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The idea of putting 61,000 new slot machines in Pennsylvania casinos and racetracks by the end of the decade makes gaming equipment manufacturers light up like a progressive slot machine hitting a multilevel jackpot.
Casino operators, however, have mixed impressions.
As the first new American casino jurisdiction of major consequence since the late 1990s, the Keystone State has become the subject of much due diligence and speculation by Las Vegas-based gaming companies.
"Strategically, we see Pennsylvania as a fantastic opportunity not only for our company but all the (slot machine) manufacturers," said Gavin Isaacs, president of slot maker Aristocrat Technologies. "Because it's new, the state is a market that's wide open. And as a manufacturer, you want to make sure you capitalize on the potential."
Pennsylvania's seven-member Gaming Control Board has not set any timetable for licensing casino operators. Most observers, however, believe it will be at least 2007 before the first slot machine handle is pulled.
"(Pennsylvania) has been looking at gaming for close to a decade," said John Mulkey, a gaming analyst for Wachovia Securities in Charlotte, N.C. "Despite the thoughtful approach to the enabling legislation, Pennsylvania's slot machine rollout has still been faced with delays. This highlights the long lead time for additional jurisdictions to legalize and get open."
Pennsylvania will prohibit table games but will license 14 gaming sites, five casinos and seven racetrack-casino locations that will each have a maximum of 5,000 slot machines. Two resort-area sites will both be allowed 500 slot machines.
Racinos will be placed at four existing horse racing tracks and two tracks under construction: one in the Philadelphia suburb of Chester that Harrah's Entertainment will operate and another in Erie owned by MTR Gaming, operators of Binion's.
A harness racing track, to be chosen by the state's harness racing association, will be allowed to apply for the seventh racetrack license.
The real competition is among the 16 applicants for the five stand-alone casinos -- two in Philadelphia, one in Pittsburgh and two yet-to-be-determined at-large sites. Companies with Las Vegas connections, such as Harrah's, Las Vegas Sands Corp., Boyd Gaming Corp., Aztar Corp., Pinnacle Entertainment and Planet Hollywood, have applied for licenses to operate one of the Pennsylvania casinos.
"We see Pennsylvania as a way to help strengthen our brand and our presence in the Northeast," Boyd Gaming Vice President Rob Stillwell said. "Certainly, there have been limited development opportunities domestically, so we view the state as an important growth opportunity."
Boyd Gaming proposes to build a casino adjacent to a 120-store outlet mall in Limerick, considered one of the at-large locations, about 35 miles northwest of Philadelphia.
Nevertheless, Pennsylvania frightened off several major casino companies from the outset when lawmakers instituted a 53 percent tax rate on gross gaming revenues.
"Simple reality, the tax rate is just too high," MGM Mirage Senior Vice President Alan Feldman said. "Pennsylvania is a fine place, but at that level, there are too many other places where we could put our money and get a better return."
Regional casino operator Ameristar Casinos took a long look at seeking one of the Philadelphia licenses. But the company decided to invest in its existing casinos instead of in Pennsylvania.
"After evaluating all the construction and development costs, we determined a Pennsylvania project didn't fit into our core strategy," Ameristar Vice President of Development Steve Eisner said. "The tax rate was a big factor in that decision."
Tax rates aside, though, Pennsylvania still has supporters.
"We believe our site is the best and most compelling location available," said Andy Abboud, vice president of government relations for Las Vegas Sands Corp. "We plan on building something that is more than just a casino, so Pennsylvania is obviously an opportunity that has us very interested."
The company, which operates The Venetian, proposes to develop a casino and entertainment complex on land that once housed the historic Bethlehem Steel factory in the Lehigh Valley. The valley is considered one of the at-large sites.
Gaming analysts questioned the 53 percent tax rate; they wondered how casino operators can obtain a decent return on their investment. In addition to paying gaming taxes, the casino operators will be required to fund the state's gaming regulatory structure out of their 47 percent of the gross profit.
"It's perplexing to me because with a jurisdiction (Pennsylvania) that is highly taxed, the operators are only looking at returns in the mid to high teens," said Steve Ruggiero, gaming analyst for CRT Capital Group in Stamford, Conn.
"For some companies, it's a way to get a toehold in a new jurisdiction. (But) I think when they start putting pencil to paper, many may throttle back on what they plan to do."
Ruggiero said the current lack of domestic expansion opportunities for gaming makes Pennsylvania attractive. Florida is the only other state now considering legalizing casinos at racetracks in certain counties, Ruggiero said. That state's gaming tax rate could be as high as 62.5 percent.
"Pennsylvania truly is a growth opportunity in what has been an otherwise slowing domestic growth business," Mulkey said. "The way Pennsylvania is laid out, the operators who get the licenses could have virtual monopolies. Most will have minimal competition."
At first, the casinos will only be allowed between 1,500 and 3,000 slot machines. But after a yet-to-be-determined time period, the casinos will have the opportunity to petition regulators to expand to the maximum 5,000-machine level.
The market is big. Pennsylvania's potential 61,000 slot machines equals the number of games found in the 56 American Indian casinos in California. Pennsylvania's gambling halls could have 31 percent more games than the 41,675 slot machines available at the 12 casinos in Atlantic City.
By comparison, the largest Strip casinos average about 2,000 slot machines, Nevada Gaming Control Board statistics show.
Pennsylvania's potential will jump-start sales for slot makers, Ruggiero said. Slot makers' sales have sagged in the past few years due to a lack of new markets and because many casino operators had already replaced older slots with newer ticket in-ticket out machines.
"For the slot machine manufacturers, Pennsylvania is a no-brainer," Ruggiero said.
Some slot companies, such as Reno-based International Game Technology, believe Pennsylvania will become a test market for futuristic products, such as server-based gaming, which allows casinos to use a central computer to switch out games and content on their slot machine floors.
"On paper, (Pennsylvania is) potentially a huge market," IGT spokesman Ed Rogich said. "But Pennsylvania has been a moving target in terms of getting the legislation passed. We think by the time it comes closer to be defined, it could be a great market for our server-based products."
After a decade-long debate, Pennsylvania passed casino legislation in 2004 that Gov. Edward Rendell signed into law. A Democrat, Rendell campaigned for office in 2002 advocating gaming as an economic development vehicle.
Twenty-five casino license applications for the 14 locations, encompassing more than 700 companies and individuals, were filed with state gaming regulators. Many established casino companies partnered with Pennsylvania-based companies and business leaders. For example, Boyd Gaming's partners include Pat Rooney Jr., an heir to the family that owns the Super Bowl-bound Pittsburgh Steelers.
In Philadelphia, five companies including Pinnacle and Planet Hollywood are seeking licenses. Trump Entertainment Resorts, the casino arm of developer Donald Trump, is part of a proposed project.
Harrah's is listed on the application for Philadelphia Entertainment, but only because the company has subordinated debt interest in the land for the proposed location, company spokesman Alberto Lopez said.
Meanwhile, three applicants seek the single license in Pittsburgh. Applicants include Harrah's, in partnership with retail giant Forest City Enterprises, and riverboat casino operator Isle of Capri, which says it will build an arena for the National Hockey League's Pittsburgh Penguins.
Las Vegas Sands, Boyd and Aztar, which is proposing a casino for Allentown, are among eight companies seeking the two at-large sites.
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