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Rod Smith
 

The Future of Las Vegas: The Big Two and Then Who?

6 June 2005

This is the second of two stories examining how mergers are affecting competition in the gaming industry.

Despite a year of investigations and regulatory hearings on the two biggest mergers in gaming industry history, the question of whether the buyouts are damaging to competition and the local economy remains unresolved.

MGM Mirage completed its $7.9 billion buyout of Mandalay Resort Group, first announced last June, in April, and Harrah's Entertainment is set to complete its $9.4 billion merger with Caesars Entertainment, first announced in July, by the end of this month.

Once complete, the mergers will leave two giant casino companies controlling more than half of the business on the Strip.

Keith Schwer, director of the University of Nevada, Las Vegas' Center for Business and Economic Research, said the real question is whether "effective" competition will survive, rather than whether one or two companies will control too many hotel rooms.

"My assessment would be that in the short run competition remains strong, essentially unchanged after the recent mergers," he said.

This is largely because fusing large organizations is neither an easy nor a quick task, he said.

"As such, the gaming industry will remain pretty much as it was before the mergers for the time being," Schwer said.

Over the next year or two, however, there is a good chance the mergers will erode competition, which would harm the industry and the community, Schwer said.

Economic analyses suggest that competitive markets with many companies lead to lower prices, more supply and increased innovation compared with industries dominated by a few giants, he said.

"Mergers can either be of economic benefit, lowering the cost of goods and services (through sheer size), or weaken competition, thereby increasing the costs of goods and services to consumers," Schwer said.

In the case of the two gaming mergers, a positive effect is unlikely to evolve through economics of size, he said.

"I think there may be some economies of borrowing associated with large gaming firms after mergers, but it is less likely that they would be able to become operationally more efficient," Schwer said.

More harmful, companies shielded from competition by narrowly controlled markets tend to become complacent and less innovative.

"Remember when the executives from the U.S. automobile industry told us, 'No one would want to drive one of those Japanese-manufactured cars.' It was not too long before Japanese firms were taking away business from the Big Three because management (at those companies) was fat, dumb and happy," Schwer said.

As competition diminishes over time, possible inefficiencies resulting from the mergers will become bigger problems, Schwer said.

Too little time has passed to gauge whether the industry will lose market share and become less competitive, as the Big Three U.S. automobile makers did, or whether it can remain competitive and efficient, he said.

It is clear, however, the lack of a competitive gaming industry could seriously affect the region's economy, he said.

"Complacency, inability to adjust to competition, slow reaction to technological change and poor management are my concerns for the future," Schwer said. "And the less competition we have, the more the concern."

Other experts and most industry insiders, however, believe Las Vegas gaming will remain as competitive as it is now.

MGM Mirage Chairman Terry Lanni said his company and the Federal Trade Commission staff have found that competition is thriving despite the local market concentration that has occurred over the past few years.

For one thing, there is tremendous competition and little coordination, especially in room rates, between hotel-casinos owned by the same company, he said.

For another, Las Vegas is a dynamic marketplace that's planning to add 30,000 new hotel rooms in the next five years, Lanni said.

Of those, the 4,000 MGM Mirage will build at Project CityCenter represents only 15 percent of that 30,000 total, effectively cutting the company's market share in Las Vegas.

Jim Medick, chief executive officer of the MRC Group, Nevada's largest market research firm, believes competition will surge in the gaming industry, but not across the board.

"Competition will be fierce for those casinos that are going after the same segment and the competition will be won by those that can deliver superior customer service and quality," he said. "That should be a good slugfest and it's one fight that will be good for the Vegas visitor."

UNLV history department Chairman Hal Rothman said once the megamergers are history, MGM Mirage and Harrah's will effectively control the Strip. That will eliminate competition at the top, he said, but it may open the door to competition from smaller and newer operators, he said.

"The real (competitive) action will be between beneath-the-radar properties, the successful specialty niches headed by the likes of (Hard Rock Hotel owner Peter) Morton and (Palms owner George) Maloof," Rothman said.

Ultimately, the issue is how elastic the gaming market is, and it appears to be about as open to competition as it can be -- at least for smaller operators," he said.

"The top tier, however, is going to be dominated by the few because it requires such a high level of capital that entry is almost impossible if you're not already in it in some way," Rothman said.

However, the market's focus on further increasing market share, and reducing competition among giants, should open even more opportunities for investors interested in properties under, say, $1 billion, he said.

"That historically has been where the new ideas get generated: Wynn Resorts Chairman Steve Wynn and former Mandalay Resorts Group President Glenn Schaeffer are the marvelous exceptions, high-enders who generate exciting new creativity," Rothman said.

"If the market remains elastic, then the competition seems most likely to be between hotel rooms and condos; if it tightens up -- if the new wave doesn't bring more visitors, then we'll see a much more competitive environment and probably a higher level of smaller scale M&A," Rothman said.

The Future of Las Vegas: The Big Two and Then Who? is republished from Online.CasinoCity.com.