N.Y. may be tip of iceberg for expansion of casinos

David Strow

Friday, Oct. 26, 2001 | 9:29 a.m.

Legalized gambling is on the verge of an unprecedented expansion in New York -- and Las Vegas' largest casino operators are all eyeing ways to become involved in what could be the newest frontier for the gaming industry.

But New York, casino industry executives and observers say, could merely be the tip of the iceberg. The same factors that caused casinos to spread across the nation in the early 1990s -- growing state budget crunches and a deepening recession -- are becoming problems today.

Many believe other states will respond in the same way -- with new casinos, lotteries, and slot machines at racetracks.

"The circumstances today are very similar to the late '80s and early '90s," said Gary Thompson, spokesman for Harrah's Entertainment Inc. "We know there are a number of states that are looking at expanding or legalizing gambling. Gaming is not a panacea for all ills, but it's certainly been beneficial to every state that's legalized it. It's generated an awful lot of tax revenue for an awful lot of jurisdictions."

Even the most virulent opponents of legalized gambling, who had been largely successful in slowing gaming's spread in recent years, expect a tough fight.

"We are going to see a tremendous attempt to expand gambling in the midst of a national crisis," said Tom Grey, executive director of the National Coalition Against Gambling Expansion. "Instead of selling savings bonds, we're going to push casinos. Maybe that's the difference between the greatest generation (the World War II generation) and who we are now."

Expanded gambling in New York State has long been discussed. But with the attack on the World Trade Center on Sept. 11, New York suddenly lost billions of dollars in tax revenues.

The bill passed by the New York Legislature uses a three-pronged strategy to use gambling as a way to regain some of those lost dollars. First will be the introduction of Powerball, the popular multi-state lottery. Second will be the introduction of slot machines at five racetracks, including Aqueduct in New York City.

The final step will be the addition of up to six Indian casinos -- three in Western New York, three in the Catskills near New York City.

Park Place Entertainment Corp. is the first Las Vegas company poised to cash in on New York's embrace of legal gambling. New York's action opens the door for the company's long-time plans to open a casino resort in the Catskills -- and Park Place said it expects to break ground on that resort sometime next year.

Park Place and its partner, the St. Regis Mohawk Tribe, are looking to pump $500 million into the project. Once complete, the Catskills hotel-casino will have 750 rooms and a 130,000-square-foot casino.

But Park Place is far from the only Las Vegas company closely watching New York.

"I think every gaming company has talked to New York and the officials back there," said John Marz, senior vice president of marketing for Mandalay Resort Group. "We really look at every jurisdiction contemplating gaming, so obviously New York is something we'd be looking at."

For Harrah's, New York represents something very familiar to the company -- tribal casinos.

"We have a very good relationship with the tribes we've managed casinos for, and we think we have a pretty good reputation in Indian country," Thompson said. "Obviously, if we could find the right situation that would make sense for our shareholders, it's something we'd take a look at."

But even those companies without any tribal gaming experience -- like MGM MIRAGE -- are interested.

"Philosophically, we'd love to (enter the New York market)," said Alan Feldman, spokesman for MGM MIRAGE. "Obviously being in New York has great attraction, but there's an awful lot of hurdles before this is solidified to a point where we can make a decision whether we'd do business there.

"If the business opportunity were appropriate for investment, we'd be happy to look at that (a tribal casino in New York)."

But for Harrah's, Park Place, MGM MIRAGE and Boyd Gaming Corp., New York's expansion of gaming could also spell bad news. New York is a massive feeder market for Atlantic City.

Harrah's and Park Place already have substantial investments in Atlantic City. And whatever benefit Park Place will see from the Catskills casino -- 30 percent of net cash flow -- won't be enough to make up for lost business to the Catskills, said gaming analyst Jason Ader of Bear Stearns.

"In the end, they're a net loser," Ader said. "Atlantic City gets hurt more than they can make in the Catskills. It would be better for them if they just kept Atlantic City without competition in New York."

MGM MIRAGE and Boyd are putting $1 billion into the Borgata, a 2,000-room megaresort set to open in 2003. Once that's open, MGM MIRAGE wants to build a wholly-owned, $1.3 billion to $1.5 billion resort in Atlantic City, with a tentative opening date of 2005.

With casinos coming to the Catskills, Ader thinks both companies should think about cutting back on those plans. A new MGM MIRAGE casino in Atlantic City "doesn't make a whole lot of economic sense" now, Ader said.

"We think there's substantially more risk to their Atlantic City developments, given the New York law change," Ader said. "I think shareholders of Boyd Gaming and MGM should be concerned about the expansion of gaming in New York."

Both companies, however, deny they have any plans to put on the brakes.

"If anxiety could be bottled and sold, Atlantic City would have a whole new industry," Feldman said. "Those analysts viewing this as automatically a bad thing for Atlantic City aren't taking the time to analyze what we're talking about.

"If we're talking purely about gambling, Atlantic City is in trouble. Only so many people give a damn about gambling. We're focused on the larger picture of people who want to go on vacation for a few days."

Many believe talk of new gambling won't remain isolated to New York for long, as New York isn't the only state government hurting for money.

"Politicians are leery of unpopular causes, but when they need money, and it becomes an issue of whether people have to pay more taxes or not, that's what usually provides the motivation and support to do it," said Shannon Bybee, executive director of UNLV's International Gaming Institute. "If they're able to tell someone, 'Do you want gambling, or do you want to pay more (taxes)?', that certainly improves the situation for the expansion (of gaming)."

The most immediate pressure could come in other states in the Northeast, Ader said.

"It becomes a question of sound economics, and the prevention of losing business in your state (to casinos in other states)," Ader said. "That's how gaming proliferated in the Midwest."

Not everyone agrees, though, that casino gambling is yet poised for huge growth.

"I don't see any other states where you have discussion of casino gambling anywhere close to that (in New York)," said Frank Fahrenkopf, chief executive of the American Gaming Association. "It's an isolated situation at this time, because of the confluence of a number of factors. I do not see any (evidence) that there's an appetite out there for more casino style gaming across the country."

That could change if the recession becomes long and painful, Fahrenkopf said.

"That's historically when we saw the onset of riverboat gaming," Fahrenkopf said.

But states have more options than simply legalizing casinos. David Anders, a gaming analyst with Merrill Lynch, believes this is the least likely possibility.

Instead, Anders believes a number of states, including Pennsylvania, Maryland and Ohio, will reconsider the possibility of putting slot machines in racetracks.

"Because they are installed in establishments that already offer an accepted form of gaming, devices at the racetracks have come to be viewed as more acceptable than riverboat or land-based gaming," Anders wrote in a recent report.

A second possibility is that those states that already have legal casinos will relax the restrictions on these casinos, Anders said. Indiana, for example, could pass legislation allowing its riverboat casinos to remain perpetually at dock, while Missouri could eliminate the $500-per-trip loss limit imposed on gamblers at all the state's casinos.

A third possibility is the lottery.

"While it is still early, we believe that states without lotteries may seek legalization in order to once again plug budget shortfalls," Anders wrote.

Thirteen states currently do not have lotteries, but one -- South Carolina -- will launch one within 12 months. Three other states -- North Carolina, Tennessee and Oklahoma -- have considered legalization in recent months.

Anti-gambling forces have been largely successful in stopping these efforts in the past. But Grey concedes it may not be that easy this time.

"We're prepared, but we're in for a tough fight," Grey said. "Let's just say I'm not going to get an early retirement."

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