2005 State of the Industry Report

Good morning.  My boss, Frank Fahrenkopf, sends his regards and regrets for not being here due to a minor medical procedure.

I’m happy to be here at the fabulous Wynn Las Vegas to report on the state of the commercial gaming industry as we head into 2006.  As many of you know, this past year marked the 10th anniversary of the American Gaming Association, and I think it’s fair to say that as we enter our next decade, we do so as the voice of an industry that has seen its fair share of challenging times but has emerged more united, stronger, and with more opportunities than ever.

To be sure, 2005 was marked by both triumph and tragedy for the gaming industry.  On the one hand, when we put out our annual State of the States survey this spring, it revealed that the commercial casino industry in 2004 had enjoyed the largest annual percentage increase in gaming revenues since 2000. 

Last year, the 445 commercial casinos in 11 states generated nearly 29 billion dollars in gross gaming revenue, surpassing 2003 gross gaming revenues by more than 7 percent.  The nearly 350,000 direct industry employees earned wages of more than twelve billion dollars in 2004.

In addition to these strong numbers, the past year was marked by several major developments that have changed the face of the commercial gaming industry.  This summer, mergers were finalized between Harrahs Entertainment and Caesars, MGM MIRAGE and Mandalay Resorts, and Penn National Gaming and Argosy, creating three out of the four largest gaming companies in the country. 
   
Elsewhere, voters in Broward County, Florida voted to allow slot machines at four pari-mutuel facilities in the area, despite stiff opposition from critics of gambling.  After initial delays in its implementation, it appears now that a tax and regulatory scheme will move forward that will result in the installation of 6,000 machines by next summer.
Delays in developing regulatory policies also continue to slow the introduction of slot machines at racetrack facilities in Pennsylvania, although we expect many of these issues to be resolved or finalized in the coming year.  Current plans call for slot machines at several of its tracks, as well as two free-standing gaming facilities in the state.  Once these facilities are open, there will be a total of 12 states with racetrack casinos in the U.S. The first racetrack casino in Maine opened early last month.         

Other domestic expansion has primarily been concentrated in proven existing markets like Las Vegas and Atlantic City.  MGM MIRAGE this fall announced details of its Project City Center, an enormous multi-use community that will feature a number of hotel, shopping, residential and casino experiences.  The condo boom in Las Vegas is hard to ignore, what with all the construction cranes looming in the background of the Strip.  Even the Strip itself is expanding. This beautiful property opened to worldwide fanfare this summer, and several additional properties are slated for construction or expansion. 

This growth is not just a Las Vegas phenomenon.  Markets from Atlantic City to Kansas City are witnessing an increase in capital investment, creating more rooms and more amenities for an increasingly sophisticated clientele.

In fact, the growth in amenities is another major trend of which we should all take note.  Properties continue to offer a wider variety of entertainment options, ranging from five-star restaurants and shopping complexes to spas and world-class performance experiences.  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.  It has taken the industry by storm.  Other markets are beginning to follow Vegas’ lead, and it’s paying off big. 

With so many options, casinos are attracting visitors looking to do more than gamble.  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 attracting a whole new kind of customer to gaming markets nationwide.  In fact, according to a public opinion poll we commissioned earlier this year, Americans by a more than two-to-one margin say they enjoy casinos more for the food, shows and entertainment than for the gambling.

Beyond proven markets in the U.S., the other major opportunities for gaming expansion clearly lie overseas.  Several U.S. companies have set their sights on Asia – particularly Macau and Singapore – as the next big markets for the industry.

While these recent developments no doubt present exciting opportunities for the future of our industry, perhaps no events this year had a more significant impact on the commercial gaming industry and its future than the twin disasters of Hurricanes Katrina and Rita.

Frank Fahrenkopf has always said that, at the AGA, the strong commitment we demonstrate to our companies and our colleagues is a reflection of the industry we serve.  Nowhere was that commitment more evident than in the days, weeks and now months following the hurricanes. 

When Hurricanes Katrina and Rita tore through the Gulf Coast this fall, tens of thousands of industry employees were affected by the disasters.  Industry reaction to help displaced employees was swift.  Gaming companies affected by the storms immediately set up individual relief funds for their employees.  They also set up employee assistance hotlines, established employee relief centers at neighboring properties and other venues, and most continued to provide pay and benefits to employees for several months.  Many companies have assisted employees in locating jobs at sister properties and some have hired displaced employees to help with cleanup and rebuilding efforts.

And, whether or not they were affected by Katrina, nearly every other gaming company in the country made sizeable contributions to the American Red Cross, Salvation Army and other relief organizations.   

Right after the storms, the AGA also established its own organization, the Gaming Industry Katrina Relief Fund, to unite those in our industry who did not already have a way to donate to the victims.  To date, the fund has raised more than $600,000 for gaming employees in Mississippi and Louisiana.  Thanks to these and the efforts of nearly every individual gaming company in the country, the gaming industry along the Gulf Coast has a solid foundation on which to begin again.

And that rebuilding has already begun.  The resilience of our industry is visible everywhere along the Gulf Coast.  Several of the least damaged facilities in Lousiana already are back up-and-running, and several casinos in the hardest hit areas of Biloxi and Gulfport have plans to reopen their casinos – albeit in temporary facilities – before the end of the year.   

Since the Mississippi legislature has agreed to allow casinos along the Gulf Coast to build onshore, rebuilding efforts can begin in earnest.  I have spoken with many of our industry representatives along the Coast, and there is a palpable excitement about this decision and what it could mean for the future prosperity of the Mississippi Gulf Coast.  We have a long way to go, but if the past few months have taught us anything, it is that our industry is strong and capable of great things in the face of adversity. 

Helping our industry fully recover has been and will continue to be a key priority of the AGA in the coming years.  As many of you know, the AGA’s first and foremost role is to represent the gaming entertainment industry and protect its interests back in Washington, and, not surprisingly, Katrina relief has dominated the headlines and legislative calendar for the last few months of the year.  The AGA has worked closely with members of the congressional gaming caucus and other allies on Capitol Hill to ensure gaming companies in the Gulf Coast region receive the support they need to rebuild their properties and bring renewed economic vitality to the area. 

Just last week, House leadership, in response to the dual needs of passing a Katrina relief measure and clearing the votes for tax reconciliation, agreed to exclude the gaming industry from Gulf Opportunity Zone tax incentives.  The Senate version of the bill does not exclude the industry, and we fully expect this matter to be resolved in gaming’s favor once legislation is finalized in a House-Senate conference committee 

Whatever the outcome, I am confident our industry will prevail in returning to even greater glory the communities along the Gulf Coast that have come to depend on us for their livelihood. 

Another issue that seems to be in the news nearly every day now is internet gambling, and the AGA continues to monitor legislation related to the topic.  Congressman Jim Leach recently introduced legislation in the U.S. House of Representatives to prevent the use of certain payment instruments, credit cards, and fund transfers for unlawful Internet gambling.  Leach’s bill is identical to draft legislation prepared by U.S. Sen. Jon Kyl. 

The approach of this new legislation is similar to bills from the 108th Congress, which would have prohibited the use of financial instruments in Internet wagering transactions.  The new legislation is characterized as an “enforcement bill” that gives certain state and federal law enforcement agencies the tools to combat illegal, off-shore Internet gambling.  Previous versions broadly defined Internet gambling, while the latest bill specifies that current statutes, such as the Wire Act of 1961, would have legal authority over the practice.  This bill will allow intrastate Internet gambling with certain restrictions, as well as ensuring that the horseracing industry can continue simulcast and account wagering. 

On other legislative and regulatory fronts, after years of attempting to ban betting on college sports in Nevada, the NCAA now regards the gaming industry in Nevada as a partner in helping to ensure the cessation of illegal wagering on college sporting events, and the AGA has reached out to begin building a strong working relationship with that organization. 

Additionally, the AGA has worked with member companies, the Access Board and the Department of Transportation to evaluate the effects of proposed rules that would update the Americans with Disabilities Act (ADA) Accessibility Guidelines for Transportation Vehicles, which affect large passenger watercrafts including riverboat casinos in several states.  The AGA submitted comments to the Access Board, which has expressed an interest in working with the AGA to tailor specific guidelines for the riverboat gaming industry.  

The AGA continues to monitor and address new developments on the issues surrounding suspicious activity reporting and terrorism risk insurance.  And just two weeks ago, representatives from our member companies met with FBI officials from the Las Vegas field office to discuss national security letters, which have been in the news quite a bit as Congress has been discussing the renewal of the Patriot Act.

These meetings helped secure an ongoing dialogue between the industry and the FBI, and further established that the security of our customers and employees are of utmost importance to the commercial casino industry.  The industry has long been a willing partner with our local, state and federal law enforcement officials in the ongoing war against terrorism, and we will continue to recognize our duty to ensure maximum possible legal compliance with all regulations affecting our business. 

The AGA also is monitoring ongoing activities in Washington related to Indian gaming, depreciation of casino equipment, potential new withholding rules for poker tournament winnings, and more.

Another issue that could have major implications for the gaming industry is smoking.  In the face of efforts in nearly every gaming state to ban smoking in public establishments, including casinos, the AGA continues to emphasize our support of reasonable, science-based solutions to indoor air quality concerns.  We continue to work closely with the American Society of Heating, Refrigerating and Air Conditioning Engineers, a standards-setting organization, on the issue, and the AGA recently established a working group to begin establishing new industry design guidelines for indoor air quality, which should be finalized next year.

Beyond our work in Washington, the AGA also is committed to a number of industrywide initiatives that help our member companies function as better corporate citizens and address issues that are important to our employees, customers and our communities.

Responsible gaming always is near the top of our agenda, and this year we launched a number of ambitious new programs in that arena.  In August, we launched “Banding Together to Keep it Fun,” one of our largest and most proactive responsible gaming awareness campaigns to date.  We introduced bright orange “Keep it Fun” wristbands to give all responsible gaming stakeholders a way to unite in a common effort to support awareness of the issue.  To date, we have sold more than 120 thousand of the one-dollar bands, and proceeds are being donated to the National Center for Responsible Gaming. 

We also launched our first television public service announcement focusing on responsible gaming in 2005. The 30-second spot aired nationally on networks in viewing areas of our member casinos, on in-room programming in many casino hotels, and continues to run on The Travel Channel in conjunction with all its gaming-related programming. Print PSAs featuring the same characters debuted last month.

The AGA remains committed to funding important research on disordered gambling through a number of generous contributions to the National Center for Responsible Gaming. 

In fact, next year marks the 10th anniversary of the NCRG, and there will be many changes in store for that organization in the years ahead.  

The AGA also renewed its commitment to diversity issues in 2005.  A pair of diversity programs conducted in conjunction with the Congressional Black Caucus (CBC) provided insight for minority-, women- and disadvantaged-owned businesses seeking to do business with the gaming industry. 

Next year, the AGA plans to launch a new diversity e-newsletter, as well as release the Gaming Industry Vendor Diversity Snapshot, a study being conducted by PriceWaterhouseCoopers, that will analyze corporate diversity in the purchasing and contracting arena of the industry.  This is the first study of its kind, and the report will serve as a benchmark for measuring future “diversity spend” activities. 

In 2005, the AGA also demonstrated its ongoing commitment to promoting business innovation and opportunity through the continued growth of Global Gaming Expo, which has become the largest international trade show and conference for the international gaming community.

Since its inception in 2001, we have worked to make G2E the most cutting-edge and relevant trade show and conference for our industry, and this year’s show did more than ever to capture the emerging trends affecting the global gaming marketplace.  G2E 2005 attracted more than 700 exhibitors and a record 26,600 attendees, including a major international and Native American presence. 

2006 holds exciting changes for G2E, with the shift to November dates for our flagship event and the debut of new event that will expand G2E’s educational offerings.  The G2E Institute, our newest event, will debut this May at the new Red Rock Station Casino outside of Las Vegas.  G2E Institute will combine G2E’s existing Casino Design and Racino events with the recently acquired Gaming & Technology Conference, and will incorporate a new series of seminars addressing developments and growth opportunities in tribal gaming. The G2E Institute will provide a unique, tailored and intimate educational platform where industry professionals can learn the latest trends in key industry growth areas, as well as how those areas interact with one another in the casino setting.

Additionally, the AGA and our trade show partners are looking at a number of international expansion opportunities for the event, which could be finalized as early as this year. 

Clearly, this year has been one of great change and great challenge for the industry, but in the midst of these challenges, we have been resilient and exhibited tremendous growth.  The gaming industry has truly become a major part of the mainstream entertainment culture and continues to make significant contributions in the communities where we operate. 

But don’t take my word for it.  The true testimony of casino gaming’s impact is best evidenced by the opinions of the civic and community leaders who live and work in gaming communities. Earlier this year, the AGA commissioned national pollster Peter Hart to conduct a survey of opinion leaders in communities with commercial and racetrack casinos. He interviewed 201 top local decision makers across the country, including mayors, city and county council members, state legislators, police and fire chiefs, and other community leaders. Most of these leaders lived and worked in these areas before the introduction of casinos, giving them a first-hand and well-informed view of the effects of casino businesses on their communities.

The results of this survey underscore what other studies have shown: Elected officials and civic leaders are strikingly positive about the impact casinos have had on their communities. They welcome the additional tax revenue, jobs, secondary economic development, and the contributions casino gaming makes to the community and charitable organizations. After the casinos opened, more than 90 percent of those leaders believe the casinos have either met or exceeded their expectations.

Fully 73 percent of community leaders also say that tax revenue and local development agreements with casinos have allowed their communities to undertake projects that otherwise would not have been possible.  And by a margin of more than three to one, community leaders are more likely to say that casinos have done more to help rather than hurt other businesses in the community.  More than eight out of 10 report that casinos are good corporate citizens.  But possibly the most telling result of this survey is that if given the chance to vote again, a full three-quarters of civic leaders and elected officials would vote again to bring casino gaming to their communities.

These results are a testament to the positive force of our industry, and they point to many successful years to come. The AGA ends it’s first decade as the voice of a vibrant industry that has become a mainstay of popular entertainment culture.  We look forward to the exciting changes ahead and to watching the commercial gaming industry continue to evolve, contribute and grow.