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Arnold M. Knightly

Casino "arms race" declared over

20 November 2008

LAS VEGAS, Nevada -- A billion bucks really is a lot of money after all.

And the days of casino companies chasing after one another to build more and more expensive new resorts are probably over for a long time, a top gaming executive said Wednesday at the Global Gaming Expo.

Harrah's Entertainment Chairman and Chief Executive Officer Gary Loveman told people attending the convention's "State of the Industry" roundtable that the financial crunch has put an end to the days when casino companies could land unsecured funding for projects at low rates -- at least for as long as the head of the world's largest gaming company expects to be in the business.

Gaming companies have been in what he called an "arms race" to build new casinos to grow their revenues, but the economic problems facing the nation are forcing them to undergo a "significant sea change in the way in which the balance sheets of these businesses are structured."

Casino companies were caught spending money "like drunken sailors" when the downturn hit, Loveman said. And many of the regional and destination resorts the companies were building with cheap credit were bringing in very low investment returns.

"I think the industry is going to have to get accustomed to the notion that not every project is a good project -- and $1 billion is a lot of money, after all."

The current liquidity crisis, which Loveman said poses a bigger threat to the gaming industry than the short-term decline in consumer spending that has cut revenues at gaming companies, will force the industry to change the way it finances new development.

"The industry is going to have to get accustomed to negotiating this," Loveman said, noting that the liquidity crisis has put an "acute stranglehold" on gaming companies that racked up large debt during the boom times.

The economic slowdown has also changed the way the world's largest slot technology maker approaches its business.

International Game Technology Chairman and CEO TJ Matthews said the cancellation and suspension of several casino projects has forced the company to focus on ways to adapt new slot technology to existing casinos.

"The only way can grow is if we make the (casino) business better," Matthews explained.

IGT now plans to concentrate on creating games that can reduce labor costs for casinos while being more entertaining and efficient for gamblers.

The company is trying to develop slot machines that appeal to a shared experience among players, what Matthews described as providing "high-five" moments.

Asian players and younger American players prefer games such as baccarat and poker, that are played in groups and provide "a public acknowledgement on winning and playing," Matthews said.

Loveman said gaming manufacturers face a more immediate challenge, though.

For heavily indebted casinos faced with having to choose between spending $1 million to purchase new slot technology with tremendous potential, or spending the money to buy back bonds trading below value, Loveman said the decision will be easy. They'll buy back the debt.

Despite the current economic challenges, Loveman described the industry as "remarkably resilient" and said it will be profitable again once the current crisis is over.

The bad economy could also open up new international jurisdictions traditionally opposed to gaming -- Vietnam, Japan, Taiwan and parts of Europe, for instance -- as those areas start searching for new sources of income, Loveman said.

But the time between now and the turnaround will drastically change the industry's books.

Casino "arms race" declared over is republished from