Nevada casino executives debate industry outlook

By Liz Benston (contact)

Monday, Jan. 13, 2003 | 10:52 a.m.

On the final day of a major casino conference in Las Vegas Friday, Nevada's top gaming executives offered an upbeat outlook for a maturing industry that is managing to tackle new challenges one day at a time.

Consumer demand, coupled with interest in nearly a dozen states to plug budget deficits by taxing casinos, will continue to fuel the expansion of gaming this year, executives from MGM MIRAGE, Harrah's Entertainment Inc. and International Game Technology told a group of casino managers, suppliers and other industry insiders at the American Gaming Summit.

Companies must approach new opportunities cautiously, however, as potentially higher tax rates in some states could make some deals unprofitable, they said.

Summit panelist Paul Rubeli, chairman and chief executive of Phoenix-based Aztar Corp., presented a darker view of the future.

The prospect of expanded gambling in New York, California and other states nationwide will lead to sporadic gains for casinos rather than major growth opportunities, he said.

In past years companies relied on new projects to stimulate revenues. In the future, he said, operators will have to squeeze profit from existing properties.

Casinos can only tighten slot payouts and change their machines by so much to boost revenues, he said.

"What a quandary we have," Rubeli said.

Casino companies began to cut costs in response to the economic downturn even before the Sept. 11 terrorist attacks, leaving behind few areas to trim save for non-traditional categories such as energy and information technology, he said.

Discounting rooms -- traditionally used to boost visitor volume -- has a snowballing effect that ultimately hurts everyone, he added.

Las Vegas operators are particularly guilty of discounting rooms over the last year and a half.

"That's a deflationary environment," he said. "We have got to stop the discounting here in Vegas."

Gaming companies' fixed costs have also skyrocketed in recent years, he said.

Aztar, which operates the Tropicana hotel and casino in Las Vegas, is facing a 300 percent increase in property insurance and liability insurance, a 10 percent increase in property taxes and increased casino revenue taxes of up to 50 percent in some states. Health costs are up about 20 percent -- driven in part by a labor contract struck last year at the Tropicana with the powerful Culinary Union in Las Vegas.

Casinos' long-term prospects still remain strong, other executives said.

Demand for places to gamble now outstrips supply by a significant margin, said Phil Satre, chairman of Harrah's.

"There are still large population centers of the United States that do not have easy access to legalized gaming."

A growing number of baby boomers with discretionary income and accepting attitudes toward gambling also bodes well for the industry, he said.

MGM MIRAGE issued a warning last week that it would miss Wall Street earnings estimates due to lower holiday returns. The warning marked its first since 1998 and touched off a shockwave that sent gambling stocks tumbling on fears about slower consumer spending.

Company Chairman and Chief Executive Terry Lanni said industry performance will likely get a boost this year as the economy improves. An economic stimulus package proposed by President George Bush could also help the industry in the form of individual tax cuts and non-taxable stock dividends, he said.

Experts say International Game Technology, the world's largest slot manufacturer, is best positioned to reap the rewards of new machine demand.

At least one state per year is likely to legalize some form of gambling over the next decade, G. Thomas Baker, president and chief executive of IGT, told summit attendees.

Starting this year, the debate about expanding gambling will likely occur at higher levels of government than ever before, Baker said.

Gaming companies must proceed carefully because legislators are interested in taxing casinos rather than promoting them, he added.

"If they could make as much money opening a concert hall ... they would."

"We need to make sure that our story is well known. They need to know the good that has come from the expansion of our business."

For all of their image problems and economic questions, casinos remain a profitable business, Satre said.

The latest annual revenues for Costco, the shopping club giant, were about $40 billion -- roughly 10 times that of Harrah's. Yet profits were about the same, he said.

"It makes us an easy target as long as we have an image that's below other sources of tax revenue."