The World of Gaming: A Global Perspective

Good afternoon.  I’m Frank Fahrenkopf, president and CEO of the American Gaming Association, the national trade association that represents the U.S. commercial casino industry in Washington.  I’m proud to tell you that last year we celebrated our tenth anniversary as the voice of the commercial casino industry, and it’s been a tremendously successful decade filled with opportunity, evolution and growth. 

In the United States, there are five types of legal gaming: commercial casinos like I represent, Native American casinos, lotteries, the pari-mutuel industry and charitable gaming.  Today, I’m here to give you some insight specifically into the commercial casino industry, as well as on some of the opportunities and challenges we’ll face in the future.  I’ll begin by giving some background in the form of economic and employment statistics,
and then I’ll get into some of the issues and trends that are currently driving the gaming entertainment industry.

In 2004, the 445 commercial casinos in 11 states generated nearly 29 billion dollars in gross revenues. Of that amount, nearly 4.7 billion dollars went toward gaming taxes paid to state and local governments. We’re also a labor-intensive business, providing more than 350,000 direct jobs paying more than 12 billion dollars in salaries, including benefits.  We’ve just finished compiling our numbers for 2005, and I’m pleased to report the industry enjoyed another record year last year.  Overall, the U.S. commercial gaming industry had revenues topping 30 billion dollars for the first time in 2005.  In Atlantic City, gross gaming revenues topped 5 billion dollars for the first time, and Nevada topped 11 billion for the first time.  There’s also evidence that, despite the damage brought by Hurricane Katrina, Mississippi gaming revenues were strong in 2005.
 
Research shows that the industry doesn’t just provide jobs, but that employment in the commercial casino industry helps improve lives.  According to a study of industry employees conducted in the late 1990s, more than 8.5 percent of commercial casino employees across the country reported they had left welfare as a result of their employment, and 16 percent said they had used their casino industry job to get off public assistance.  And 63 percent of casino employees said they had better access to healthcare benefits as a result of their employment.

It may surprise you to know that more than 80 percent of Americans say that casino gambling is acceptable for themselves and others.  Our approval rating as an industry has remained similarly high for the nearly ten years we’ve been collecting data on the subject.  Undoubtedly, public acceptance of our industry has served us well.  However, it does not diminish that it’s important for us to conduct our business in an honest manner and present ourselves as good corporate citizens to keep these approval ratings high. 

In order to be in good standing with the communities where we work and with our customers and employees, we need to emphasize responsible gaming at our casinos. Although the vast majority of our customers, about 99 percent, enjoy casino gaming without adverse effects, the National Research Council of the National Academy of Sciences and Harvard Medical School’s Division on Addictions have concluded that about one percent of Americans can’t gamble responsibly and meet the criteria of the American Psychiatric Association as pathological gamblers.  

In truth, study after study has shown that the positive community impact and economic benefits of commercial casinos far outweigh the social costs.  Nonetheless, the AGA and the commercial casino industry have taken the lead on supporting research into pathological gambling and promoting responsible gaming behavior. 
Over the years we have developed an extensive and broad range of initiatives, activities and resources addressing these issues, among them the creation of the National Center for Responsible Gaming, which celebrates its tenth anniversary this year, and the AGA Code of Conduct for Responsible Gaming, which was implemented by all our member companies in September 2004.

While the industry’s strong economic performance and dedication to its employees and patrons has remained consistent over the years, there is no doubt that the face of the gaming entertainment industry is changing.  As recently as six years ago, 60 percent of the bottom line of a major gaming company like MGM Mirage came from gaming revenue, while hotels, restaurants and other services accounted for only 40 percent. 

These days, large companies typically generate more than 55 percent of their revenues from non-gaming amenities like shopping, dining, spas, shows and more.

So, it’s official folks, we have entered the era of the destination casino-resort.  And it’s no wonder.  According to a 2005 public opinion poll conducted for the AGA by Frank Luntz, Americans by a more than two-to-one margin said they enjoy casinos more for the food, shows and entertainment than for the gambling. 

Gaming companies have been anticipating and working to meet this need, breaking new ground and bolstering existing properties by incorporating a number of diverse entertainment options that offer something for everyone. 

Clearly, this trend is most evident in Las Vegas.  MGM MIRAGE last fall announced details of its Project CityCenter, an enormous $7 billion retail, casino, condo and hotel complex slated to open in Las Vegas by 2009. 

This project and a similar project by Boyd Gaming called Echelon Place indicate that companies are willing to commit significant investments into multi-use properties focused on non-gaming amenities.  

But this paradigm shift is not just a Las Vegas phenomenon.  Properties across the country continue to offer and add a wider variety of entertainment options, ranging from five-star restaurants and shopping complexes to spas and world-class performance experiences. 

Since its opening in Atlantic City in 2003, the upscale Borgata Hotel, Casino and Spa has been the top-grossing casino for all but one month, and has been credited with re-energizing the city, spurring other properties in the area to build out in order to catch up. 

Now, shopping and entertainment venues like the Quarter at Tropicana, the soon-to-open Pier at Caesars, and other developments are allowing Atlantic City to fully realize its promise of turning the city into a world-class entertainment destination on the east coast.

The non-gaming amenities boom has been accompanied by changes in the makeup of the industry, as well as the growth and expansion of the industry itself in U.S. markets and abroad.  Last 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. 

These days, commercial gaming expansion in the U.S. is being driven largely by the remarkable proliferation of racetrack casinos. Commonly known as racinos, these properties have witnessed explosive growth over the past few years, and they represent the fastest growing sector on the commercial side of the gaming business. 
With 23 operational facilities located in seven states, racetrack casinos alone generated nearly 2.9 billion dollars in gross gaming revenue in 2004, which was 30 percent higher than the previous year.  Racetrack casinos employed more than 14,000 people in 2004, and generated in excess of 1 billion dollars for state and local governments.  Additionally, 2005 saw the first racinos open in Maine and Oklahoma.

 And racinos are continuing to make headway in other jurisdictions.  In Broward County, Florida, citizens voted last year 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 this summer.

Despite delays in developing regulatory policies also slowing the introduction of slot machines at racetrack facilities in Pennsylvania, the Gaming Control Board there has made progress, collecting bids for operator licenses at the end of 2005.  Current plans in Pennsylvania call for slot machines at seven of its tracks, as well as five free-standing gaming facilities in the state and two resort hotels.  Once licenses are awarded, the first of these facilities are expected to open this fall. Once these and the Florida facilities are open, there will be a total of 11 states with racetrack casinos in the U.S.

In our industry, chances are that if you’re not running a racino, you’re competing with one.  The same also can be said of the rapidly expanding Native American gaming market, which itself generated 19.4 billion dollars in revenue in 2004. 

The commercial gaming industry as a whole also has been expanding nationwide, primarily in existing markets like Las Vegas and Atlantic City.  In addition to the developments I’ve already mentioned in Las Vegas, the Strip itself is growing as it becomes the site for a number of new and expanded properties.  Markets from Detroit to Kansas City are also experiencing an increase in capital investment, creating more rooms and more amenities to meet the needs of patrons who hail from all over the world.

Without a doubt, these growth and expansion efforts present exciting opportunities for the future of our industry, but perhaps nowhere is the building effort more important right now than in the Gulf Coast region.

At the AGA, the strong commitment we demonstrate to our companies and our colleagues is a reflection of the industry we serve.  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, with gaming companies affected by the storms immediately setting up individual relief funds for their employees, as well as other programs.  Right after the storms, the AGA also established its own organization, the Gaming Industry Katrina Relief Fund, which to date has raised more than $710,000 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.

The resilience of our industry is visible everywhere along the Gulf Coast as the commercial casino industry rebuilds its properties and helps to revitalize the communities that were affected by the hurricanes. 
Seven months after the disaster, almost all of the gaming facilities in Louisiana are back up-and-running, and three of the casinos in Biloxi have already reopened amid the massive reconstruction efforts underway there.   

Since the Mississippi legislature agreed last fall to allow casinos along the Gulf Coast to build onshore, rebuilding efforts have begun in earnest, and the new law is making way for bigger and more luxurious properties that will boast more amenities and look more like the destination resorts of Las Vegas than the former floating barges that were tossed ashore by the storm.  These changes are generating a palpable excitement about the future prosperity of the Mississippi Gulf Coast.  We have a long way to go, but if the past six months have taught us anything, it is that our industry is strong and capable of great things in the face of adversity. 

As I mentioned earlier, 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 dominated the headlines and legislative calendar for the last few months of 2005.  Thankfully, the recent passage of the Gulf Opportunity Zone Act of 2005, signed into law by President Bush in December, will help much of the progress already being made in the Gulf Coast region.

Unfortunately, the tax relief negotiations reiterated the disconnect that still exists between some politicians and the general public with regard to the gaming industry.  Despite the fact that more than 80 percent of Americans consider casino gambling acceptable for themselves or others, a small group of legislators led by Rep. Frank Wolf from Virginia fought to exclude casinos and some other businesses from receiving the proposed benefits of the relief legislation. 

The final version of the bill prevents commercial golf courses, country clubs, massage parlors, hot tub facilities, and liquor stores from taking advantage of 50 percent bonus depreciation or net operating loss carry-back provisions. 

However, thanks to a provision pushed through by Sens. Harry Reid of Nevada and Trent Lott of Mississipi, the commercial casino industry along with horse and dog racing interests are subjected to narrower compromise language that excludes the deduction of gaming equipment and casino floor space, but allows non-gaming amenities, such as hotel, retail, dining, convention areas, parking garages and other portions of the facility, to be treated as any other business on the Gulf Coast.  Also included is an employee retention tax credit, which is not subject to the gaming carve-out.

Despite the challenges of rebuilding and the legislative issues we continue to face, I am confident the communities along the Gulf Coast will prevail, thanks in large part to the efforts of our companies and its employees.  I look forward to a bright future in that region. 

The continually evolving U.S. gaming industry is also exploring expansion abroad as global gaming markets open all over the world.  Macau and Singapore, as well as other Asian markets, have garnered the most attention of late, but lucrative gaming markets are also emerging in England, Eastern Europe, South America and beyond.

As one might expect, the emergence of international gaming markets presents the industry with an entirely new set of challenges and opportunities.  Whether it’s adapting to different regulatory structures or growing business within the context of different cultural norms, U.S. companies seeking a presence in international markets are faced with a wide variety of challenges. 

Successful international expansion will require a thorough understanding of these issues in order to inform the development of culturally sensitive marketing campaigns and responsible gaming solutions.  Companies looking to expand into Asian markets are already focused on addressing these challenges as they envision new properties and programs for the region.

The growth of gaming abroad has not only presented the occasion for the U.S. gaming industry to increase its business opportunities on a global scale, it also has bolstered interest in gaming worldwide.  While there has been some speculation that the opening of gaming markets abroad could funnel tourist dollars away from the U.S. gaming industry, we here in the U.S. have proven that expansion into new jurisdictions has been a hallmark of success for our industry. 

Let me explain what I mean by that.  I often like to remind people that when casinos were first legalized in New Jersey in 1976, there were those within the industry who worried that the competition would mean dire consequences for Nevada’s gaming operations.  As we can all see, those skeptics were proven wrong when gaming in Nevada experienced solid growth in the years after casinos first opened in Atlantic City, and thirty years later, Las Vegas continues to be the leader in industry trends and innovation. 

This is largely due to the fact that, when patrons have the opportunity to experience the unique entertainment experience offered by casino resorts close to home, they look forward to visiting new venues as well as venues known for providing the newest and best offerings.  Similarly, the expansion of gaming into new markets abroad will garner interest in the U.S. market, encouraging visitors from around the world to come and experience properties throughout our country.    

Gaming is expanding not only into new geographical regions, but continues to find its way into alternative mediums as well.  One issue that seems to be in the news nearly every day now is internet gambling.  According to their annual report on gaming industry revenues, Christiansen Capital Advisors predicted internet gaming revenues for 2004 were over $4 billion, a more than 40 percent increase over 2003 figures. 

According to the U.S. Justice Department, the Wire Act of 1961, which prohibits gambling over the “wires,” makes all forms of Internet gambling illegal under existing law.  There is some disagreement over this, however.  Even the U.S. Court of Appeals for the Fifth Circuit has interpreted the statute differently, affirming in 2002 a lower court ruling that under federal statutes, sports betting conducted over the Internet is illegal, but casino games are legal.  In the past few years, Congress has attempted to wade into the murky issue, and though the AGA does not represent online gaming operators, we continue to monitor legislation related to this controversial topic. 

This winter, Congressman Jim Leach 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.  U.S. Sen. Jon Kyl introduced an identical bill last fall, but it failed due to procedural objections.   

Leach’s 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.  The bill specifies that current statutes, such as the Wire Act of 1961, would have legal authority over the practice.  This bill also would allow intrastate Internet gambling with certain restrictions, as well as ensuring that the horseracing industry can continue simulcast and account wagering.

Another bill introduced this February by Rep. Bob Goodlatte of Virginia seeks to more clearly define the Wire Acts as applying to Internet gambling.  Similar legislation to these bills has been proposed for almost a decade now without winning approval.  Nevertheless, some sponsors of the legislation believe that political developments – including the fallout from the Jack Abramoff investigations – make their prospects particularly favorable now.  This bill would also leave open the door to possible intrastate wagering online. 
Despite the myriad proposals, for now at least, it seems only time will tell what the future has in store for Internet gambling regulation.

As you can see, the industry has experienced great change and great challenge of late, 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 you don’t just have to 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 resoundingly 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 these 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. 

And the praise doesn’t stop there.  More than eight out of 10 report that casinos are good corporate citizens.  Finally, in possibly the most telling result of this survey, if given the chance to vote again, three-quarters of civic leaders and elected officials would vote in favor of bringing 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. 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 become a mainstay of popular entertainment culture.  We’ve seen our fair share of challenging times but have emerged more united, stronger, and with more opportunities than ever.  We at the AGA look forward to the exciting changes ahead and to watching the commercial gaming industry continue to evolve, contribute and grow.