The End of Empire-Building?

The American gaming scene is changing. Call it maturation, or an adaptation to the post-recession, long-recovery economy, but the industry is shifting. For the past generation, expansion has been the rule, not the exception. That’s not the case anymore, and Las Vegas will have to adjust to a new paradigm.

The gaming “industry” emerged in the late 1960s, as Nevada casinos went public (Harrah’s, Showboat and several others) and publicly traded companies bought casinos (most notably Hilton and Lum’s, which subsequently became Caesars World). In Las Vegas, all the fun of the previous 20 years—skimming and mob influence—continued for a time, but in general cement shoes were out and slide rules were in.

By the time Atlantic City opened its door to casinos in 1976, the industry was sufficiently nimble that it was able to invest in the new market. Those that did, like Harrah’s and Caesars World, discovered that profits from the new East Coast gambling haven far outpaced those from Las Vegas. By the end of the next decade, Bally’s—a company that built its first casino in Atlantic City—had bought Kirk Kerkorian’s Reno and Las Vegas resorts, and a minor downtown operator, Steve Wynn, used the design and financing tricks he’d learned in New Jersey to build The Mirage on the Las Vegas Strip.

From there, the national gaming industry exploded. During the 1990s, state after state legalized casinos. Nevada-based companies were typically in the vanguard in new markets, and when they weren’t, they bought the local and regional operators that were. The industry even reached a rapprochement with tribal-government gaming, which it initially opposed. Casinos on Indian lands might cut into their customer base, but management contracts were lucrative.

It was a perfect feedback loop: Expansion fueled growing profit margins, which made money cheaper to borrow, which in turn encouraged more expansion. In the early 2000s, the industry consolidated in Las Vegas, with four major players (Wynn, Sands, Caesars/Harrah’s and MGM) left on the Strip.

Then the bottom fell out. Companies with most or all of their business in Southern Nevada, like Herbst Gaming and Station Casinos, were driven into bankruptcy. Boyd remained afloat, but canceled its under-construction Strip megaresort, Echelon. The two Strip giants, MGM Resorts International and Caesars Entertainment, staved off bankruptcy through a combination of asset sales, cost-cutting and pushing back debt maturities. Only operators with a solid footprint in Asia—namely, Las Vegas Sands and Wynn Resorts—seemed bulletproof now, and even they no longer looked so mighty domestically.

As 2012 began, most industry observers were optimistic. A recovery seemed to be taking root in Nevada, steadying the balance sheets of companies with significant exposure there. Asia, meanwhile, buoyed Sands, Wynn and, to a lesser extent, MGM. For those locked out of Asia, domestic expansion in markets such as Ohio, Massachusetts and Mississippi, offered growth prospects.

Eight months later, few observers are so sanguine. Expansion in New York and Pennsylvania has hurt markets like Atlantic City and Connecticut, and the rollout of casinos in Ohio may have led to a decline in Michigan. National unemployment remains high, and consumer confidence continues to lag.

National growth is no longer in the pipeline for most Las Vegas-based gaming giants. Casinos in Texas, Florida and Kentucky remain possible, but even those states would likely draw from existing markets. The overall casino spend is a necessarily finite number, and we may be bumping up against its ceiling.

In Las Vegas, things look even murkier. Gaming revenues fell in June and are substantially flat for the year; they had been projected to rise. Since the new year, more people have come to Las Vegas, but they continue to gamble less.

Both trends—slowing national gaming expansion and stagnant Las Vegas gaming revenues—are converging, signaling a definitive end to the chapter of casino history that began in the late 1960s. Gaming companies have, for the most part, won their empires; now they have to govern them.

With money harder to come by, there won’t be any more big corporate acquisitions, and it’s likely that the big players may continue to sell off assets. MGM and Caesars in particular will look to grow through strategic partnerships with regional operators and related hospitality industries. Even without growth, the gaming industry will survive.

That’s if things stay as they are or improve; if there’s another downturn, the Strip could see the same bankruptcies the locals market saw at the recession’s height. During the restructuring, it’s likely that visitors won’t even notice the difference, but there could be considerable changes behind the scenes, including more asset sales and reorganization.

Of course, even with tighter credit and more limited growth prospects, gambling will continue—its culture is as old as recorded history. But the party-without-end that ended five years ago isn’t about to begin again anytime soon.

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