The Gaming Industry: Past, Present and Future

As Asia begins a new era in gaming here in Macau, I want to talk today about the past and present state of the casino industry in the United States, because I believe it can teach us valuable lessons about how to build an industry that is not only popular with our customers, but also politically viable and sustainable over the long-term.

Before I begin, I’d like to tell you a little bit about my organization, since many of you may not be familiar with who we are or what we do. The American Gaming Association, or AGA, was formed seven years ago as the national trade association for the commercial casino industry. In this role, our organization represents the leading casino operators and equipment manufacturers in the United States on federal legislative and regulatory issues. We also serve as a national voice for the industry. One of our most significant achievements has been in the area of pathological gambling, where we have developed a model that we believe can be successful in other gaming jurisdictions around the world.

As I travel to places throughout the United States as well as around the world to Australia, Europe and now Asia to speak about gaming, one of the questions people ask me most often is, ‘How did the gaming industry get to be so large and so controversial? When did it all begin?’ As most of you probably already know, gambling has been around for centuries. Dice have been recovered from Egyptian tombs, while people here in China as well as Japan were known to play games of skill and chance for amusement as early as 2300 B.C. Many references to games played with dice also can be found in Greek and Roman literature. Gaming has been a part of U.S. history as well, with lotteries used in Colonial America to finance George Washington’s army and to build several of the most prestigious U.S. academic institutions, including Harvard, Yale and Princeton universities.

When I am asked about gaming’s growth in the United States, people usually mean the latest wave, which has brought some form of gambling to 47 of the 50 states in our country. Just over a hundred years ago, in the wake of a series of lottery scandals, virtually all gambling was outlawed in the United States.

In the late 1920s and early 1930s, the United States was mired in an economic depression. The state of Nevada - my home state - decided to do something about it, and re-legalized casino gambling in 1931. Thus began a gradual trend toward re-acceptance of different forms of legalized gambling back into American society. Throughout the 1930s, 21 states brought back racetracks. By the 1940s and 1950s, almost all states had changed their laws to allow pari-mutuel wagering and low-stakes charitable gaming.

While many other forms of gaming saw expansion during the 1940s, ’50s and ’60s, the casino industry remained geographically isolated in the state of Nevada. At the time, it was an industry of entrepreneurs, charismatic mavericks and a few scoundrels. And while there was a glamorous side to Las Vegas back when it was home to Frank Sinatra and The Rat Pack and other noted lounge acts, it had little mainstream appeal. Certainly, there was little if any concern about excessive gambling, or what the experts call pathological gambling, which today is critically important to anyone doing business in this industry.

Americans’ perceptions about gambling started to change in the 1960s. Three developments contributed the most to the dramatic evolution of our industry: First, the Del Webb Corporation, headed by noted developer Del Webb, in 1961 became the first public company involved in the ownership of Nevada casino-hotels. His involvement in the casino industry brought other reputable businessmen to Nevada, including Howard Hughes. Their involvement in the industry helped shape today’s strong regulatory framework in Nevada and gave the industry access to legitimate sources of capital and thus public company ownership.

The second important event came in 1963, when the state of New Hampshire legalized a lottery. Many other states followed suit. An activity that once was viewed with suspicion by most Americans was now being run by state governments, which gave gambling in general added credibility and, most importantly, helped build widespread public acceptance.

On top of the corporate investment and tighter regulation that came in the 1960s, the 1970s ushered in another significant development: the geographic expansion of casino gambling. The state of New Jersey in 1976 legalized commercial casino gambling for Atlantic City in an effort to rebuild that community. When casinos opened there two years later, it marked the first growth of casino gambling outside the state of Nevada.

The 1980s brought even more geographic expansion, but from an unexpected source: Indian reservations. In 1987, a U.S. Supreme Court decision affirmed the right of Indian tribes to self-regulate high-stakes versions of all games not prohibited by state law. A year later, the U.S. Congress passed the Indian Gaming Regulatory Act, commonly referred to as IGRA. This opened up opportunities for the development of casinos on Indian reservations in the United States. Today, 10 years later, more than 200 federally recognized tribes operate approximately 150 casinos in the United States, with estimated annual revenues of nearly $10 billion.

The next wave of growth occurred during the late 1980s and early 1990s, primarily in the mid-section of our country, along the Mississippi and Missouri rivers. Commonly referred to as the ‘riverboat states,’ Iowa, Illinois, Indiana, Missouri, Mississippi and Louisiana all adopted casino gambling as a way to rejuvenate local and state economies during a recession.

The convergence of these forces - growing acceptability and expansion, fueled by economic pressures in different communities - led us to where we are today. Of the 50 states, only Hawaii, Utah and Tennessee have no legalized gambling. Thirty-eight states plus the District of Columbia operate lotteries. Forty-one states permit pari-mutuel wagering. Six states allow electronic gaming devices at pari-mutuel facilities. Forty-six states allow charitable gaming. Native American casinos are legal in 23 states. Eleven of the 50 U.S. states now permit commercial casino gaming.

With the growth of the industry, however, has come controversy as well as considerable media and political scrutiny.

As casino gambling expanded beyond Nevada’s borders, opponents of gambling became more mobilized. These activists are part of a small but vocal segment of the population that is morally opposed to gambling. Because their moral opposition did not resonate broadly with the American public, gambling opponents used other so-called ‘social cost’ arguments about gambling to advance their political agenda and try to put the industry out of business.

Chief among those issues was pathological or problem gambling. When my organization, the American Gaming Association, was formed in 1995 by leading commercial casino operators, problem gambling was considered one of our most important industry issues. We stated publicly, as an industry, that we recognized that there are individuals who gamble in unhealthy ways. While there was considerable debate then about the actual numbers, we said that even one problem gambler is one too many. While gambling opponents have continued to exploit this issue to help them achieve their goals, we have looked for ways we could actually address the problem.

Just a year after the AGA was founded, we created a foundation to fund independent, peer-reviewed research on gambling disorders and improve public awareness of this issue. The goal of this organization, the National Center for Responsible Gaming, is to find better ways to diagnose, treat and ultimately prevent pathological gambling. To date, casino companies and related organizations have committed more than $7 million to the National Center for Responsible Gaming; over $3.6 million in research has been funded at some of the most prestigious institutions in the United States and Canada.

The most important aspect of this organization was its adherence to a system of peer review modeled after the federal government’s National Institutes of Health, or NIH. This system ensures that only research proposals of the highest scientific merit are approved. The National Center’s model was so successful that the grant-making capabilities of the organization are now housed at Harvard Medical School’s Division on Addictions in a newly formed organization called the Institute for Research on Pathological Gambling and Related Disorders. The National Center funds the Institute at Harvard while continuing its work to improve public awareness of pathological gambling.

Separately, the AGA has developed tools to help our companies educate their employees and customers. Today, we offer a wide array of programs, services and materials devoted to responsible gaming.

More than a decade earlier, individual companies in the casino industry, led by Harrah’s and Boyd Gaming Corporation, already had recognized the problem and began to take steps to address it. Leading casino operators put in place comprehensive responsible gaming programs. They funded toll-free hot lines for those in need of treatment and posted those numbers throughout their properties. They provided training for employees. They increased public awareness through brochures and posters in their properties alerting customers to the signs of pathological gambling. Many offered employees insurance coverage for treatment of gambling disorders, which typically is not part of a standard insurance plan.

For years, gambling opponents have resorted to problem gambling and other claims of social costs to paint a negative picture of casino gambling. Their allegations were behind the call for a comprehensive study of the gaming industry in the United States, while the Australian government called for a similar investigation in that country. The two studies had very different outcomes.

In the United States, we approached the National Gambling Impact Study Commission as an opportunity for our industry to set the record straight on a number of issues and dispel the myths and stereotypes about our business, many of which had been spread by gambling opponents.

After an intensive, two-year effort by the industry, the dire predictions about the outcome of the commission’s report proved to be unfounded. The commission found that commercial casinos, particularly destination-type resorts, did bring important economic and social benefits to their communities. It recognized the industry’s place in mainstream culture. And it confirmed many things that what we already knew: that the range of pathological gambling prevalence is somewhere between 1 and 2 percent, regardless of the availability of casino gambling … that casinos are no longer controlled by organized crime … and that gaming does not cause bankruptcy, crime or the many other social ills critics like to blame on our industry.

After a rapid expansion, the gaming industry in Australia was subject to a similar investigation called the Australian Productivity Commission. A public backlash against gambling in Australia, where there are gambling machines in virtually every hotel, bar or tavern, prompted the panel to make sweeping recommendations to severely restrict gambling. Today, the Australian gaming industry is still grappling with the far-reaching impact of that government report, facing regulations that threaten the very existence of the industry in that country.

Why was the outcome so different? I think there are two explanations.

First, the United States has always respected the right of each community to determine for itself the kinds and amounts of gambling that should be made available to citizens. By contrast, the expansion in Australia occurred with government approval but without formal approval from citizens.

Secondly, the commercial casino industry in the United States was able to demonstrate that its ‘destination-type resorts’ provide significant economic benefits. Australia features widely dispersed gaming machines in non-destination resorts, so-called ‘convenience gambling,’ which was the focus of criticism in both government reports because it failed to provide benefits similar to those at ‘destination-type resorts.’

The most important lesson learned from these two contrasting experiences is that we can’t take public confidence for granted. The legitimacy of our industry is contingent on it delivering on promises of economic growth and a quality entertainment experience in a well-regulated environment, while locating only in communities where we are welcomed. This formula has enabled us to grow to where we are today.

This is an especially important lesson as we debate the future of Internet gambling. While it is widely regarded as one of the most promising areas of expansion, participation in Internet gambling has the potential to jeopardize our standing with the public. Can it be properly regulated to prevent access by minors and those with gambling problems? Can we prevent those who live in jurisdictions where the practice is illegal from gaining access? Before we answer these important questions, we must take a cautious approach to expansion in this area.

Despite the overall clean bill of health given the commercial casino industry, several recommendations from the U.S. federal gambling commission did give momentum to federal legislative proposals. The three most prominent issues were a proposed ban on legal college sports wagering in Nevada - the only state where it is legal in the United States - a proposed ban on cash-access machines on casino floors, and a proposed ban on Internet gambling. All three remain under consideration by the U.S. Congress.

The drive behind many of these legislative initiatives has been that vocal minority in the United States that is opposed to gambling on moral grounds. As I indicated earlier, moral arguments no longer hold much sway within American society, but they have had some success when using problem gambling to advance their arguments. As the industry looks toward the future, we are continuing to search for better ways to reduce the scope and cost of problem gambling as well as our political vulnerability on this issue.

Expansion may have caused more political scrutiny of the industry, but it also has allowed many casino companies to grow and prosper, becoming more national in scope. From Del Webb’s pioneering days in the 1960s, the industry has seen dramatic changes in corporate control, with today’s industry dominated by large, publicly traded companies listed on the New York Stock Exchange.

At the same time, those corporate takeovers have created new layers of regulation in the industry, from the state to the federal level, providing the integrity so necessary for public acceptance. Many of the newer jurisdictions - distrustful of the industry because of its past - adopted extraordinarily stringent regulations. For example, when casinos on riverboats were first legalized, they were all required to cruise. Regulators imposed loss limits and size restrictions. In many ways, they made the product as inconvenient as possible for customers. But what we have seen over time in many jurisdictions is a gradual relaxation of some of the more onerous regulations that were borne out of suspicion of the industry. As other states become more comfortable with the industry, I expect that their systems, too, will evolve.

One of the other byproducts of the casino industry’s corporate evolution is an increase in the number of mergers, causing significant consolidation in our industry. Some of the most notable mergers involved Mirage Resorts, which merged with MGM Grand, creating MGM MIRAGE; Caesars World and Grand Casinos, Inc., which became part of Park Place Entertainment; and Rio, Showboat and Harveys, all merging with Harrah’s Entertainment. There has been similar consolidation on the equipment manufacturing side with IGT, Aristocrat and others. Most people believe this is a trend that will continue.

The major companies in the casino industry today face even more demands than the average company - demands from regulators, demands from customers, demands from politicians and demands from shareholders - for a certain level of return on investment. After Sept. 11, nearly every industry in the United States struggled to meet those demands. Those in the hospitality industry suffered the most because of their dependence on air travel, which experienced a significant decline in business. Since then, however, most of our companies have rebounded and are showing strong signs of recovery. Barring any additional setbacks, we expect our industry to continue to grow at a slow but steady pace.

With the economic downturn exacerbated by Sept. 11, gambling again has become a consideration for many state legislatures as an alternative to raising taxes. The most promising areas of expansion are seen in Indian casinos and gaming machines in pari-mutuel locations. Beyond the United States, international markets like here in Macau and in the U.K., which recently relaxed its regulations to allow Las Vegas-style casino gambling, also are prime areas for new development.

As I mentioned earlier, acceptability has been key to gambling expansion. The American public no longer views gambling as a sin, but rather a mainstream activity. An overwhelming percentage of Americans - close to 80 percent - now view the activity as acceptable for themselves or others - certainly a figure that couldn’t have been imagined just 50 years ago. And that figure is only expected to grow. What we’re seeing in polling is that those in their twenties and thirties have a significantly greater acceptance of casino gambling than those in their sixties - most likely an outgrowth of geographic proliferation and normalization of casino gambling behavior.

As a measure of that acceptability, more than 303 million visits were made to casinos last year in the United States. Those visitors spent over $25 billion on casino gambling, which doesn’t even include spending on non-gaming activities such as dining, shopping and other entertainment. Polling shows that Americans strongly believe in the right to spend their disposable income in ways they see fit. They characterize casino gambling as ‘a fun night out.’

But we always have to keep in mind that there are limits to the support we receive from the public. Americans demand that we keep minors out of our facilities. They also demand that the industry do what it can to address problem gambling. Both are responsibilities that we take quite seriously

The past is an important tool for all of us as we look toward building an economically viable and well-regulated industry on a global scale. As a region with potential growth opportunities in gaming entertainment, Macau is likely to play an increasingly prominent role in the industry. Its future - and the success of our industry as a whole - is dependent on an understanding of our industry’s past and present, as well as our mutual cooperation as we move forward.

Thank you.