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Alexandra Berzon

Strip heavyweight sees tough '08, but he's alone

14 December 2007

and Liz Benston

LAS VEGAS, Nevada -- Casino executives on the Strip have spent the past year congratulating themselves on a job well done, watching their businesses grow in spite of an economic slowdown fueled by the housing slump, higher interest rates and downbeat consumer spending forecasts.

But the chief executive of the state's largest gaming company burst that bubble this week, saying he wasn't confident that growth would continue. He seems alone in voicing such concerns.

"I think we're going to have a very difficult '08 in our business," MGM Mirage Chief Executive Officer Terry Lanni told the Sun during a roundtable discussion Tuesday with civic leaders on the state's future. He repeated his remarks at Thursday's Governor's Conference on Tourism at Caesars Palace.

Gaming experts expressed skepticism at Lanni's forecast, saying evidence points toward growth in 2008. Lanni's comments could be timed to evoke sympathy as the industry battles a widely popular teachers' initiative to raise the state gaming tax from 6.75 percent to 9.75 percent, they said.

Lanni forcefully rejected that contention.

"It's going to be a challenging year," Lanni said at the roundtable, "and I think it's going to affect the state in sales tax revenues and the live entertainment tax. We're the largest taxpayer in the state, and we want some other people to join us" in paying taxes.

Rival casino companies and some Wall Street analysts who follow the industry say they aren't expecting problems in the coming year.

"We feel very good about 2008," Harrah's Entertainment Chief Financial Officer Jonathan Halkyard said Wednesday. "We are constantly looking at our business performance for indications that there might be softness from certain segments and certain geographies, and we haven't seen in our business any weakness I could attribute to the subprime mortgage crisis or the housing market."

If Las Vegas has an economic soft spot, it's at the low end of the market that attracts budget-conscious tourists who might travel less in 2008, analysts said. But the Strip is distancing itself from its bargain hunting past, instead courting wealthy tourists drawn to town by top-tier resorts.

Lanni said he is particularly concerned about MGM's low-end properties, including Circus Circus, Excalibur and Slots-A-Fun, which attract families that may be most directly affected by the housing slump, and may choose to curtail their Vegas travel next year.

Cutbacks in commercial lending could hurt MGM's conference business, which makes up roughly 20 percent of the company's revenue, he said. Conference bookings for 2008 have not fallen off, but Lanni is worried that corporations may send fewer employees next year, or may give employees less to spend.

Lanni said there's growing concern in the company that the weak housing market and rising gas prices will slow corporate and personal travel to Las Vegas and slash spending here. He said he has instructed executives to draw up 2008 budgets to reflect only modest spending for capital projects and new hiring.

Gaming revenue on the Strip rose 20 percent in October - boosted by heavy baccarat play and players' bad luck - and gaming revenue rose 8 percent over the past 12 months. Although revenue from gambling hasn't grown as much as it has in previous years, growth in nongaming revenue has soared - offsetting slower growth in other areas.

"It's really been a tale of two cities," Deutsche Bank stock analyst Bill Lerner said. "Gaming revenue growth has been in the low single digits this year, but nongaming growth has been very strong," driven by new attractions such as ultralounges, nightclubs and shows that draw younger, wealthier customers who don't necessarily gamble.

In 2006, Strip casinos generated $8.9 billion in nongaming revenue, about 60 percent of total revenue, versus only $5.5 billion in 2000, or 54 percent of total revenue.

"I don't have a lot of worries about gaming next year," said Jefferies & Co. analyst Lawrence Klatzkin. "It's not going to be a record year, but it will be a solid year."

Convention experts say anything short of a severe recession won't affect the convention and trade show industry significantly.

"If employment stays steady and consumer spending holds, conventions and tourism should see moderate growth in 2008," said Michael Hughes, associate publisher of Tradeshow Week magazine. "It may be smaller growth than 2007 but still positive."

The Las Vegas Convention Center is projecting full occupancy in 2008.

Other convention cities such as Chicago, Los Angeles and Orlando, Fla., are forecasting a strong start to 2008.

Gaming companies say their business may not be strong or consistent enough to shoulder the state's tax burden and that the state should consider taxing other businesses. The Nevada Resort Association and Las Vegas Sands Corp. have filed legal challenges to the teachers' initiative, arguing that it is misleading and covers too many subjects.

Strip heavyweight sees tough '08, but he's alone is republished from