Has gambler mother
lode tapped out?

Mar 20, 2006 11:27 PM

The law of diminishing returns, the law of gravity, and the law of "Don’t Mess with Texas." One of these is possible to break, but you have to know someone at NASA. As with the classic Econ 101 example, the free refills offered only with the ginormic tub of popcorn at the movies maintains practical limits; there are only so many refills one can endure prior to serious decreases in a feeling of well being (i.e., a tummy-ache) and marginal utility kicking in.

After munching through the first half of the second ginormic vat of popcorn (the popcorn sizes at the movie usually start at large, progress to extra-large, jump to freakin’ huge, and then inch their way, like an expanding waistband, to ginormic), each oil soaked, butter-flavored liquefied Lipitor coated and heavily salted kernel becomes increasingly less desirable to consume. The law of diminishing returns, however, is sometimes neglected by casino operations.

When does a gold mine owner decide to close a mine? The answer is: when there is not enough raw precious metal left in the ground that can be excavated at a profit.

Regional casino markets are not that different from mines. The divergence is that the discretionary income of some patrons is a relatively renewable resource, unlike gold. With customers who retain a dwindling or fixed income, cash is not necessarily renewable.

It is common knowledge within the gaming industry that when a casino first locates in a new or emerging market, it is the mining equivalent of finding a rich vein of gold near the surface”¦ easy mining with ample opportunities for exploitation.

The byproduct of this new opportunity is a gold rush-like swarming of both independent and corporate operators into the market. Central City had nearly twice as many casinos in its earlier boom years as it does now. Just as with the gold rush nearly a century before, some casino operators had a boon and some had a bust.

As the operating years pass, the quantity of gold in a mine depletes and becomes more difficult to extract. The cost of excavating and processing each ounce of gold becomes exponentially more expensive. Eventually mines resort to strip mining resulting in a considerable destruction of the environment for marginally less gold.

At the point where the value of gold cannot compensate for the cost of excavation, the mine has been depleted to the end of its functional life. On a historical note, this is why numerous long shuttered gold mines were re-opened after 1968 when the $35 per ounce cap on the price of gold was lifted. Once gold could be traded as a commodity, the fluctuating (and universally higher) value per ounce made gold a viable substance to pursue.

Still, all gold stakes are considered limited resources due to the factor of depletion. It is odd that casino operations develop, open, and operate as if the construct of an economic lifespan does not apply. Without more effective or efficient ways of operating a casino, inevitable diminishing returns come to fruition.

Unlike diamonds and, in theory, the associated love represented by the diamonds, casinos are not meant to last forever. Yet, planned obsolescence is not a realizable objective in most properties’ plans.

Observe one of the leaders of hospitality, Disney. While some of the rides and attractions at the theme parks have seemingly been around forever, others are planned to draw for a set period of time and then be replaced by something new (think: Michael Jackson’s "child friendly" Captain EO). To keep current customers and acquire new ones, casinos must learn to accept that no matter how wonderful an attraction or offering they might boast, individual interest spans are short.

There has been minimal revenue or visitation growth to the Colorado markets over the last few years. The virtual stagnation may be attributable to the lack of novel facilities and amenities available to the visitors. To stretch market relevancy, Colorado casinos would be wise to take a page from the books of one-named-wonders Cher and Madonna and learn a lesson of self-reinvention (minus the plastic surgery and Kabbalah stuff).

(David Paster serves as the Strategic Database Manager with National Hirschfeld LLC of Denver, CO, a single-source printing, digital imaging and direct marketing company offering clients targeted solutions aimed at increasing profitability. He can be reached at [email protected] or 303-320-8500.)