Is the US land-based gambling market now saturated? At first, it seems like a stupid question. According to the American Gaming Association (AGA) 2013 State of the States report, only 23 states – less than half – have legalized commercial gaming. Potentially lucrative markets such as Texas, Florida, and New York remain untapped. Meanwhile, Maryland and Ohio have recently legalized gambling, while Massachusetts – the 14th largest state by population – is bringing four facilities online in the next couple of years.
And yet, commercial gambling revenues in the US still remain below levels seen in 2007. The AGA, among others, have blamed general economic weakness leading into and coming out of the 2008-09 financial crisis for the the slow recovery in US commercial gaming. Yet since 2007, US gambling has seen massive expansion. Pennsylvania produced just $1.09 billion in gambling revenue in 2007, the first year where stand-alone casinos were legalized; that figure would triple by 2012, reaching well past $3 billion. New markets in Ohio and Maryland – the 7th and 19th largest states by population, respectively – came online in 2010 and 2013, while Kansas added two casinos in its more rural areas. In addition, commercial gambling was expanded in high-population states including Colorado, Florida, and Illinois.
Despite that expansion, however, total commercial revenues in 2012 – again, according to AGA calculations – still sit just a touch below 2007 levels. To be fair, there has been less growth in terms of locations in long-regulated markets; AGA figures show that 513 commercial and racetrack casinos operated in 2012, up only slightly from 508 in 2007. But tribal locations have increased 10 percent over the same period, with electronic gaming machines (EGMs) in states such as Montana and Oregon increasing 4 percent. The loss of locations in those competitive markets would seem to imply the closure of facilities that could not compete with other, nearby locations (be they commercial casinos or slot parlors); it still does not explain why overall gaming revenues have declined despite the (admittedly modest) economic expansion of the past six years or why new, supposedly underserved, markets have not boosted overall US commercial revenues.
No market better illustrates the problems with US expansion better than Ohio. As our own Kirby Garlitos pointed out this week, Ohio revenues have come in well below expectations. Overall gambling revenues in the state are running nearly 20 percent below the projections made in a 2011 study commissioned by Governor John Kasich. And yet, even that below-expected growth of the new market is having a significant impact on casinos in border states. As I noted in August, three different companies – Pinnacle Entertainment, MTR Gaming, and Full House Resorts – all reported double-digit percentage revenue declines in the second quarter on a year-over-year basis, with all three blaming the new Ohio market for losses at their properties in Indiana and West Virginia.
To be sure, there have been some success stories; Maryland Live! is operating at a roughly $600 million annual run rate in terms of revenue. That casino alone would add roughly 1.6 percent of total US commercial gaming revenue to the overall total. And yet, there remains little, if any growth, in overall gaming revenues. According to the AGA, commercial gaming revenues rose 4.8 percent in 2012, not far above the 2.2 percent growth seen in the overall economy. Stripping out gains from new operators in Kansas, New York, Maryland, and Maine, US commercial gaming grew at a rate slower than the admittedly sluggish US economy, meaning that either gambling’s attractiveness has been limited or that new markets have eliminated incremental revenues from players who had, in the past, traveled to multi-casino cities such as St. Louis, Tunica, or Biloxi.
At last month’s Global Gaming Expo, Deutsche Bank analyst Andrew Zarnett asked a provocative question. Given the stagnant growth in the US commercial market – even when accounting for the expansion into new markets – he asked, “Why are gambling companies still looking for billion-dollar projects?” Likely referring to the proposed developments in Massachusetts and for the sixth casino license in Maryland, Zarnett argued that “nobody can remember what happened in 2007,” when massive developments, primarily on the Las Vegas Strip, created modest returns at best and wound up unfinished at worst.
Another panelist replied to Zarnett, pointing out that “the guy who has the only casino in Boston will make a lot of money.” This may be true; but a large chunk of that money will come from the pockets of the casinos in Maine, and Rhode Island, and Foxwoods and Mohegan Sun in Connecticut. Similarly, the long-proposed legalization of gambling in Kentucky would further disappoint politicians in Ohio, while denting revenues in West Virginia and southern Indiana.
Overall, it’s not clear where US commercial gambling can grow. Even in Florida, the US’ fourth-most-populated state, and where casinos are largely concentrated in the state’s southern areas, it’s not clear that there is room to grow. A Miami Herald article this week cited a report commissioned by the Florida Legislature which predicted a “minimal economic impact” from casino expansion in the state. The study did argue that casinos would receive more revenue, while also claiming that those revenues would be diverted from other entertainment pursuits, such as theme park and attraction spending in the state’s tourism-dependent areas. But whether those casinos will ever be built remains unclear; Florida legislators have already denied a bid by Genting to build the world’s largest casino in Miami, due in part to fears that the property would decimate other local operators, such as the Seminole Hard Rock in nearby Fort Lauderdale.
There are likely only two major states left where legalization can substantially boost overall gambling revenues. One would be Georgia, the 8th largest state by population, in large part due to the growth seen in Atlanta over the last three decades. Atlanta’s closest casino is the Harrah’s Cherokee in western North Carolina, some 160 miles away. But Georgia’s conservative and religious bent would seem to mean the idea of a Las Vegas-style casino anywhere near that major city remains a pipe dream.
The other major market is Texas. There is a reason that the world’s second largest casino – the Winstar World Casino – sits on the Oklahoma-Texas border, despite being situated 20-30 miles from two cities with a combined population of only about 40,000. The Winstar’s operators, the Chickasaw Nation of Oklahoma, has contributed several hundred thousand dollars to the campaigns of Texas governor Rick Perry, perhaps in part explaining his reluctance to support expanded gambling in the state. But with just one tribal casino in southwest Texas – well away from key population centers in Austin, San Antonio, and Houston – most Texans are relegated to hour-plus drives to border casinos in Oklahoma, Louisiana, and New Mexico. With Perry leaving at the end of his term, and polls consistently showing a solid majority of Texans in support of legalized gambling in the state, that market may – finally – be opened in the coming years.
But at what cost? To be sure, a regulated market in Texas or Georgia would, for the most part, come at the expense of tribal casinos, who lack the shareholder base of behemoths such as Caesars Entertainment or Penn National Gaming. But politicians in both states are already well aware of their attractiveness to commercial operators, and a deal won’t come cheap. One need only look at the massively higher tax rates in Pennsylvania, relative to states with a longer gambling history such as New Jersey and Delaware, to realize that public officials will not (pretend to) give away their virtues at any price. And one need only look at the experiences in the newest markets, where growth in Maryland and Ohio appears to have come at substantial cost to their neighbors, to wonder just how much room is left for US casinos to grow at all.
