees are allowed on casino floors. Casino operators provide continual training and refresher courses for gaming employees in both gaming operations and public relations, as customer service is a mainstay in this hospitality and service industry.

Hiring and Retaining Management Employees  Recruiting and retaining management is critical to providing superior customer service in the gaming industry. Competition for qualified management personnel is intense, and companies’ ability to attract and retain such staff is important. Companies’ promotional opportunities include allowing junior management personnel to function in significant positions at Indian casinos operated by the company under contract. Service in these contract positions can make the employee eligible for a bonus and sometimes a percentage of revenue. Such opportunities offer a good training for junior management.

VP Sales/Marketing - Sales

Making Gambling Fun  Increasing competition offers the public a greater variety and location of facilities to gamble. Casinos increasingly promote themselves as destination resorts offering fine dining and entertainment in addition to gambling. Resorts promote a complete resort and entertainment experience, marketing partnerships with championship golf courses, staging sporting spectacles and offering major shows and acts.

Attracting Corporate Customers Despite a downturn in business travel, and an unwillingness of corporations to hold business meetings in resort locations, many casinos are marketing to the convention and business travel segment. Business travel improves hotel occupancy, increases restaurant use, and increases gambling and entertainment revenues. Websites often tout casino hotels’ meeting and convention space.

Executive Conversation Starters

Chief Executive Officer - CEO

What expansion plans does the company have? Visitors are increasingly attracted by larger properties with lavish entertainment.

Does the company expect expansion of gambling in more states? The gambling industry is heavily regulated and future growth depends on favorable state legislation.

Chief Financial Officer - CFO

Can the company fund capital improvements with internal funds? Casinos need large amounts of capital to update and refurbish properties

What new controls on cash is the company considering? Gambling operations result in large inflows of cash, requiring special controls.

Chief Information Officer - CIO

What new types of gaming machines is the company planning? Companies use computer technology to develop video poker and wide-area games.

What computer system upgrades is the company planning? Some casinos have automated surveillance and security systems.

Human Resources - HR

What training programs does the company have for new employees? Employees may train in simulated casino situations.

How does the company retain key operating managers? Competition for qualified management personnel is intense.

VP Sales/Marketing - Sales

What new promotional programs does the company plan? Casinos increasingly promote themselves as destination resorts.

What corporate-oriented programs does the company offer? Casinos market themselves to smaller businesses as rewards programs.

COMPANY BENCHMARK TRENDS

COMPANY BENCHMARK INFORMATION

NAICS: 7132, 72112

EVALUATION MULTIPLES