The most significant stories
of 2003

Dec 30, 2003 8:55 AM

Was 2003 a very good year? For the gaming industry in Nevada, the jury is still out.

It would be difficult to pinpoint any event that significantly altered the landscape, but there were several that could have far-reaching effects in the short and long term.

Here is a quick look at the most significant news stories of 2003, and how they may shape the gaming industry this year.

1. California Gaming: Like most great stories, this one has plenty of subplots. And it’s only fitting that we start with a Hollywood actor, Arnold Schwarzenegger, who wrestled the governorship of California away from the fat-cat politicians in Sacramento.

Although it remains to be seen exactly what Schwarzenegger will do in office, he must and most likely will deal with the tribal gaming situation very quickly.

First, Schwarzenegger has pledged to make tribal casinos pay their fair share of taxes. This may not have a noticeable effect on gaming in Nevada.

But the tribes are clamoring to expand their gaming operations, and Schwarzenegger may use that as a bargaining chip. It seems likely that the state will allow tribes to add up to 2,500 slot machines to their already 2,000 slot machines permitted per casino.

With nearly 50 tribal casinos in the state, the effect on gaming in Nevada could be significant. Especially in the Reno-Carson City area, which relies heavily on drive-in traffic from the Bay Area and Sacramento.

The expansion of slot machines in California has another face. Because of a loophole, tribes may be able to circumvent the law restricting slots by installing Class 2 gaming machines. These so-called "bingo" or "lottery" machines are virtually the same as regular (Class 3) slots and it is expected that, even if the state won’t permit additional slots, the tribes will pursue Class 2 machines. This leads us to our next significant story:

2. Class 2 Gaming: Currently, 53 tribes operate about 62,000 slot machines in California. One market analyst, Jefferies & Company, estimated the demand for Class II machines in California could be as high as 55,000 machines.

That figure, coupled with demand from other jurisdictions, could open up a world of opportunity for slot manufacturers.

International Game Technology (IGT), the world’s largest manufacturer of slot and gaming machines, is poised to capitalize on the boom, should it occur.

IGT already has a Class II prototype machine, which could take up to 60 percent to 70 percent of the Class II market.

Another major manufacturer, Alliance Gaming, has positioned itself to service the Class II market with the acquisition of privately-held Sierra Design Group (SDG), a leading supplier of Class II gaming devices, systems and technology.

3. Foreign Gaming: By "foreign," we mean gaming that extends beyond Nevada’s borders. Although one Nevada operator was once warned that trekking beyond the state line was like "walking through a mine field with clown shoes," casino operators are instead finding a bonanza in other locales.

Station Casinos has been highly-successful with its approach to operating Las Vegas-style casinos outside of the state. Notably, its Thunder Valley casino, which it runs for a percentage of the revenue, is one of the most successful casinos in California.

Indeed, Thunder Valley, if it operated in Nevada, would be only second to the Bellagio in revenue generated.

Station is hoping to duplicate that success with other tribes, and are in the process of developing casinos sites in California and Michigan.

Another operator, Harrah’s, has thrown its festive cap into the ring by teaming up with Great Britain’s Gala Group, the country’s leading mid-market gaming operator.

The joint venture calls for Harrah’s and Gala to build a network of up to eight "world-class" regional casinos, each consisting of 30,000 to 50,000 square feet of gaming space, along with dining and entertainment facilities.

And, of course, Steve Wynn and Sheldon Adelson are both pursuing new casinos in Macau. Look for other operators to soon hop on the bandwagon.

4. Sin is back in: Although no one admits the "family destination" campaign of the 1990s was a bust, Las Vegas has jettisoned its kiddie attractions and re-focused on providing adult entertainment. And it has done it in a big way.

"Sex is back with a vengeance," says Heather Kovacs, who designed the new Risque ultra lounge at Paris Las Vegas.

The move back to Las Vegas’ roots is apparent everywhere. Treasure Island’s wholesome pirate battle was revamped (Freudian slip?) with a bevy of "sirens," buccaneer showgirls who add spice to the outdoor action adventure.

Cirque du Soleil deviated from its inherently family-oriented productions with the introduction of Zumanity at New York-New York. Definitely for the over-18 crowd, Zumanity is a surreal adventure that seems to celebrate, though not very subtly, human sensuality.

Changes are apparent inside the clubs and casinos as well. Even going to the toilet can feel a little risqué. Walk into the restroom at Risque, for instance, where you’ll find the sexes separated only by a translucent wall that goes just part of the way up. You can even see shadows and hear sounds of what goes on on the other side. Even if you don’t want to!

5. Taxation without representation: Although gaming taxes in Nevada have been relatively stable over the years, they took a dramatic turn in other jurisdictions. In fact, spiraling taxes on gaming revenue could have a significant role in shaping the gaming industry’s future in some states. Because of holdings in those states, Nevada operators could be affected..

The most troubling trend has been the rash of increased taxes on gaming revenues at the state level, according to Frank Fahrenkopf, Jr., president and CEO of the American Gaming Association (AGA).

"State legislatures have turned to gaming as a source of new or increased taxes to shore up budget deficits and shortfalls," said Fahrenkopf, citing Illinois as an example of runaway tax rates, which were increased to a 70% marginal bracket last year.

But rather than raise needed funds for the state, higher taxes have actually had a detrimental effect, Fahrenkopf said.

"Unfair tax rates have had the opposite effects of their intent, which is to raise revenue for the state," Fahrenkopf said.

In Illinois, Fahrenkopf said, the immediate impact of higher gaming tax rates has been a 10% drop in casino revenues, a reduction of casino hours and the halt of any new capital investment in gaming.

Moreover, higher admission rates at Illinois casinos (riverboats may charge admission to patrons) have driven some customers to nearby Missouri casinos.

"Since the increased taxes in Illinois, revenue at Missouri casinos has increased 5 percent," Fahrenkopf said.

Fahrenkopf has vowed that the AGA, a national trade organization for the commercial casino industry, will focus some of its resources at the state level to educate officials about how sensitive gaming is to unfair taxes, and lobby against any unwarranted increases.