Casino Concentration and the Logic of Empire

Consolidation looks like a bad move for operators, customers

For the Las Vegas casino industry, the past decade has been defined by two things: consolidation and disaster. From 2000 to 2008, Las Vegas Strip casino operators acquired each other until two companies—today they are known as MGM Resorts International and Caesars Entertainment Corporation—controlled nearly two-thirds of the Strip corridor casino market. The following three years is where the disaster, in the form of the recession, comes in. The timing of the two makes it difficult to assess whether the mergers were good or bad, on the balance, for Las Vegas, but the evidence we have indicates that we would have been better off with less-concentrated ownership.

It all began in 1999, when Caesars (then Harrah’s Entertainment) bought the Rio, doubling its Las Vegas footprint. The following year, MGM Grand Inc. bought Steve Wynn’s Mirage Resorts, creating MGM Mirage. Then, in two mergers that were announced in June/July 2004 and consummated in 2005, Harrah’s bought Caesars (formerly Park Place) Entertainment, and MGM Mirage bought the Mandalay Resort Group. In 2005, Harrah’s bought the Imperial Palace (now the Quad) and, in 2007, the Barbary Coast, which it then renamed Bill’s before closing it in preparation for rebirth as Gansevoort Las Vegas. And in 2010, shortly before it renamed itself Caesars Entertainment, the company bought Planet Hollywood, completing its Strip collection.

At the time, executives promised that the mergers would lead to more profitable companies that generated higher revenues; others opined that, with their economies of scale, the companies could deliver better-quality service for lower prices and ratcheting up the competitive pressure on other resorts. The ultimate benefits of the mergers—better experiences for the customer and higher profits for the companies—would justify the resources expended on them.

Yet these benefits failed to materialize. MGM’s stock price remained steady in the year after the merger, and while it did grow by 55 percent in 2006, Wynn’s rose by 60 percent and Las Vegas Sands’ rose by 57 percent in that year, suggesting that skilled operators were getting similar gains without saddling themselves with merger-related debt or organizational unwieldiness. Harrah’s saw an even smaller increase in its stock price. Similarly, MGM’s revenues and profit margins initially grew at a lower rate after the Mandalay acquisition, and while both would skyrocket in 2006-07, well, so did everyone’s.

Looking at the impact on consumers, it’s equally difficult to discern what quantifiable benefits consolidation has had on prices. In 2004, the average daily room rate in Las Vegas was $89.78. By 2007, well after any consolidation-based cost efficiencies should have been realized, it had risen to $132.09—a 47 percent increase in just three years, which hardly speaks to two companies with massive slices of room inventory delivering better value. True, in the next two years room rates fell back to nearly their 2004 levels, but that is because too many rooms were competing for too few customers, as seen by the plummeting occupancy rate.

Concentrated ownership likely eased the rollout of resort fees, which are purported to grow revenue but also can alienate customers. The fees started gaining traction in post-recession Las Vegas. Caesars Entertainment initially held out against them but reversed course earlier this year. Similarly, the introduction in multiple casinos of 6/5 blackjack, which pays winners 20 percent less on a natural blackjack than traditional 3/2 blackjack, has been made possible by concentration. For the consumer, the major benefit of concentration—the broader range of resorts to accrue and redeem loyalty club points—may not make up for the value lost to higher room rates, resort fees and decreased game odds.

The worst effect of consolidation might have been that it broadened the ambition of the operators. They no longer were content with running popular casinos; instead, they wanted to play real estate developer and “transform” Las Vegas. Caesars’ credit ran out before it could begin executing its east-Strip master plan (of which the sensible Linq is a scaled-down version). Meanwhile, CityCenter—whose initial mixed-use premise was flawed despite the success of Aria as a stand-alone casino—is like the first-time gambler pushing his life savings onto the layout after an early run of luck.

In short, concentration produced companies well-suited to the flush years of the mid-decade, but poorly adapted to recession and post-recession Las Vegas. Economies of scale did not make up for reduced institutional flexibility. Smaller, in this case, might have been better.