GAMING INDUSTRY: 15 YEARS OF CHANGE

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Gaming today is more widespread, more diverse and more popular than ever before, and much of that

expansion and growth is attributable to industry developments over the past 15 years. From the growing

footprint of legalized gambling across the globe to advances in technology, the industry continues to

change and adapt to meet the new demands and challenges of an ever-evolving landscape.

Gaming Expansion

There is perhaps no greater theme of the past 15 years than the growing popularity and proliferation of legalized gaming around the globe. Considered an economic engine that generates new jobs, economic output, and tax revenues, legal gaming enjoyed a prolonged period of expansion in markets across the

United States and the world.

On the domestic front, 15 states had legalized commercial gaming within their borders in 2001. Since then, nine more states have legalized the activity (Florida, Kansas, Maine, Maryland, Massachusetts, New York, Ohio, Oklahoma and Pennsylvania), bringing the total to 24 states, or nearly half of the nation. The rising number of commercial casinos across the United States has translated into growing

gaming revenue. From 2001 through 2015, combined gross gaming revenue among the nation’s domestic markets had climbed 65 percent from $22.3 billion to $36.8 billion.

During that period of expansion, Nevada maintained its position as the top-grossing gaming revenue

market. In fact, it has widened the gap between itself and the next-closest state. This trend is attributable

to the expansion of gaming in the eastern part of the country and its significant impact on gaming

activity in Atlantic City, New Jersey.

In 2001, the Garden State ranked second in gross gaming revenue with $4.3 billion, which was less than half the $9.5 billion collected in Nevada that year. Between 2004 and 2010, casinos opened in the neighboring markets of New York, Pennsylvania and Maryland, and each state absorbed a proportion of gamblers who chose to play closer to home rather than drive or take a bus to Atlantic City. Since 2001, New Jersey’s annual gross gaming revenue tumbled 58 percent to $2.5 billion, and four of the city’s 12 casinos recently closed. Meanwhile, combined annual gross gaming revenue in New York, Pennsylvania and Maryland now exceeds $6.3 billion. Pennsylvania accounts for $3.2 billion of that total, ranking it second among states in terms of gross gaming revenue. New Jersey dropped to fourth.

Rapid expansion has not been limited to commercial gaming. The tribal gaming segment has also experienced a period of significant growth over the past 15 years. In 2001, the 330 tribal gaming operations in the U.S. produced $12.8 billion in gaming revenue. Through 2014 (latest available), the number of operations has expanded to 459 (+39.1 percent) while total gaming revenues more than doubled to $28.5 billion.

Perhaps the greatest growth success story of the past 15 years, however, is Macau, China. The former Portuguese colony was transferred to Chinese control in 1999, and soon after commercial gaming opportunities were expanded for foreign companies. The first of two dozen casinos under this arrangement opened in 2004, and as the number of casinos climbed, so did gaming revenue. Between 2002 and today, the number of casinos in Macau more than tripled from 11 to 35, while gross gaming revenue has skyrocketed from $2.8 billion to $27.6 billion.

Macau’s gaming rise came so quickly that in 2006, just a few years into its new casino era, annual gaming revenue surpassed that of Las Vegas, and by 2008 Macau had overtaken Nevada to become the largest gaming jurisdiction on the planet. Gross gaming revenue continued to rise after that point, with the trailing 12-month total peaking at $47.9 billion in May 2014. Since then, an overall slowdown in the Chinese economy and a government anti-corruption investigation has curtailed gaming activity, which has since dropped to $27.6 billion. Despite that decline, Macau remains the top gaming destination in the world.

The examples of Macau, Singapore and Pennsylvania illustrate how quickly the gaming world can transform. Fifteen years ago, none of these three jurisdictions registered on the global gaming radar. Yet in a short period of time, these new markets emerged and grew to dominate the top of the global gaming world. Macau is the world’s largest gaming market, even with the heavy declines of the past two years, while Singapore and Pennsylvania sit third and fourth, respectively, behind Nevada.

Over the next 15 years, there is a good chance that commercial gaming will emerge in new markets, creating opportunities as well as competitive challenges. Amid the expansion of gaming markets and increasing competition for gaming dollars, Nevada and Las Vegas, in particular, have evolved to include a more diversified offering of services and experiences to differentiate from gaming-only competitors. These additions include high-end dining options, nightclubs and headlining music and entertainment acts. Although gaming revenue remains a significant source of overall resort revenue, its share continues to decline. In 2001, gaming revenue accounted for 43.7 percent of overall revenues for Las Vegas Strip operators. By 2015, that number had dipped to 34.9 percent as other sources of revenue increased.

As gaming supply across the nation and the world rises and moves closer to potential market saturation, gaming operators will likely look to similar strategies to set themselves apart in an ever-more competitive environment.

Consolidation and Mergers

Throughout its history, the Las Vegas market has been known for its constant evolution. This is true both in terms of attracting the ever-changing customer base and in terms of redefining the standard of hospitality. The market remains the top domestic destination for gaming-related entertainment, just as it was 15 years ago.

That cycle of evolution holds true for the gaming companies that own and operate the signature resorts in Las Vegas and around the globe. Throughout the past 15 years, the gaming industry has experienced considerable consolidation at the top as a series of mergers and acquisitions has transformed the corporate landscape.

The Applied Analysis Gaming Index, a onetime feature of this column that tracked the Wall Street performance of the top gaming companies, illustrates how much things have changed. Fifteen years ago, MGM Mirage, Park Place Entertainment, Mandalay Resort Group and Harrah’s Entertainment combined to control the vast majority of Nevada resorts.

Although it occurred just beyond the 15-year time-frame, MGM Grand’s purchase of Mirage Resorts in 2000 was the largest gaming industry corporate buyout in history and set the stage for the decade of consolidation that would follow. In 2005, MGM Mirage followed up with another large acquisition of Mandalay Resort Group. In the same year, Harrah’s Entertainment acquired Caesars Entertainment. These purchases alone reduced the number of major gaming operators on the Las Vegas Strip by half.

While the major gaming companies were consolidating, two gaming and convention pioneers were making new imprints on the Las Vegas Strip and abroad. After selling his stake in Mirage Resorts, Steve Wynn created a new company, Wynn Resorts, which opened the Wynn Las Vegas hotel-casino in 2004 and followed that with Encore in 2008. Wynn has also opened a resort in Macau as that region’s gaming operations have expanded. The company has also recently started construction on Wynn Boston Harbor, one of the first planned properties in Massachusetts under that state’s Expanded Gaming Act of 2011.

Sheldon Adelson’s Las Vegas Sands has increased its footprint in Las Vegas with the addition of The Palazzo resort hotel, which opened in 2007. However, Sands’ growth has been greatest outside Nevada’s borders. The company owns resorts in Pennsylvania, Macau and Singapore, which has grown into one of the world’s largest gaming markets in a short time.

The wave of company acquisitions hasn’t been confined to the Strip. Boyd Gaming merged with Coast Resorts in 2004 to consolidate the southern Nevada locals gaming market. Boyd expanded its reach earlier this year with the announced acquisitions of two Cannery properties and the Aliante Casino + Hotel + Spa in the region. Meanwhile, Station Casinos recently made a play to move closer to the Strip by purchasing the Palms Casino Resort this year.

Mergers and acquisitions have not been limited to the gaming operations side of the industry. Gaming equipment manufacturers have also seen increased consolidation as larger players look to add new technology and brands to their portfolios.

Scientific Games has been particularly aggressive in expanding its product offerings via acquisition. In January 2013, Scientific Games acquired WMS Industries. A year later, Scientific Games purchased Bally Technologies, and solidified its position as one of the key players in game design and manufacturing.

GTECH, one of the largest firms in the industry, merged with IGT in April 2015 to further diversify and expand its product offerings. The new company, using the name International Game Technology, offers numerous products and services to the gaming and casino industry.

Technology

In 2001, the first Global Gaming Expo (G2E) was held, bringing the newest ideas in technology and gaming to one place. Since that time, casino floors have changed and adapted to integrate new technologies that improve gaming experience and efficiency.

As casinos have changed, so too has the technology within the casino and the experience delivered to the customer. In the early 2000s, casinos began the transition from coin-based slot machines to ticket-in/ticket-out systems, which have become the standard on casino floors. Coinless gaming has also gone hand in hand with casino rewards and loyalty programs. These now ubiquitous programs allow gaming operators to gather information on players and provide tailored promotions to guests. These loyalty programs are now commonplace as resorts compete to attract and retain their loyal clientele.

The look and sensory experience of slot machines has also changed. With the advent of highly sophisticated server-connected machines and top-of-the-line graphics, slot machines have become more interactive. In addition, brands have also become a key selling point for slots as gaming manufacturers align with television shows, movies and other mediums to create a more personal experience for gamers. In the effort to pursue younger generations of gamblers, slot manufacturers are now working to integrate social- and skill-based games where players may interact with each other or participate in a game that is less governed by randomness and chance.

Thanks to technological developments over the past 15 years, gaming is no longer restricted to the casino floor. With smartphones, tablets and computers, online gaming and sports betting have blossomed in Nevada and New Jersey. While online poker makes up a large portion of the new industry, online casinos featuring games like slot machines are becoming increasingly popular for those wanting to gamble on the go.

As hotels continue to grow larger and service more guests from around the globe, the way casinos market to these guests has also had to change. What was once the task of the casino host to build a personal connection to the players is no longer as feasible. While top-tier players still receive a personal level of attention, gaming operators have now turned to other outlets to maintain connections with their clients and offer promotions. While direct mail marketing was once a staple of promotions, the proliferation of e-marketing has made marketing faster, more targeted, and potentially more cost effective for the casino industry. Analytics and data collection are now crucial to understanding how to best and most efficiently reach the target consumer. In addition, social media has created new ways to build relationships and gather data with the casino customer.

The past 15 years have brought incredible expansion and changes to the casino industry. New states and countries have opened their borders to gambling while the very casino floors themselves have transformed with changing tastes and technology. I can only imagine what the next 15 years will bring.

Brian Gordon is a principal with the Nevada based advisory services firm, Applied Analysis. Gordon has extensive gaming and leisure experience from an accounting, finance and operational perspective.

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