2004 State of the Industry Report

It’s good to be with you today. As the program duly noted, my boss, Frank Fahrenkopf, has made it a point to attend this conference every year for the past nine years — which means he’s been here every year since the AGA was created in 1995. Unfortunately, he could not be here today, but he didn’t want the streak to end at nine, so he asked me to fill in for him this year.

Unlike Frank, who is a near-native of this city, I am visiting Reno for the very first time. But I’m not new to gaming. I have been with the AGA for seven of its nearly 10 years, and that background has given me an understanding of the issues facing this industry as well as a broad perspective on our business, both of which I’d like to touch upon today in my remarks about the state of the gaming industry.

Resilience is a word that has been used to describe our industry in recent years, but this year all indicators are that we are healthy and growing, despite increased competition. Overall, in terms of gross revenue, we have steadily climbed back from pre-Sept. 11 numbers and are now even exceeding those figures. Las Vegas is the driver of business in this state, and it has seen increases compared to last year in gross gaming revenue, nongaming revenue, visitors, room rates and occupancy levels. As you probably know, Las Vegas is expected to shatter its previous record and attract more than 37 million visitors this year. Similar trends are being seen in other jurisdictions.

The health of our business has been reflected in other ways as well. New investment opportunities with Wynn Resorts and Las Vegas Sands have attracted significant interest, fueled by their reputation as two of the industry’s premier operators and the potential of their casino licenses in Macau. At least in part, robust market conditions prompted the longtime privately held Las Vegas Sands to go public. Stock prices of many existing operators and manufacturers have skyrocketed as well, with MGM MIRAGE up 76 percent and Boyd Gaming and Penn National shares more than doubling. Other major Las Vegas operators also had record earnings in the third quarter of this year.

Obviously, the improving economy has been critical to our industry’s success, but other factors have played an important role as well.

While consolidation is shrinking membership in the AGA, it has certainly fueled growth for our companies. This year, there were more mergers than ever before, with Harrah’s buying Horseshoe and Caesars, MGM MIRAGE buying Mandalay, Boyd buying Coast Resorts, and Penn National buying Argosy. Consolidation is common in any mature industry, so we expect that trend to continue.

With the exception of the Penn National-Argosy merger, all of these purchases reflected a move within the industry to concentrate capital investment in proven markets with stable, predictable tax rates. When Mississippi Gov. Haley Barbour announced earlier this year that he was “against raising anybody’s taxes, period,” Terry Lanni, who as most of you know is chairman and CEO of MGM MIRAGE, joked that maybe his company should move there. I don’t think you have anything to worry about, but his point was that pro-business states such as Nevada, New Jersey and Mississippi, where they have “reasonable taxes and understand [the] industry,” would be the focus of all of his company’s domestic investment and development plans.

The recent announcement by MGM MIRAGE that it plans to develop a multibillion-dollar “urban metropolis” on the Las Vegas Strip is an indication that Terry Lanni was serious — serious about capital investment in proven markets, not about moving to Mississippi. The 18 million-square-foot first phase of Project CityCenter calls for a 4,000-room hotel and casino, three 400-room boutique hotels, 1,650 luxury condominium-hotel units and 550,000 square feet of retail, dining and entertainment space. According to analysts, urbanized mixed-use development of hotel-casino real estate represents the future, and other companies with land to develop on the Strip, including Wynn Resorts and possibly Boyd Gaming, are expected to follow suit.

Other proven markets have seen a surge in capital investment projects as well. In Atlantic City, increased competition — and threats of more competition — spurred growth unseen for years in that market. The $1.1 billion Borgata opened last year, prompting many operators to upgrade their facilities. Several projects were unveiled this year, including The Quarter at Aztar’s Tropicana hotel-casino, a $285 million retail, dining and entertainment complex that is the largest nongaming expansion project to date in Atlantic City. Other recent retail ventures include the Walk, an outdoor mall that opened last year in the downtown area, and the Pier at Caesars, which will open next year. In addition, Borgata has already announced a $500 million expansion that will include more retail and restaurants.

That does not mean that our industry has ignored other markets.

Gambling expansion in the U.S. this year has been limited primarily to Indian casinos and racinos — industry parlance for slot machines at horse and dog tracks. Pennsylvania became the latest state to legalize slots, approving up to 60,000 machines at racetracks and stand-alone facilities, a number that would exceed the total slots in neighboring Atlantic City. A racino is expected to open soon in Maine as well. In last month’s election, voters in Florida narrowly approved a measure that would allow a referendum in two counties to determine whether or not to authorize slots at racetracks.

Major U.S. casino operators see the greatest opportunities overseas, primarily in Asia and the U.K. A report by Credit Suisse First Boston called Macau the fastest-growing market in the world and already third in size behind Las Vegas and Atlantic City. The new Sands Macau is helping to fuel that growth, and Wynn Macau has yet to open. Malaysia, Singapore, South Korea, Taiwan and Thailand also are considered potential markets. In the U.K., while the government initially projected that up to 40 new casinos would be developed following gambling deregulation, a government decision last month scaled back those plans. However, that country still figures prominently in the business plans for many of our companies, including Harrah’s/Caesars, MGM MIRAGE and Isle of Capri.

As the U.K. considered liberalization of their gambling laws, they sought out expert advice from many corners, including the United States. Earlier this year, Frank Fahrenkopf was invited to testify before the British Parliament and share our industry’s perspective on a wide range of topics, including taxation and problem gambling, based on our experience here. When foreign and state governments are interested in getting a better understanding about our industry, they often come to us as a resource. We feel that it’s an important role to play, particularly in a business like ours where there is a lot of misinformation.

Of course, we play a similar role in our everyday work lobbying Congress and the federal agencies. I handle government relations for the AGA, so my job is to ensure that the gaming industry’s interests are always represented. With the leadership and persistence of the Nevada congressional delegation — Senator Reid, Senator Ensign and Representatives Jim Gibbons, Shelley Berkley and Jon Porter — as well as other supporters, we were successful this year in preventing the passage of any adverse federal legislation. Of particular interest to this state, we continued to monitor any possible movement on House and Senate bills that would ban college sports wagering in Nevada. Both were introduced nearly two years ago at the beginning of the 108th Congress and referred to their respective committees, but neither saw any action. We also followed the progress of Internet gambling to ensure that a version of the legislation approved by the Senate Banking Committee — which did not respect states’ rights and did not provide for a level playing field among all segments of the gaming industry — would not be added as an amendment to a spending bill that could win easy approval.

Another issue heating up this year that has the potential to impact tourism and the Nevada economy is smoking. As an industry, we are not pro-smoking or anti-smoking, but our job as a business is to keep all our customers happy — which, of course, is a goal we all share. And like it or not, many of our customers choose to smoke. We also recognize that others, including our employees, do not smoke. We believe that we can achieve the same level of safety through state-of-the-art ventilation systems, which can already be found in many Strip casinos and are gradually being installed in casinos across the country as they upgrade their facilities. This year, we have worked closely with the American Society of Heating, Refrigerating and Air Conditioning Engineers, a standards-setting organization, to emphasize our support of what we see as reasonable, science-based solutions to these indoor air quality concerns. As part of that effort, we successfully completed a petition drive to establish a separate standards committee within the organization that would address concerns specific to the hospitality industry. Now that we’ve gathered the requisite number of petitions, the organization’s full membership will vote early next year on whether or not to establish that committee. Internally, we have established a board-level subcommittee to address this issue and expect to work toward developing a set of industry best practices.

We recognize that our image as an industry can impact our success on Capitol Hill and in state capitols as well as on Wall Street and Main Street. So, as many of you know, the AGA has dedicated a significant amount of time and effort to industrywide issues of public concern, such as problem gambling and diversity.

This year, we achieved a significant milestone with the implementation of the AGA Code of Conduct for Responsible Gaming. The code, which was adopted by our board last year and took effect this past September, represented a commitment to integrate responsible gaming into all our daily operations. The provisions, which cover employee and customer education, underage gambling, alcohol service, advertising and research, establish a high standard for all companies involved in the casino business.

On diversity we made progress as well. Through our Diversity Task Force, we released updated industry employment statistics for minorities and women. Our report found that commercial casinos employ a higher percentage of black executives, white and black female executives, Hispanics and women compared to other businesses in their states and nationwide. The statistics showed that casinos participating in the survey employed a significantly higher percentage of minorities compared to other businesses in their states and the overall U.S. work force. Even when service workers were removed from the equation, participating casinos consistently employed a higher percentage of minorities than their counterparts in other industries. Among every ethnic category, casinos employed a higher percentage of minority officials and managers — the top professional level — when compared with the adjusted national U.S. work force, and they employed a higher percentage of minority workers in non-service segments.

In addition to the updated employment statistics, we created an online Diversity Resource Guide to promote better corporate diversity programs and provide information to disadvantaged and minority- and women-owned companies interested in doing business with our industry. We also held our third annual Opportunity Expo, giving these potential vendors the opportunity to participate in one-on-one meetings with purchasing agents from casino companies. In tandem with this effort, we conducted a workshop to provide guidance on the certification process.

Why is all this important? According to a survey released earlier this year by the Travel Industry Association of America, Hispanic and Asian Americans are traveling to Las Vegas more than any other city, and gambling ranked as the top desired travel activity among 12 percent of Asian Americans and blacks. These statistics underscore the popularity of gaming among America’s minority populations. With America’s minority population continuing to grow, it’s critical for our companies to reflect this changing customer base, and our efforts on diversity help us achieve that goal.

Another element critical to our business success — and ultimately impacting tourism in this state — is our annual trade show, Global Gaming Expo. G2E has grown from a concept in 2000 to an economic force in 2004. This year, the show had a record 25,000 attendees and 700 exhibitors in more than 250,000 square feet of trade-show floor space — an 84 percent increase compared to last year and nearly double the show floor space since the show debuted in 2001. A new focus on international aspects of the gaming industry brought a record number of attendees from outside the United States. There were 108 international exhibitors from 26 countries at the show, an increase of 56 percent compared to last year.

G2E not only provides business growth opportunities, but it also offers educational training for gaming industry employees. This year, we acquired two new shows: Casino Design, which was held in June in Atlantic City, and Racino, which was held last month in Toronto. Next year, Casino Design will be held at Wynn Las Vegas. Satisfying the professional needs of our industry helps us create a better product and, in turn, attract more tourists to the state.

We bought Casino Design because we recognized that this sector was becoming increasingly important within the gaming industry. Las Vegas has, of course, led the way in creating a higher standard for design that adds to the intrigue for visitors. This year, as part of our annual G2E Future Watch survey, we asked leading casino resort design and build professionals to describe the casino design of the future. What they told us was that they expect casinos to cater more to younger customers and move away from traditional themed approaches. They also told us that despite the fact that resort design continues to be more capital-intensive in Las Vegas than in other markets in the United States, they anticipate this “design gap” to begin closing within the next 10 years as casino resorts across the country become more similar. Similarly, they expect nongaming revenue — restaurants, shopping, nightclubs and other amenities — to become increasingly important for gaming properties across the country, as they have in Las Vegas.

In politics, I’m a little more wary about predicting what’s going to happen in the future, even a year out. But with no change in the control of the White House, Senate or House of Representatives, we don’t expect any dramatic changes in the legislative agenda. There will, however, be other differences that could affect our industry. The most significant is the ascension of Senator Reid to become minority leader, giving us an ally in a position where he can stand up for our interests, as he always has. There will also be changes in the leadership and makeup of committees that handle gambling-related legislation, which could impact policy decisions.

As I alluded to earlier, 2005 marks the 10-year anniversary of the AGA. The gaming industry and Nevada have a sort of symbiotic relationship — as the industry goes, so goes the state. In 10 years, we have built a strong foundation for our industry that I hope will grow even stronger in our next decade together.