The Global Gaming Industry: Addressing Challenges and Seizing Opportunities

Good afternoon.  I’m Frank Fahrenkopf, president and CEO of the American Gaming Association (AGA).  I’d like to extend my sincere appreciation to Monografie for inviting me to join you here today.

While some of you already know my organization and what we do, I’d like to start by sharing some background on the AGA for those of you who are unfamiliar with us.

As the national trade association for the commercial casino segment of the U.S. gaming industry, the AGA works to build a better understanding of casino entertainment among the general public, elected officials and the media.  To fulfill its mission, the AGA serves as a clearinghouse for industry information, develops aggressive educational and advocacy programs, and provides leadership in addressing industry issues of public concern.

Our membership consists primarily of publicly held casino companies listed on the New York and NASDAQ stock exchanges, including most of the operators you’re probably familiar with, such as Harrah’s, MGM MIRAGE, Wynn Resorts and Isle of Capri.  We also represent major gaming equipment manufacturers, such as IGT, Bally’s and WMS, as well as other vendors and suppliers to our industry.

And unlike most other trade associations in Washington that have been around for nearly a century, we‘re only in our fourteenth year – which gives you an idea of how relatively young the U.S. gaming industry really is.

One of the key roles of the AGA is to represent the interests of the commercial casino industry and its employees on Capitol Hill in Washington.  We routinely meet with members of Congress to promote the industry’s positions on a variety of federal legislative and regulatory issues.

Just last week, we coordinated a two-day event that brought the CEOs of our member companies together in Washington for a series of high-level meetings with members of Congress and the Obama Administration.  We worked to better educate our members of Congress about the real impact of gaming, and that’s a mission we carry on throughout the year.

Another of the AGA’s most important responsibilities is to develop industrywide programs on a variety of critical issues.

Responsible gaming is one such issue; it is among the top priorities of gaming operators and manufacturers throughout the country.

Our industry has long implemented employee and public education programs to increase awareness of gambling disorders and promote responsible gaming practices.  When the AGA was established in 1995, we built on the efforts individual companies already were undertaking to develop broad, industrywide responsible gaming programs that have become models for how the global gaming industry approaches this important issue.  Responsible gaming is only one of the many industrywide programs implemented by the AGA.  As I mentioned before, we provide leadership on a variety of other crucial issues as well, including underage gambling and diversity.

Another one of the AGA’s most important responsibilities is organizing the Global Gaming Expo (G2E) family of events.

Every year, in partnership with Reed Exhibitions, we host G2E and G2E Asia, the premier gaming industry events in those regions.  Our conferences and trade shows attract tens of thousands of gaming executives from around the globe, who come together to network, share best practices and discuss trends and technologies.  I know many of you have attended our G2E events over the years, and we greatly appreciate your support and participation.  We are looking forward to our ninth year of G2E in Las Vegas this November, and I hope to see you all there.

As many of you may already know, this year, the AGA and Reed Exhibitions established a partnership with Monografie to produce SAGSE.  We have long been impressed with the quality of the SAGSE event and its ability to attract the leading exhibitors and attendees.

In addition, AGA members and G2E exhibitors have identified Latin America as a place that holds great promise for the future expansion of the global gaming industry.

SAGSE has been the strongest event in South America for many years, and it’s important for a market to have one industry-leading event where all the key players can meet, discuss the industry, educate members of the industry and present all of the new products in one place.

We are absolutely delighted to collaborate with Monografie, and, together, we hope to offer SAGSE and the Latin American market broader exposure around the globe.

Now that you are better acquainted with the AGA, I would like to spend some time discussing the current and future prospects of the global gaming industry, focusing specifically on the U.S., Asia and Latin America.  It’s no secret that our industry has been significantly impacted by the global financial crisis, and the coming years promise both significant challenges and tremendous opportunities.

Let me begin by giving you some background on the U.S. gaming industry.

Currently, there are five types of legal gaming in the U.S. – commercial casinos like the companies I represent, Native American casinos, government-run lotteries, pari-mutuel facilities and charitable games.  Only Utah and Hawaii have no form of legal gambling in their states.

The commercial casino segment of the U.S. gaming industry is a significant part of the national economy.  There currently are 445 commercial casinos operating in 12 states across the U.S.  Together, they earned more than $32 billion in revenue last year.  Casinos also stimulate local economies, providing good jobs and a stable source of tax revenue.  In 2009, they returned $5.7 billion in tax receipts to state and local governments.  They also employed more than 357,000 people who earned $14 billion in wages and salaries.  In fact, casinos directly employ more people than the U.S. auto industry.

Racetrack casinos (or racinos) represent one of the most promising segments of the U.S. gaming industry.  The sector grew significantly in 2008 and now operates in 12 states.

Gross gaming revenues at racinos rose to $6.19 billion last year, a 17.2 percent increase over 2007.  Also, tax revenues increased to $2.59 billion and employment figures also steadily climbed to more than 29,000 employees.

The U.S. commercial casinos industry is a highly regulated one.  Casinos are regulated and taxed at the state level in our country, and tax rates and regulatory structures are different from state-to-state.

Obviously, there are some federal regulatory and legislative issues that affect our businesses – if there weren’t, I would be out of a job! – but our casinos primarily are overseen at the state level.

If you’ve been reading the newspaper during the past year, it’s no secret that the volatile economic climate continues to negatively impact the U.S. gaming industry.  Quite frankly, surviving in this economy represents the single biggest challenge our industry has faced in its relatively young history.  Though the recession has impacted virtually every corner of the American economy, consumer-driven industries like ours have been particularly hard hit.  Two issues – the national credit crunch and the steep drop in consumer spending – have had a dramatic affect on the gaming market.

Available capital dissolved abruptly in the midst of several major gaming industry development projects, forcing many companies to stop construction mid-stream or to cancel new projects altogether.  This has made expansion, a pillar of the U.S. gaming industry’s business strategy, much more difficult.

And, not surprisingly, as Americans feel the pinch of the recession, casino patrons have cut their entertainment expenses.  For the first time since the AGA began tracking it, consumer spending on commercial casino gaming declined in 2008, dropping 4.7 percent from 2007 totals.

And 2009 numbers are even more discouraging.  Thus far, casino revenues are down more than 6.5 percent from last year.

Americans are taking shorter trips for fewer days, and they are spending less on the high-end amenities that have become intrinsic to multi-faceted casino resorts.  As a result, destination markets like Las Vegas and Atlantic City are suffering more that drive-in markets in the middle of the country.

For example, gambling revenue on the Las Vegas Strip fell 11 percent in July – the nineteenth straight month of decline.  Likewise, Atlantic City’s gambling revenue dropped 16 percent in August.

It is important to note, however, that the struggles of the U.S. gaming industry are hardly unique. The recession has caused Americans to reduce their spending on leisure activities across the board.

According to a recent survey, nearly 40 percent of Americans are adjusting their annual vacation plans and 56 percent are cutting back restaurant visits.  Hotel occupancy rates and airline revenues continue to decline precipitously.

And, as I mentioned a moment ago, the gaming industry is far from monolithic.  Though some gaming communities are struggling, others are faring better.

More specifically, throughout 2009, casino revenues in Indiana, Pennsylvania and Missouri have significantly increased or held relatively steady despite the challenging economic environment.

In fact, a new casino that recently opened in Pittsburgh, Pennsylvania, has received enthusiastic praise from community leaders for attracting visitors to neighboring businesses and injecting fresh vigor into the town.  During its first month, The Rivers casino attracted nearly 23,000 gamblers and diners.

And local hotels continue to report an increase in calls from out-of-town tourists who plan to visit the area.

In truth, despite the hard times, millions of visitors are still visiting our casinos every day.  People still seek out entertainment experiences—even in the tough times.  And in order to attract more visitors, gaming establishments all across the United States are reemphasizing their reputations for value. Casino hotels – particularly in Las Vegas – have slashed room rates to unprecedented levels.

Gaming facilities are welcoming patrons with myriad coupons and other special offers.  Gaming equipment manufacturers continue to develop new and exciting games that meet the demands of increasingly frugal customers.

Our industry is working to reestablish itself as a source of good-quality entertainment at a fraction of the cost of other recreational activities.  In these economic times, that kind of value is more important than ever.

In addition, states throughout the country are considering expanding gaming to address severe budget shortfalls.  Expanded gambling offers the U.S. gaming industry tremendous opportunities.  But, more importantly, it offers communities important advantages.  Casinos provide good-paying jobs, indispensable tax revenue and business opportunities for local vendors – benefits which, without casinos, wouldn’t otherwise exist.  Those benefits can help communities stay afloat during these difficult times.

If states choose to expand gambling, setting reasonable tax rates for gaming facilities is imperative.  I am not suggesting that any economic sector should pay less than its full share.  But many states seem to regard gaming as a cash cow that can be taxed to the hilt without any regard for the bigger picture.  Inordinately high taxes stifle growth and prosperity.

Now, I’d like to turn to the Asian gaming market, which also has experienced both growth and contraction throughout 2009.  Let’s begin with an in-depth look at Macau, the world’s largest gaming market.

Macau enjoyed a much more prosperous 2008 than Las Vegas, its sister city overseas.  Casino revenues surged 31 percent to $13.7 billion, a record high.  However, when the global economic crisis reached the shores of Macau in late 2008 and early 2009, gaming revenues began to drop rapidly and unemployment numbers soared.

From November 2008 through June 2009, gross gaming revenues decreased month after month. As a result, Macau’s gross domestic product began shrinking during the fourth quarter of 2008, and the city’s economy contracted 12.8 percent during the first half of this year.

Those declines were aggravated by an abrupt disintegration of available capital.  Currently, many development projects throughout the city have been delayed or canceled, as evidenced by the construction cranes that clutter the city’s skyline.

In addition, tourism to Macau has slowed significantly, due in large part to tightened visa restrictions on travel from mainland China.  Beijing reduced the number of allowable visits to Macau in the middle of 2008 in an attempt to stop civil servants from gambling.  As a result, the city’s efforts to attract greater numbers of middle-class, mainland Chinese tourists have been significantly hindered.

This summer, however, the tide abruptly turned; Macau defied economic analysts’ forecasts by earning record profits for August.  The land casino industry in Macau earned more than $1.34 billion – the highest monthly gaming revenue ever recorded in the city.

Without a doubt, those record-breaking revenues were buoyed by City of Dreams, the new integrated entertainment resort that opened in June.  The resort welcomed 1.1 million visitors in July – an eye-popping average of 37,000 visitors per day.

Gaming industry insiders hope the spike in Macau’s gambling revenues signals that a period of recovery is underway.  If nothing else, last month’s significant growth demonstrate that the city’s already expansive gaming market has yet to be saturated.

Other chips seem to be falling in place as well.  A regulated and enforceable junket commission cap of 1.25 percent will be introduced in the near future.

And, thankfully, Beijing recently relaxed Visa restrictions for visitors from mainland China.  As of this month, residents of Guangdong province now are permitted to visit Macau once a month versus only twice a year.  Gaming revenues and stock prices of companies involved in the Macau market have risen on the news.

Analysts predict that Macau’s gaming revenues will continue to grow in the coming months. Unfortunately, though, much damage already has been done.

The government of Macau recently predicted a 10 percent drop in gross gaming revenue for the whole of 2009.

The forecast is mixed throughout the rest of Asia.  In Singapore, the Marina Bay Sands resort and Resorts World at Sentosa are on track to open in early 2010.  Both establishments are expected to do extraordinarily well.

There had been talk of lifting the ban on gambling in Taiwan and developing two casino resorts on its outlying islands, but on Saturday, voters on Penghu Island turned down the legalization of gambling by a three-to-two margin.

Additionally, in Cambodia, the government recently issued a directive ordering all slot machines at entertainment clubs to be removed to improve security and public order.  Going forward, slot machines can only be located in licensed casinos and hotels.  Additionally, the country issued directives banning its citizens from gambling – now only foreigners can visit gaming facilities.

I’d now like to turn to Latin America and the amazing story of gaming that is unfolding down here.  I think it’s fair to say that Latin America and Europe are battling to become the world’s third-largest gaming market.  I have no doubt that Latin America is poised to seize that title in the coming years.

It is perhaps an understatement to say that excitement is fervent within the global gaming industry regarding Latin American gaming expansion.  Every major equipment manufacturer in the world – including IGT, Bally’s and Aristocrat – have set up shop in Latin America, poised to take advantage of the many opportunities provided by this burgeoning market.  And homegrown Latin American manufacturing companies such as Novomatic and Octavia already have achieved considerable success.

Right now, the market is expanding at a break-neck pace, and, in the coming years, growth will only accelerate.  Chile and Argentina are leading the way; they have the most mature gaming operations in the region.  And, unlike the U.S. and Asian gaming industries, the Latin American gaming industry has not been extremely hard hit by the global financial crisis.

For example, according to the latest figures from the Superintendent of Casinos and Gambling, Chileans are gambling at casinos more often and are spending more money during each visit.  Between January and July of this year, Chileans spent an average of $52 per person each time they went to a casino – that’s a 13.2 percent increase compared to the same time last year.  In addition, gross gaming revenue reached $84.8 million during the first half of the year – a dramatic jump of 78.1 percent.

Gaming in Colombia and Peru also has grown rapidly in recent years. And the industry is also gaining strength in Uruguay, Panama, Nicaragua, Costa Rica and many other countries.

There are two major questions that could have significant implications for the future of the entire gaming industry in Latin America, and I know everyone’s talking about them this week.  What’s going to happen with Brazil and Mexico?  Everyone is waiting for new legislation in Mexico to clearly regulate Class III games.

Should that happen, the growth of the Mexican gaming industry will be explosive.  Likewise, Brazil represents a tremendous opportunity; gambling is a favorite national pastime there.

In fact, the future of gaming in Brazil looks to be coming into focus with the advancement of Bill 2254 in the federal legislature.  While full-fledged casinos are not included in the bill, the legislation does allow for 1,000 new bingo halls across the country, all of which will be allowed to house slot machines.

The bill has made it further in the legislative process than any gaming legislation in recent memory, and if it passes is expected to become law in March 2010.

Existing gaming markets in Latin America are evolving to keep pace with global industry trends, and in many cases are helping to lead the way.  Gaming establishments throughout the region are becoming increasingly sophisticated.  The latest technology is available to patrons, who, like Americans, have come to expect the most cutting-edge games.

In addition, there are a number of world-class gaming resorts throughout the region, which are very similar to the gaming establishments that line the Las Vegas Strip.  We learned in the U.S. gaming industry that diversified facilities – gaming resorts that include a variety of entertainment options like restaurants, theaters and spas – are crucial to success.  We have found that those establishments tend to perform better than casinos that just offer gambling.  The concept of the destination casino resort appears to be taking hold in Latin America as well, and from all appearances, the model seems to be working.

Obviously, each country within Latin America approaches gambling slightly differently.  The unique political landscape in each location dictates the development and management of gaming establishments.  However, I strongly believe that rigorous regulation will foster continued growth and encourage private investment.

Likewise, I believe that maintaining integrity in games and casino operations is essential to the future prosperity of Latin American gaming, and that casinos and equipment manufacturers here must embrace their social responsibilities and promote responsible gaming among patrons.

You all should be very proud of the industry you have built in this region.  The eyes of the global gaming community certainly are upon you as these markets continue to grow and evolve.

I want to say a few brief words about online gambling before I close because I know it is an issue that it is an extremely hot topic in Latin America right now.  Countries throughout the world are avidly discussing the possibilities and challenges related to legalizing online gambling.  Currently, regulation is a major stumbling block; no one knows exactly how to govern this segment of the industry.  However, without question, it is a very lucrative prospect.

In the U.S., Congressman Barney Frank introduced a bill earlier this year that would allow for the legalization and regulation of online gambling.  He contends that doing so would create a major new federal revenue source.  The AGA remains neutral on Internet gambling because our members don’t agree on the issue, but the U.S. gaming industry is monitoring this proposal and others like it very closely.  However, U.S. legislators are grappling with a number of pressing issues at the moment, and movement on the bill before the end of the year is highly unlikely.

As many of you are likely aware, earlier this month the European Union issued a ruling allowing countries to ban foreign online gambling Web sites if the intention is to prevent criminal activity.  The judgment directly contradicts previous rulings, and stocks of major online gambling companies fell after the announcement.

Here in Latin America, Argentina is prepared to legalize online gambling before the end of the year.  The country recently gained the rights to broadcast soccer matches, and the prevailing opinion is that Internet gambling will finance the venture.

In closing, I want to reiterate that even though this is a time of considerable uncertainty for the global gaming industry, opportunity is everywhere.  There is opportunity in the U.S., where several states are considering gambling expansion.  There is opportunity in Asia, where multifaceted resorts are bringing about a recovery in Macau, and Singapore’s new casinos are poised for success.

And, without a doubt, there is opportunity in Latin America.  Here, the future of gaming is bright – all of the evidence indicates that it will grow and thrive in the coming years.  As you explore the SAGSE show floor – which will open in just a few moments – you will experience first-hand the entrepreneurial spirit and innovation that will usher the Latin American gaming industry into a new era.  Thank you very much, and please enjoy the rest of your time at the show.