Why is Las Vegas gambling on the decline?

Why is Las Vegas gambling on the decline?

Why is Las Vegas gambling on the decline?

Moneybox
Commentary about business and finance.
Oct. 27 2007 6:29 AM

Leaving Las Vegas

Explaining the gambling decline in Sin City.

Slots at a casino. Click image to expand.

A British couple strolls around the corner from St. Mark's Place and asks for a canal-side table. On this glorious day—temperature in the low 70s, blue sky overhead—they join the mobs dining al fresco, watching as the gondolas drift by. Never mind that this "Venice" is an enclosed mall in the Venetian resort in Las Vegas, and the cerulean sky is a painted ceiling. For tourists like these, gambling is practically an afterthought. In the faux Venice, you can shop at Banana Republic, take in Wayne Brady's variety act, and sample the fare of enough celebrity chefs to stock a rival to the Food Network. All without having to bother with the pernicious influence of fresh air and sunlight.

Viva Las Vegas!

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A brief sojourn in the new Las Vegas, where growth is booming but you have to search a bit to find the blackjack tables, raises a few questions. Is gambling played out in its historical capital? Now that it has gone mainstream, is gambling a discretionary spending industry, tethered to the flagging fortunes of the American consumer? And, really, just how much of Celine Dion can one city take?

Gambling may be many things: a bad habit, an addiction to some, a sin to others. In America, it's a massive industry that shows no signs of flagging, despite the economic headwinds. "During the Great Depression and previous recessions, people would always save enough to the go to the movies," said Frank Fahrenkopf, chairman of the American Gaming Association in Washington, D.C. "The same is true today. People save their money to go to the casinos." (Note: Gaming is the industry; gambling is the habit that supports it.)

Just how much do Americans fritter away on losers' bets? Last year, 460 commercial casinos in 11 states employed 366,197 people, according to the American Gaming Association. That doesn't include the 372 Indian casinos in 28 states. Throw in horse racing and lotteries (42 states and the District of Columbia), and every state save Utah and Hawaii has some form of legal gaming. Analyst Eugene Christiansen says that the industry's take—net sales of casinos, lotteries, et. al., after accounting for winnings—was about $91 billion in 2006, up 7.7 percent from 2005, or 0.7 percent of GDP. That compares with $45.1 billion in 1995 or 0.6 percent of GDP. (These figures do not include ubiquitous but illegal NCAA basketball pools.) For comparison's sake, $91 billion is about what Americans spend on soft drinks each year or Egypt's GDP. (Or, given the weak dollar, what you'll spend on five nights in a hotel, a few slices of pizza, and a gelato in Venice.)

Legalized gambling has grown at a faster rate than the overall economy for the past few decades in part because it's a relatively young industry. Bugsy Siegel opened the Flamingo casino in Vegas in 1946. "For virtually all of history, there's been more demand than supply," notes Eugene Christiansen. And as older iterations matured, like horse racing and lotteries, casinos picked up the slack. But in Las Vegas—a city devoted to excess of all kinds—supply and demand for casino gambling seem to be in balance. The slumping economy and the continuing boom in Native American casinos in California, Vegas' largest feeder market, are having an impact. In August, Nevada's gambling take fell 4.4 percent from August 2006, below expectations.

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The city's growth is now dependent on a diversification process that began in the 1980s, when casino operators first made massive investments in the sorts of retail, dining, and entertainment experiences that inexplicably coax British couples to fly 6,000 miles to sit alongside an indoor canal under a painted sky studded with sprinkler heads. In the second quarter, mega-operator MGM Mirage reported that casinos accounted for about 37 percent of overall revenues. At some of its properties, including the posh Bellagio, gaming provides only about one-quarter of revenues. Today, MGM is rolling the dice on the $7.4 billion City Center development, slated to open in late 2009. Sure, it will contain a new casino. But the real money will come from selling the 3,600 condominiums it plans to build and filling up the hotels and malls.

In other words, the Las Vegas economy is looking more like that of America as a whole—driven by discretionary consumer spending on clothes, entertainment, and food. And as a result, this city that has defined itself as being outside the mainstream will increasingly be constrained by the quotidian macroeconomic factors that drive housing and retail markets across the country: interest rates, employment growth, and disposable income.

At the same time, the rest of the country is starting to look more like Las Vegas. As the strip fills up with condos and veteran casino operators tout their malls and variety shows, Native American tribes and states are seeking to provide local residents with gaming options. California now has 55 Indian casinos, whose combined haul now rivals that of Las Vegas. Kansas this year passed a law allowing for the potential opening of four state-owned casinos. In Massachusetts, where the Mashpee Wampanoag tribe wants to build a casino, Gov. Deval Patrick in September offered a plan to bring three destination resorts to the state, including one in Boston. The historic wellsprings of Prohibition and Puritanism, respectively, are now taking economic cues from Sin City.

Meanwhile, Las Vegas resort operators will have to redouble their efforts to stage new shows to attract tourists from Great Britain, and beyond. Celine Dion is packing up her show and leaving Las Vegas in December.

This article also appears in the Nov. 5 edition of Newsweek.