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Rod Smith

Life on the Strip after the Mergers

13 June 2005

The mergermania that has swept the gaming industry for more than a year is changing competition in ways no one expected when it all began, industry experts agree.

Caesars Entertainment, once the largest gaming company, will be nothing but history once Harrah's Entertainment completes its $9.4 billion buyout of the company as expected.

Harrah's won Nevada regulators' approval Friday, completing the last regulatory hurdle to close the deal, probably on Monday.

That merger follows by two months the disappearance of Mandalay Resort Group, previously the fourth-largest casino company in Las Vegas.

It was bought out in April by MGM Mirage for $7.9 billion, at the time the largest merger in history.

And a year ago, Coast Casinos, once one of the Big Three locals casino operators, disappeared when it was bought out by Boyd Gaming Corp.

In the wake of the megamergers, it is no surprise Harrah's will become the world's largest gaming company, beating out the current king of the hill, MGM Mirage, by one-third in financial performance.

It's more surprising, perhaps, that Wall Street is projecting Wynn Resorts Ltd., which opened its first hotel in April, to attain the No. 3 spot as soon as next year.

Analysts say that projection depends on Wynn Las Vegas bringing in high nongaming revenues.

On the list of top gaming companies, Harrah's, MGM Mirage and Wynn should be followed by International Game Technology, the leading slot maker, and Boyd Gaming Corp., until recently a sleepy, locals casino company.

Then come Penn National Gaming and Las Vegas Sands Corp., GTECH, Station Casinos, Argosy Gaming Co., Ameristar Casinos and Aztar Corp.

As the Harrah's merger speeds toward completion, market pressures are pushing all of these casino companies and a handful of niche operators to innovate and compete for customers as never before, industry experts said.

Some compared the gaming industry today with the automobile industry a generation ago.

Las Vegas accounts for 25 percent of all commercial gaming revenues in the United States, down from its monopoly 30 years ago before gambling was legalized in Atlantic City.

This is similar to the domestic automobile industry, which accounted for virtually all U.S. sales until Japanese auto manufacturers challenged its position in the 1970s, eventually pushing U.S. carmakers' market share down to 25 percent.

The megamergers in the gaming industry are like Ford buying Chrysler and General Motors buying Toyota and Mazda, mergers that would have rocked the business world.

University of Nevada, Las Vegas history department Chairman Hal Rothman said that although the gaming market looks like the automobile market in its heyday, the companies are operating from positions of strength rather than weakness, as was the case with carmakers.

"Harrah's and MGM's models suggest that they can do more with the properties they are acquiring rather than less. They're dealing from positions of strength," Rothman said.

Since they will be bigger and need to integrate properties, both companies will initially tend to standardize operations and cut costs, he said.

That will work against them in the long run, Rothman said.

"One of the key features of Las Vegas' success is the way it creates an illusion of unique experience. Greater standardization works against that," he said. "As far as a decline in market share, our best days as a pure gaming venue are over. We're a multifaceted entertainment destination, niched to an unbelievable degree."

Operators focusing on nongaming operations recently have been winning most of the competitive battles. Nongaming revenues today account for 60 percent of the operators' business and 70 percent of the growth in Las Vegas hotel-casinos. Twenty years ago, gaming accounted for more than half of the business generated by operators, he said.

"Standardized management combined with the need to match innovative niche operators such as the Palms and Hard Rock Hotel and Casino will be a new challenge for the giant companies and particularly complicated for Harrah's to negotiate," Rothman said. "Las Vegas' future is in entertainment, not casinos. This is where Harrah's and MGM (Mirage) divide. Entertainment is MGM's fort . Harrah's sees itself as a gaming company, a strategy that works better outside of Las Vegas than it does here.

"On some levels, they've split the market; MGM will dominate here, competing at the high end with specialty properties, The Venetian and Wynn (Las Vegas) in particular, while Harrah's will dominate the middle market and the gambling niche. Essentially, the two behemoths are looking for different kinds of customers. MGM's are newer, more affluent, and more culturally oriented; Harrah's are either more serious gamblers or more middle class."

Jim Medick, chief executive officer of the MRC Group, Nevada's largest market research firm, said the real question is what new concepts and services will make one casino company a stronger draw than another.

"With the mergers and acquisitions close to completion, the new management teams face increased board pressure to grow their market share by retaining current customers, increasing the per-capita spending of current customers, and securing new customers," Medick said.

These customer prospects will look at the market and make decisions by comparing a "chain store" service atmosphere with that of boutique operators, he said.

"The big megacompanies are the chain stores that offer promotions and discounts to hold, grow and attract customers while the new niche players will compete in the area of uniqueness and personalized customer service," Medick said.

Rothman said this should make the niche marketers the big winners in the postmerger era, although even for them, the price of admission will be so high that the number of new entries will be limited to big players in the lodging industry or financial markets.

Brian Gordon, a principal in Applied Analysis, a Las Vegas-based financial consulting company, said in the long run, this competition among major players and niche operators will have a big impact on the gaming industry and Las Vegas.

First, the new products and services will pique interest in Las Vegas and increase demand faster than previously projected, Gordon said.

Furthermore, competition will force more mature properties to develop innovative marketing campaigns and amenities to generate repeat business and lure new customers, he said.

Gaming companies will be forced to chase the latest technology to improve performance and remain cutting-edge performers, he said.

Furthermore, Gordon said it is likely new niche operators will target the full spectrum of customers, including a mix of wealthy customers to more cost-conscious visitors, to stabilize their cash flow.

"In addition to meeting the challenge of providing innovative products and quality service, casino companies face the challenge of producing strong and stable financial results to meet investor expectations," he said.

"This aspect of the business ultimately drives the creativity and innovation by resort operators, and we expect these demands to continue to drive the market forward," Gordon said.

Taken together, that spells growth for the Las Vegas economy, although individual gaming companies may prosper or falter, he said.

UNLV professor Bill Thompson, who specializes in gaming studies, said the postmerger changes likely won't make much difference for consumers, at least in the short-run.

"The casinos will look the same. I don't think any new properties developed by the new owners will be drastically different," he said. "Harrah's-Caesars will not seem to be the biggest -- certainly not the most glamorous -- as individual properties will retain their names and probably their exterior characters. Harrah's will be still be Harrah's -- a midmarket property at best."

However, in the longer run, he said, the Las Vegas boom will get a boost from the consolidation because bigger companies will attract more and larger investors.

"There will be plenty of money for smaller players to enter Vegas with purchases of places like the Sahara, Riviera, and Primm casinos, much like Landry (Restaurants), MTR (Gaming Group) and the Planet Hollywood investors," he said. "Really, what is happening is evolutionary, not revolutionary, nothing radical until one leaves and looks around."

Look at Las Vegas 15 years ago, Gordon said, and imagine that much change and more in the next five years.

Despite the optimism, industry experts agree on one problem that could stifle development.

While demand may keep up with supply, Deutsche Bank analyst Andrew Zarnett said the passenger capacity into McCarran International Airport will probably become a bottleneck for the gaming industry and the local economy as up to 30,000 hotel rooms and possibly 30,000 condominium units are added to the market.

Surveys suggest there is enough demand to keep the new rooms filled for the next five to 10 years, especially since it is unlikely more than 45,000 total will be built.

But the airlines and the airport may be hard-pressed to handle all the passengers who now feel more comfortable flying than driving, more so since the rooms are aimed at a very upscale visitor who is likelier to fly than drive, he said.

Medick agreed, saying the airport will need to accommodate close to 5 million added passengers a year in the next five years.


Based on projected earnings

2006 Revenues

Cash flow

Net income

Harrah's Entertainment

$9.912 billion

$2.787 billion

$800 million

MGM Mirage

7.533 billion

2.419 billion

566 million

Wynn Resorts Ltd.

2.819 billion

874 million

315 million

International Game Technology

2.595 billion

960 million

474 million

Boyd Gaming Corp.

2.584 billion

784 million

239 million

Penn National Gaming

2.315 billion

616 million

180 million

Las Vegas Sands Corp.

1.818 billion

645 million

383 million

GTECH Holdings Corp.

1.398 billion

577 million

220 million

Station Casinos

1.346 billion

618 million

205 million

Argosy Gaming Co.

1.027 billion

312 million

93 million

Ameristar Casinos

1.010 billion

272 million

78 million

Aztar Corp.

965 million

228 million

64 million

SOURCES: Bear Stearns, Merrill Lynch