Initial fears of local casinos losing revenue appear to be a false alarm

By Liz Benston

Friday, Feb. 28, 2003 | 5:04 a.m.

The alarm bells started going off in Las Vegas on Nov. 3, 1998.

That was the day California voters approved a proposition legalizing Indian gaming and allowing that state's Indian tribes to operate Las Vegas-style casinos.

"This is the most significant day in Nevada history," a Las Vegas gaming industry executive told the Las Vegas Sun for a front-page story.

Since that day, the number of slot machines in California has tripled and 13 casinos have opened there.

And since 1998, Nevadans have been warned repeatedly that this expansion of California Indian gambling would result in fewer gambling trips to Nevada. Consequently, the warnings said, employment in Nevada would decline along with gaming revenue and casino tax payments to the state.

One expert warned in 2000 that Las Vegas Strip casinos could lose 15 percent of their business and downtown Las Vegas casinos could lose 30 percent of their revenue to California casinos.

Today, more than four years after the vote that led to the California gambling expansion wave, it appears those were false alarms for Las Vegas. It's true that Reno has been hurt by California Indian gambling, but there's no evidence that Las Vegas has been meaningfully affected.

Las Vegas is holding its own against the new competition because it's, well, Las Vegas. No city in America -- or the world, for that matter -- can compete with the eye-popping concentration of gambling and entertainment. The California casinos, spread up and down the state in mostly rural areas, are no real match for the Strip and its marquee properties such as Bellagio and The Venetian.

"They still like Vegas. Everyone still covets the Vegas vacation," said local gamblers' newsletter publisher Anthony Curtis.

Still, the warnings keep coming.

Indian gambling in California has expanded from an estimated 15,000 slot machines that operated openly, but illegally, in 1998 to about 46,000 machines operating legally today. That compares to about 211,000 slot machines in Nevada -- nearly 152,000 of them in Clark County.

The number of California Indian bingo halls, casinos and other gambling operations has increased from 38 in 1999 to 51 today -- a number that is growing to challenge the 75 or so big casinos with at least 500 slot machines each in the Las Vegas area. Sixty-one California tribes have gambling compacts, but some have not yet opened casinos.

The new California Indian casinos don't rival the Strip's megaresorts. They range from Kmart-like warehouses with a few dozen slot machines to luxurious, midsized resorts about the size and cost of Green Valley Ranch Station Casino in Henderson.

For example, the Lucky Bear Casino near Eureka, Calif., offers fewer than 100 slot machines and no table games, while the Barona Valley Ranch Resort and Casino is a sprawling resort near San Diego with 2,000 slot machines, about 30 table games, a golf course, a wedding center, luxury rooms and private gambling areas.

The California casinos are tremendous moneymakers. They pay minimal state and local fees, and there is no tax on their winnings. Their revenue has jumped from $1.5 billion in 1999 to estimates ranging from $5 billion to more than $8 billion a year.

That compares to Nevada's $9.4 billion in gambling revenue for the 12 months ended Nov. 30 -- a figure down 1 percent from the same period a year earlier.

One reason that warnings continue in Las Vegas about the new competition is that a second wave of California gambling expansion is expected soon.

Gov. Gray Davis, facing a budget deficit, is looking to collect gambling taxes in exchange for dropping a limit of 2,000 slot machines per tribe that the Indians earlier agreed to.

"California in the very near future will be the gambling capital of the world -- not of the U.S. -- of the world," former California Lt. Gov. Leo McCarthy boasted in a recent Los Angeles Times Magazine story.

"Nevada will become merely a California gambling satellite," said McCarthy, who served on the National Gambling Impact Study Commission.

Anthony Martin, a warehouse runner who stocks the kitchens at the Fremont in downtown Las Vegas, is among the local workers worried about the new competition.

During a trip last year to Southern California, Martin finally saw what the buzz was about. Billboard after billboard in Los Angeles advertised fancy California casinos -- the fallout of the 1988 vote and a second California initiative in 2000 that authorized Indian tribes to build Las Vegas-style gambling palaces.

"They're going after our dollars," said Martin, who fears that downtown will be the first area in Las Vegas to be hurt by the growing California competition. "No one's going to want to come downtown if they have casinos boarded up on either side of us. If downtown dies, we die."

Rank-and-file workers in Las Vegas aren't the only ones fretting about the explosion of Indian gambling in not just California, but also in Arizona, another nearby market that feeds Las Vegas. Arizona's 15 tribes operate 22 casinos generating about $1 billion in revenue a year -- a figure expected to grow in tandem with California's.

"I think public policymakers, if they're not nervous, should be nervous," said Bill Bible, president of the Nevada Resort Association, the state's chief casino lobby.

"Nevada had a monopoly on gambling until 1975, and that (ended) 3,000 miles away," he said, referring to Atlantic City casinos.

"This is on our border," he said of the California Indian casinos.

"While we have the critical mass, they have the advantage of being closer to the population bases. It has to concern those who make public policy to maintain the industry's ability to compete."

But Las Vegas gambling experts can't find any evidence that the new Indian casinos in California and other states have reduced travel to Las Vegas or cut into the area's gambling winnings.

"History has shown that the expansion of gaming generally doesn't have an effect," said Kevin Bagger, a Las Vegas Convention and Visitors Authority senior research analyst. "If anything, it makes them more likely to want to see Las Vegas for the ultimate experience. That being said, we are checking to see if it ultimately has an impact on visitation."

Still, some tourism promoters are convinced Las Vegas is at risk.

"We're starting to hear footsteps," LVCVA President Manny Cortez said at January's Preview Las Vegas economic development forum as he displayed a map showing Indian casinos in California and Arizona. "Now you know how Custer felt at Little Big Horn, surrounded by Indians."

Cortez's comment reflected the prevailing wisdom of the past few years that at some point Las Vegas would be pinched by the new Indian competition.

These fears about Las Vegas have been bolstered by the decline in gambling revenue in recent years in Reno -- a secondary market nationwide and a market more dependent on California than Las Vegas.

Reno casinos won $1 billion from gamblers in 2002, down 3.8 percent from 2001. That's a weaker performance than the statewide decline of 0.3 percent, and there's plenty of evidence the proliferation of California Indian casinos has reduced the incentive for Northern Californians to drive to Reno to gamble.

But there's no such evidence that Las Vegas is suffering the same fate. There's no evidence that gamblers from, say, Minneapolis, are choosing to travel to San Diego instead of Las Vegas to gamble. And there's little evidence to suggest Californians themselves have reduced visitation to Las Vegas because of the proliferation of gambling in their home state.

In fact, bus and auto traffic from Los Angeles and San Diego to Las Vegas is as heavy as ever. Interstate 15 is still clogged on weekends with Californians visiting Las Vegas. The LVCVA estimates that more than 37,860 vehicles, on average, each day crossed the California border at I-15 last year. That marked a 6.2 percent increase from 2001 and an 8.6 percent increase from 2000 as more people chose to drive rather than fly after the 2001 terrorist attacks.

Las Vegas casino operators want to keep it that way and continue to run ads in big Southern California feeder markets to remind travelers that there's only one real Las Vegas experience.

MGM MIRAGE promotes its Le Cirque restaurant at the Bellagio, the La Femme cabaret at MGM Grand and the white tiger exhibit at The Mirage. Park Place Entertainment Corp. executives show off the Forum Shops at Caesars and the Eiffel Tower replica at Paris Las Vegas.

Downtown, leaders at Boyd Gaming Corp. -- which owns the Fremont, California and Main Street Station -- emphasize good values, friendly service and better casino odds.

The promotion of amenities rather than gambling makes sense for Las Vegas casinos. Fifty-six percent of visitors last year said they primarily came to Las Vegas for a vacation or for pleasure, up 1 percent from 2001. Only 6 percent said they came primarily to gamble, down from 8 percent. Twelve percent visited for a convention, up 1 percent. Another 10 percent were in town to visit friends and relatives, up 1 percent.

But while California casinos with fewer amenities aren't yet seen as real competition to Las Vegas, no one in the industry is taking their California customers for granted.

Every traveler valued

Every traveler to Las Vegas these days is valued as the area tries to shake off the slump that began with the 2001 terrorist attacks and continues to produce flat visitation and casino win numbers. In 2002, the area hosted 35.1 million visitors, up just 0.2 percent from the previous year. And while no one can show California Indian gaming has led to reduced visitor counts in Las Vegas, some say the Golden State gambling explosion is at minimum restraining the growth of the Las Vegas gambling industry.

According to an upcoming LVCVA report on the California market, California visitors to Las Vegas said they reduced their average number of trips last year to about two from three the previous year. Bagger suspects that's more a function of the troubled economy than the effect of tribal casinos.

Similar figures aren't available for Arizona, which accounted for about 7 percent of Las Vegas visitors last year compared to California's 34 percent.

In February, the LVCVA released its annual visitor profile study for 2002 -- a random survey of 3,300 people that serves as an important benchmark for casino executives, Wall Street analysts and other industry-watchers.

Among the highlights: A greater proportion than in previous years said they would be more likely to visit Las Vegas again even with a proliferation of more-accessible casinos nationwide. The proportion of visitors who said they were "somewhat more likely" or "much more likely" to visit Las Vegas jumped to 45 percent last year. That compares to 35 percent in 2001 and 22 percent in 2000.

Some Las Vegas casino executives embrace the expansion of Indian gambling in California and Arizona because of its potential to generate significant profits for their companies.

Harrah's Entertainment Inc. of Las Vegas -- which operates 26 casinos nationwide -- may be a test case for how Las Vegas will endure in the coming years.

"As you introduce gaming in a new jurisdiction you're introducing a new form of entertainment to people who haven't sampled it before," Harrah's spokesman Gary Thompson said.

Ultimately, he said, all of those customers want to check out Las Vegas.

During an earnings call to discuss fourth-quarter financial results, Harrah's executives said their two Las Vegas casinos saw a 25 percent increase in "cross-market play" compared to fourth-quarter 2001. That means they earned more business from customers traveling beyond their closest Harrah's casino. Companywide, cross-market play jumped 20 percent last year compared to 2001, to more than $1 billion.

In 1988, Nevada casino companies spent more than $27 million to fight the California gambling expansion measure, Proposition 5. The state's Supreme Court shot down the initiative after voters approved it, laying the groundwork for Proposition 1A in 2000, which is law today. Nevada interests didn't put up a fight in round two, while a couple -- Harrah's and Station Casinos Inc. -- announced plans to operate their own California tribal casinos.

Both companies say they have a duty to shareholders to invest money where they believe it will produce the greatest return.

Station Casinos -- the dominant operator of Las Vegas casinos for locals -- says its investment in the Thunder Valley casino near Sacramento won't jeopardize its hometown.

The deal will boost the bottom line, freeing up cash for local projects, Station Casinos Chief Legal Officer Scott Nielson said.

The company hasn't delayed or cut any Nevada projects as a result of its investment in Thunder Valley, he added.

"Indian casinos are being built in California with or without Las Vegas companies," he said. "It's going to give us a really good opportunity to make money in California and bring that back to Nevada."

The potential threat

California's tribal casinos would present more of a credible threat to Las Vegas if they were allowed to expand their slots and if they beefed up amenities even more to draw destination tourists along with their typical regional customers, Bear, Stearns & Co. analyst Michael Tew said.

Given that scenario, their casinos could approach the size and slot machine concentration of Las Vegas' top resorts, Tew said.

"I still think there's plenty of growth left in that market," he said. "There's a tremendous amount of pent-up gaming demand in that state."

But MGM MIRAGE Chief Executive Terry Lanni said Las Vegas is well positioned to withstand the competition.

MGM MIRAGE spends hundreds of millions of dollars each year to freshen its resorts and design amenities to attract travelers, Lanni said.

"I think that kind of competition will make Nevada better because it will force us to reinvent ourselves much earlier than we would have otherwise," he said.

California's new casinos may decrease the number of annual trips visitors make to Las Vegas, but not enough to cause a drop in gaming revenue, said Shannon Bybee, executive director of the International Gaming Institute at the University of Nevada, Las Vegas.

"It affects our growth, but not so much that we're going backwards," he said.

Wall Street appears to agree with that view.

"Although the Las Vegas market may lose some business to California Indian casinos, the megaresorts should be able to offset this loss with growth from other areas," Merrill Lynch analyst David Anders said in a recent report.

Marginal, lower-rent properties on the Strip are more likely to be affected by California competition, while Reno and Laughlin stand to take an even greater hit, Anders said.

Bill Eadington, director of the Study of Gaming and Commercial Gambling at the University of Nevada, Reno, agrees.

"If they're (low-rent properties) becoming boarding houses to the rest of the Strip, maybe they're not viable in an environment that has convenience gambling all over the place," he said.

Duane Krohn, chief financial officer at the Riviera, believes second-tier properties such as his will be affected in the near term -- though the Riviera relies more on Eastern markets than it does on California.

"In the end, it may not hurt as much as we may think," however, he said. "It's the newness theory. Theirs (California casinos) are essentially locals' casinos and maybe they eventually get tired of their local casino."

Boyd Gaming's three downtown Las Vegas casinos also have their niche. The majority of customers are from Hawaii because of a long-standing charter program that offers inexpensive package vacations for Hawaiians.

"I think we need a longer period of time in order to look at what the impact (of California Indian casino growth) might be," spokesman Rob Stillwell said. "There was talk in the early '90s about how (casino expansion) would impact Las Vegas and it didn't prove itself out."

The company says its promotions for local and mainland Hawaiians helped the trio of casinos yield the highest annual cash flow last year in six years amid difficult economic times.

Niche markets

Besides Reno, Primm is seen as a Nevada gambling market that lacks amenities and can't top some of the upscale resorts that lure California travelers, said Max Rubin, the Las Vegas-based author of "Comp City" and a consultant for Barona casino resort.

But Laughlin, like Las Vegas, has carved out a niche catering to fly-in tourists looking for bargain, warm-weather vacations and may be less affected by the competition than other smaller markets, Rubin said.

"Three to four years ago they were ringing the death knells (in Laughlin), but it doesn't look like that happened," he said. "They go after that 55-plus market and they do a good job."

The downtown Las Vegas casinos also benefit from a niche -- busloads of Californians delivered daily to the downtown Greyhound station.

Greyhound -- the nation's largest long-haul bus transport company -- has 33 average daily arrivals into Las Vegas, up from an average of 30 arrivals in 2001. The majority of those arrivals are from California, with 17 trips originating from Los Angeles and 10 from San Diego.

"Our business is very strong along that corridor," Greyhound Bus Lines Inc. spokeswoman Kim Plaskett said. So strong, in fact, that the company expects to expand the number of affiliate-operated charters it operates in and around Las Vegas for tourists once they arrive.

Still, Las Vegas executives will watch warily this month when some of the California tribes are expected to begin the process of renegotiating casino compacts struck three years ago with Davis.

Twenty-one of the 61 California tribes authorized to run casinos have created the Tribal Compact Coalition, and last week the coalition indicated a willingness to pay more to the state and local governments in exchange for relaxation on the 2,000-slot limit and other concessions such as new state roads to tribal areas.

The coalition said it's willing to make "fair-share contributions from increased revenues of additional slot machines."

Other tribal leaders, represented by the California Nations Indian Gaming Association, are sharply critical of Davis' effort to tap into their revenue. Tribes are not required to renegotiate, and some have indicated they won't participate in the talks.

The potential affect on Las Vegas is up in the air, as some tribes could end up with different slot maximums and the tax rate may be different for different tribes.