Exercise
Intensity of Competition in the Casino Gambling Industry
INSTRUCTIONS
Read the description of the casino gambling industry below. Respond to the
questions that follow in order to evaluate the intensity of the forces and their
impact on the profitability that can be attained in the industry.
The Casino Gambling Industry in the United States:
Expansion and Competition
ompared to industries such as the traditional hotel business, the gambling industry
is not mature. Up until 1988, legal casinos operated in only New Jersey (Atlantic
City) and evada. During the 1990s, gambling revenues increased largely as
a result of geographical expansion into the Midwest and the South and to new
investment in Las Vegas. Today more than 20 states allow gambling. In fact, much
of the industry's expansion is due to casinos being allowed on Native American land
in various states.
The casino gambling industry includes more than 450 legal casinos in the United
States that offer customers the opportunity to play coin-fed machines and table games.
This industry group does not include facilities that focus on bingo, or other facilities such
as racetracks in Delaware and Iowa, where casino activity is limited to coin-fed machines.
Revenues, which are the amount of money wagered less the winnings paid to players,
totaled approximately $58. 7 billion in 2007.
Table 6.1 shows a breakdown of facilities and revenues by location.
TABLE 6. 1 CASINO GAMBLING FACILITIES AND REVENUES BY STATE, 2007
Location Number of Facilities Revenues
Nevada (statewide) 274 casinos in addition to smaller facilities, such as
$12.8 billion
taverns and retail stores, with video poker machines.
Atlantic City, NJ 11 high-volume casinos $4.9 billion
Mississippi, Indiana, Illinois, Louisiana, 83 water casino projects (some consisting of more than
$11.8 billion
Missouri, and Iowa waterways one casino boat)
Detroit, Ml 3 casinos
New Orleans, LA 1 land-based casino $2.7 billion
Colorado; Deadwood, SD 50 limited stakes casinos
Note: The remainder of industry revenues is from casinos on Native American land.
Although more than 20 states allow gambling, the industry is highly regulated, and
the introduction of casino activity requires licenses or agreements with state authorities.
A significant form of regulation is taxation. In some markets, the state or local tax on
casino winnings may be less than 10%, while in other markets it exceeds 20%.
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40 Session 6: Forces Affecting Competitive Strategy
The casino industry faced its steepest slump in 2008 due to the recessionary economy
and the tough financing environment. The housing market decline and concerns about
unemployment affected consumer discretionary income. A reliance on revenue from
conferences and conventions also increased the industry's sensitivity to the economy.
Native American Casinos
The ative American Gaming Regulatory Act of 1988 gave Native American tribes the
right to negotiate for the development of a gaming facility. Based on data from the federal
regulatory agency known as the National Indian Gaming Commission, more than 200
of approximately 550 Native American tribes in the United States own and/or operate
casinos in the nation. The highest volume projects are on Mohegan and Mashantucket
Pequot land in Connecticut.
The growth of ative American-owned gaming creates opportunities for other casino
companies to provide management services. Although outsiders cannot own Native
American gambling facilities, they are allowed to manage properties under contract.
Variation in Casinos
In the United States, individual states have the power to grant new casino gambling licenses
and to regulate the industry. Because of the diverse state regulations, there is considerable
variation in the appearance, scope, and location of new casinos. In some states, projects
have developed in stages. A boat with gambling can be opened quickly. As of year-end 2007,
about 81 water-based casino projects were open in Iowa, Illinois, Mississippi, Louisiana,
Missouri, and Indiana. After Hurricane Katrina, legislation was passed in Mississippi
allowing casinos to be placed up to 800 feet inland from a high-point tide.
If the riverboat operation is favorable and if financing is available, a company can
enlarge its gambling space and add related facilities, such as hotel rooms. Finding ways
to differentiate casinos is an important competitive advantage, particularly since casino
floors with slot machines and table games look alike. The Las Vegas Strip uses special
themes and attractions to create different settings, such as ancient Egypt, a pirate ship,
and a castle. Companies such as Harrah's Entertainment are developing strong brand
recognition among customers. Proximity to interstate highways and major population
centers is an advantage for new gaming facilities. Also, some companies target specific
groups of customers. Boyd Gaming targets residents of Hawaii and operates six weekly
charter flights from Honolulu to Las Vegas.
Abandoned Projects
Up until February 2008, low interest rates, high real estate values, and solid cash flow attracted
many private equity deals in the gambling industry. However, the credit crunch resulted in
Harrah's cancellation of a $2.1 billion resort in the Bahamas. In Las Vegas, foreclosure
proceedings began on the Cosmopolitan. This project had estimated construction costs
of $2 billion, and ended up with costs of $3.9 billion. Developments that need additional
funding, such as the Las Vegas Sands project in Singapore, may also be put on hold.
Internet Gambling
The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) was meant to force
banks to block payments to gambling Web sites, and it required that the Federal Reserve
and the Treasury Department issue regulations on identifying and blocking Internet
gambling transactions. As of April 2008, the director of the Division of Reserve Bank
Operations and Payment Systems noted that in recent years, card issuers and money
transmitting businesses initiated steps that make funding for gambling on the Internet
more difficult. However, some banks have concerns about their role in determining which
transactions should be blocked under the law. The American Banking Association has
complained that the law pushes banks to the position of policing illegal activities.
The European Union is launching an investigation of whether the law violates
international trade rules. The EU trade commissioner suggested that the U.S. could
be selectively enforcing the law against EU companies. Although Financial Services
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Part li: Designing Strategy 41
Chairman Barney Frank proposed Internet Gambling HR 576, which would delay the
implementation of the law until a definition of unlawful internet gambling was developed,
the House Financial Services Committee rejected the bill on June 25, 2008. Thus, despite
the issues associated with implementing UIGEA, the law will not be overturned.
Industry Structure
The U.S. casino gambling industry has become more consolidated over time due to
acquisitions and internal growth. The largest company, ranked by casino winnings, is
Harrah's Entertainment, Inc. This company was taken private in 2007.
China, however, is changing the structure of the industry. One of the world's hottest
gambling markets is Macau, the only part of China where gambling is legal. The Macau
casinos generated $3. 71 billion in gambling revenue during the first three months of 2008,
which is more than their counterparts in Las Vegas and Atlantic City combined. As a
result, international properties, such as those in Macau, are changing the structure of the
U.S. industry. This is similar to the situation that occurred with the automobile industry.
Gambling promoters for Galaxy Entertainment Group, one of six licensed casino
companies in Macau, have become very aggressive in increasing the supply of VIP customers
from mainland China. These mega-junkets are causing concern for casino operators such
as Wynn Resorts, MGM Mirage, and Las Vegas Sands whose stock prices have declined
in part because of increasing challenges they face doing business in Macau.
Suppliers
International Game Technology (IGT) designs, manufactures, and markets computerized
gaming equipment, systems, and services. The company is the largest supplier of slot
machines and is headquartered in Reno, Nevada; and the slot machine industry is
highly concentrated. IGT business expansion has occurred through acquisitions and
the development of strategic alliances. For example, in 2005 IGT acquired a Canadian
distributor, a provider of Internet gaming technology, content, and services, and a
provider of consulting services and technology in the gaming and hospitality market. In
2007, strategic agreements were established in the China lottery market.
Although casino revenues are expected to decline, gaming machine sales will increase
due to a shift to server-based slot machines. This will result in demand for replacement
equipment at casinos.
Transportation
For many of the larger gambling properties, customers arrive by airline, especially business
and vacation travelers. Although fares for air travel rose substantially in 2007, airlines
have offered fare sales. Automobiles are the primary means by which customers travel
to casinos. The smaller, regional, and Native American gambling markets are negatively
affected by the gasoline prices.
Activists
Although many residents of communities where commercial casinos are located support
casino gambling, many other groups do not. Various churches, ad hoc citizens' groups,
and national organizations such as the National Coalition Against Legalized Gambling
protest legalized gambling because it comes with a high social cost in the form of addiction.
They argue that youth are drawn into compulsive gambling habits at double the rate
of adults, and that gambling has hidden negative economic impacts, such as diverting
revenue that would be spent at local businesses. This, in turn, results in increased costs
to the state from bankruptcies, addiction treatment centers, and the penal system. These
organizations also point to the fact that when state governments depend on casinos for
tax revenue, it puts the government in a compromised position. Government now has a
vested interest in encouraging its citizens to lose money.
Casinos have attempted to address these concerns much like the alcohol companies
that encourage responsible drinking. Most casinos post phone numbers for Gamblers
Anonymous at their cashier windows and provide literature with information on problem
42 Session 6: Forces Affecting Competitive Strategy
gambling. Underage gambling is not allowed, and many casinos will not even permit
minors in the gambling areas.
Complete the information below and identify the intensity of each of the forces of competition:
l. Rivalry Among Existing Firms High Medium Low
a) Define the casino gambling industry.
b) What is its level of concentration?
2. Threat of New Entrants High Medium Low
What are the barriers to entry into this industry?
3. Bargaining Power of Suppliers High Medium Low
a) Who are the suppliers?
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b) Discuss supplier bargaining power.
4. Bargaining Power of Buyers High Medium Low
a) Who are the buyers?
b) Discuss whether the buyers have bargaining power.
5. Threat of Substitutes High Medium Low
What other substitutes limit the sales and profits for firms in this industry?
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6. Relative Power of Other Stakeholders High Medium Low
Who are other major stakeholders?
7. Relative Power of Complementors High Medium Low
Who are the complementors?
8. Now that you have analyzed each of the forces of competition, discuss the implications of the above levels of
intensity.
a) Which forces of competition are most threatening now? Which do you expect will change over the next,
say, five years?
b) What are the implications in terms of profit margins in this industry today? Over the next five years?
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c) As the CEO of a firm in this industry, what actions does this analysis suggest you implement in order to
strengthen your competitive strategy?
d) As an advisor to a potential entrant, would you recommend entry? What steps would you advise them to
take?
