Strength, Growth, Controversy: An Unparalleled Gaming Business Success

It is an honor to contribute the lead editorial to Casino Gaming International (CGI) as it celebrates its first anniversary, and it is difficult to imagine a better year than this past one to launch an international gaming publication. The 12 months that have passed since your first edition in October 2005 have been full of interesting gaming news, much of it reinforcing the international nature of the gaming industry today, and publications such as CGI are essential to keeping that fact front of mind.

From the expansion of gaming in the United States and the United Kingdom to the growth of gaming in Macau, the international nature of the business is clear.

And, although it may be somewhat parochial on my part – after all I do represent the American Gaming Association – I believe the state of the industry in the U.S. is critical to the state of gaming worldwide. In my mind, the U.S. gaming industry has demonstrated incredible strength and growth this past year that indicate the continued health and success of the global gaming industry in the coming years.

As CGI’s first magazine was being published last fall, the U.S. gaming industry was just beginning to understand the full impact of the double disasters of Hurricanes Katrina and Rita. The devastation those storms brought to the people of the Gulf Coast region was utter and complete, but I am proud to say the gaming industry has led the way to recovery. Our companies have provided tens of millions of dollars in support for their employees and, more importantly, we rushed to rebuild so there would be jobs and income for the citizens of Mississippi and Louisiana when they returned to their homes.

This August, the Grand Casino Biloxi with 1,500 employees and the Beau Rivage with 3,800 employees, became the sixth and seventh properties in the Biloxi/Gulfport area to reopen since the storm. Almost all of the casinos damaged in Louisiana also have reopened, and more properties on the Gulf Coast are expected to open later this year. Amazingly, with little more than a year gone by, our industry is nearly back to full capacity in the region.

With thousands of Gulf Coast residents now back to work at our properties – and with a significant portion of those being rehires – the seeds of redevelopment and rejuvenation for this region have been firmly planted. We know that there is more work to be done, but it’s clear that the gaming industry has generated a significant amount of progress in advancing our employees and host communities on the path to recovery.

Despite the stark challenges we faced in 2005, the U.S. gaming industry remained overwhelmingly strong and in fact reached a new milestone reached as the 455 commercial casinos in 11 states nationwide generated more than $30 billion in gross gaming revenues for the first time. Native American gaming also continued to thrive, with the National Indian Gaming Association reporting that tribal governments generated $22.6 billion in gross gaming revenues in 2005, a more than 15 percent increase over 2004 figures.

This strength also is evident in the fastest growing sector of the U. S. commercial gaming industry: racetrack casinos—or racinos. Racinos are formed when state governments allow pre-existing racetracks to add slot machines and, in some cases, table games to their facilities. In 2005, these racinos showed exceptional growth. Employing more than 17,000 people, the 29 racinos in nine states generated $3.12 billion in gross gaming revenues and distributed $1.28 billion in direct gaming taxes to state and local governments.

And new domestic markets continue to show promise as Pennsylvania and Florida are set to open their first gaming facilities sometime next year.

On a broader front, there’s no question the financial strength of gaming in the U.S. is providing a source of substantial investment in new gaming ventures around the world, and it seems the international industry is expanding at an incredible rate.

The advent of world class casino entertainment in Great Britain is the latest salvo of the industry that is showing signs of healthy growth all over Europe, and Russia and South America also are major growth markets. However, perhaps nowhere is the excitement and growth potential of gaming more evident than in Asia. Singapore recently awarded Las Vegas Sands the first of two gaming licenses in that country, with bids for the second license due this fall.

And in Macau, the gaming business is booming. Gaming revenue in Macau has more than doubled in the past four years, soaring to $5.6 billion last year. The growth shows no signs of slowing, with some analysts even predicting Macau’s revenues will overtake those on the Las Vegas Strip as early as next year. The advent of amenity-filled casino resorts in Macau like the recently opened property from Las Vegas Sands has truly revolutionized the idea of what an Asian casino can be.

This past June, I announced that the AGA and our trade show partner, Reed Exhibitions, have purchased the rights to the Asian Gaming Expo and in June 2007 will launch G2E Asia, an event that will bring the success and opportunity of Global Gaming Expo in Las Vegas to the Eastern hemisphere. We are committed to building G2E Asia into a truly world class event that will provide unparalleled networking opportunities and access to all that is new and exciting in our industry and, as with our flagship show in the United States, will evolve each year to keep participants ahead of the latest trends driving the industry.

Two of the trends driving increased revenues for gaming around the world right now are the growth of amenities and advancements in technology.

The growth in amenities such as five-star restaurants, shopping complexes, spas and world-class performance experiences have changed the entire gaming experience for U.S. gaming patrons. As you are well aware, Las Vegas has become one of the premier dining destinations in the world. But make no mistake—this trend is not limited to the Strip. Other markets are following Vegas’ lead and the establishment and marketing of amenities is showing up across the nation.

With so many options, casinos are attracting visitors looking to do more than gamble. In fact, recent reports show that more than half of MGM MIRAGE’s annual revenues now come from non-gaming amenities. This would have been unheard of 15 or even 10 years ago, and it is indicative of a whole new kind of customer gaming markets in our country are attracting.

In fact, according to a recent public opinion poll commissioned by the AGA, Americans by a more than two-to-one margin say they enjoy casinos more for the food, shows and entertainment than for the gambling. This trend no doubt will be mirrored around the world. In order to compete in this new environment, global gaming operators must be mindful of creating first-rate entertainment experiences well beyond the casino floor.

Technology is another area driving global gaming business forward. Specifically, there are three major technological changes taking place within casinos right now that are having a dramatic impact on the industry. All three are aimed at streamlining the slots management process, increasing security and better serving customers’ needs.

The first – ticket-in/ticket-out technology (TITO) — has been in place for some years, but now has grown so popular there is a general overall movement toward completely cashless slot floors in most major casinos across the U.S. Ticket-in/ticket-out technology benefits both the customer and the casino operator. Removing coins from the equation is more convenient for customers—keeping them from having to juggle or carry coins, and they no longer have to wait for cash payouts. For the operator, TITO dramatically decreases cash handling costs.

The next great slot advancement is server-based games. These games were introduced at Global Gaming Expo last year and have been tested in a handful of gaming facilities around the country, most notably Treasure Island in Las Vegas and Barona Valley Ranch in California.

Server-based technology eliminates manually changing slot machines and allows operators to make changes from a single secure computer server within the casino. Every machine is electronically linked to this central computer file server, and changes can be made in the time it takes for software download. Multiple slot machines, or even a whole floor, can be changed at once.

By having the ability to change games instantly, floor managers will be able to analyze which games and denominations perform best at any particular time of the day. They can also alter hold percentages within regulatory parameters, and even tailor their games to player preference.

Regulations to govern server-based gaming are being developed in individual U.S. states. For example, in Nevada, new regulations prohibit the casino from changing the game while a customer is playing. The machine must be idle for four minutes before a change is made, and then after the change, another four minutes must pass before anyone can play the machine.

The third innovation poised to change gaming as we know it is RFID, or radio frequency identification, a technology that has been used in shipment tracking and other applications for years, but now it is finding new uses in the gaming industry. Several casinos, including Wynn Las Vegas, are using RFID technology in their casino chips to help with security, player tracking and increase the rating integrity of both players and dealers.

The technology helps increase efficiency on the gaming floor, can help detect cheating or counterfeit chips, and leads to more accurate comping of table game players.

There are several other technologies coming online that also are of interest. One is mobile gaming, which was approved in Nevada last year and is being considered in other U.S. jurisdictions as well. Players would be able to use devices similar to Blackberries or pagers to play games while they are at the pool or on some other area of the gaming resort property. It remains to be seen what the impact of this and other technologies will be.

Beyond these innovations, it’s clear that the technological advancement having the most impact on the global gaming industry as a whole right now is Internet gambling, which continues to be one of the most controversial and dramatic trends in our industry. Currently, it is illegal for U.S. companies to operate Internet gambling businesses, but the global enterprise is thriving. In 2005, it is estimated that Internet gambling revenues topped $12 billion worldwide, with more than half of that revenue coming from U.S. customers.

Who is it that is spending this more than $6 billion? According to a survey of 552 Internet gamblers commissioned by the AGA earlier this year, the average Internet gambler is a college-educated male under the age of 40 who uses the Internet for a wide variety of tasks and has an annual income of more than $60,000. The survey, conducted by the U.S. research firm Peter D. Hart Research Associates, appeared as a special section in this year’s State of the States: The AGA Survey of Casino Entertainment.

The survey also found that while the number of Americans who gamble online still is relatively small, at 4 percent of the U.S. adult population, it is growing. In fact, a full 38 percent of the online gamblers surveyed said they started the activity within the last year, and 70 percent said they began only within the last two years. And as you may have gathered from the profile described, online gamblers as a group are younger; more highly educated and have larger annual household incomes than both the general public and the patrons of bricks-and-mortar casinos.

The survey also found that online gamblers are extremely Internet savvy in their general day-to-day lives, with a huge majority of them going online to do everything from get driving directions, purchase airline tickets, manage their bank and credit card accounts, and more. Nearly half of the respondents – 48 percent – cited convenience as the biggest reason they engage in online gambling activity. As far as the games they prefer, the survey found that 80 percent of respondents played poker for money online last year, and 78 percent said they played casino games.

While the survey represents the growing popularity of Internet gambling, it also indicates Internet gambling remains a source of confusion and, in a significant number of cases, one of apprehension as well. This can be seen in the results, which show more than half the online gamblers surveyed reporting they are at least somewhat concerned that online casinos find ways to cheat players, and just under half believe other players who gamble online find ways to cheat.

This apprehension is perhaps fueled by the confusion surrounding current laws applying to Internet gambling in the U.S. According to U.S. Justice Department, Internet gambling currently is illegal under the Wire Act of 1961.

Yet the survey found that fewer than one in five (19 percent) of online gamblers realize – or are willing to admit – that the activity currently is illegal in the U.S. And, while a bit higher, the percent of all Americans who think Internet gambling is illegal is still only 38 percent. It seems that the complex legislative and regulatory environment surrounding this issue is the cause of pervasive confusion.

Elected officials in the U.S. remain very negative toward Internet gambling, and th U.S. Congress’ decision late this summer to make it illegal for a U.S. credit card company or other U.S. financial institution to collect on a debt incurred on a illegal online gambling site has already had a significant impact on international online gaming companies.

Not withstanding the fact that the legislation does not define what is in fact illegal, we all saw the investors in online gaming companies drive the prices down dramatically.

There were many factors behind the passage of this legislation – real concern about children gambling on the internet, reaction to the scandals surrounding lobbyist Jack Abramoff, moral opposition to any gambling – but, the legislation passed raises more issues than it resolves. For example, it does not resolve the Wire Act dispute and define what is illegal online gambling; it does not address the horse racing industry’s claim that it is exempt; nor, does it answer the question of how Native American online gaming would be addressed.

Congress has no idea if the legislation will address the issues that spawned it. The fact is that millions of Americans want to gamble online. As I mentioned above, our State of the States survey found that 4 percent of adults in the U.S. gambled during the previous year; what will they do now that this legislation has passed? We don’t know, but it is a good bet that a significant number of them will find a way to continue to gamble on the Internet.

Washington, D.C., attorney and gaming expert David Stewart recently developed a paper for the AGA’s 10th Anniversary White Paper series that shows prohibition still permits a high volume of Internet gambling while imposing no regulatory policies to protect gamblers. And while this new legislation might protect some U.S. customers from the potential hazards of the current illegal, offshore, unregulated online gaming market, these measures alone will not solve the problem. Instead, as Stewart advocates, what is really needed is a one-year Congressional study commission to evaluate the impacts of Internet gaming in the U.S.

Such a commission would consider policy issues ranging from how best to protect children and problem gamblers to whether Internet gambling can be effectively legalized and regulated in the United States rather than leaving bettors to fend for themselves on illegal, unregulated offshore sites. The study also should include consideration of recent WTO rulings indicating the United States’ position on Internet gaming may be in violation of international trade obligations.

Legislation to create a comprehensive study commission has already been proposed by 44 members of the U.S. House of Representatives. The bill won’t pass this year, but its introduction lays the groundwork for it to be reintroduced in future Congresses.

The fact is, a prohibition such as Congress is seeking to impose is short-sighted, and with a number of foreign nations, including Great Britain, in the process of legalizing, licensing, regulating and taxing Internet gaming operators, it’s time for the U.S. to take a serious look at ways to regulate it.

The growth of Internet gambling, coupled with the high-rate of international expansion of the industry, has also sparked a renewal of concern over problem gambling. The more gaming expands the more important it is that the entire gaming industry addresses this critical issue. The AGA and the National Center for Responsible gaming are committed to collaborating with international organizations on the problem.

The first step is acknowledging the issue. We have said since the AGA was created that there is no doubt that there are individuals who cannot gamble responsibly. And, as gaming becomes more ubiquitous, we can expect the issue to continue to grow with us. The AGA and our member companies have contributed more than $15 million through the National Center for Responsible Gaming (NCRG) to fund research on the issue and spent hundreds of millions of dollars on programs to encourage responsible gaming and fund problem gambling awareness programs.

For its first decade, the NCRG’s almost exclusive mission has been funding research and facilitating the exchange of research information among scientists, academics and clinicians. The NCRG expanded that mission two years ago when it developed a second track at its annual Conference on Gambling and Addiction. This second track was developed to encourage greater attendance among lawmakers, regulators and other policy-makers, and it has been successful in doing so.

Now the NCRG is prepared to make the next step and is working closely with the AGA to begin an aggressive outreach and public education effort. This effort will take the research that has been developed with NCRG research dollars and begin to offer the industry and the public practical, science-based information and programs to help promote responsible gaming.

The first of these programs is called EMERGE (Executive, Management & Employee Responsible Gaming Education). EMERGE is a ground-breaking, Web-based training program developed by scientists at Harvard Medical School. It is the only online training program that translates the most up-to-date scientific research on gambling disorders and information about responsible gaming for gaming employees at all education levels.

This program will be tested by several NCRG contributing gaming companies during the coming months and is expected to be available for the entire gaming community sometime next year.

Once the testing phase is complete, the NCRG intends to work with the Institute for Research on Pathological Gambling and Related Disorders to begin modifying the program for use in international venues.

The NCRG also has included resources to modify for international audiences many of the materials that have been created by the AGA to help address problem gambling.

We look forward to working closely with the international gaming community in the coming years to ensure that responsible gaming remains a business imperative no matter where in the world we do business. We also look forward to working with the leaders in Asia to help lead that region forward through G2E Asia. With so much growth on the horizon, the future is bright for gaming in the U.S. and around the world. We plan to be at the forefront of the next generation of global gaming, and anxiously await what new challenges lie ahead.