An Analysis of Gaming News and Trends by Ken Adams
Fourth Quarter 2019
Entering a New Decade
Across the globe, one time zone at a time, the citizens of the world celebrated the beginning of new year 2020, the start of the third decade of the 21 st century. A great deal happened during the decade that ended on December 31 st . The world stage has changed in many ways. Across the globe, the economy was important for the past ten years, but for much of the decade social unrest grabbed the headlines.
In the Middle East, Osama bin Laden was killed and Al Qaeda lost its prominence. The Arab Spring exploded out of a simple protest, and protests spread across North Africa and beyond. The Arab Spring was followed by the Syrian civil war, which lead to the rise of the Islamic State. New leaders have now taken control throughout North Africa. Turkey, Iran, and Russia have taken on much stronger roles in the battlegrounds around Syria and with the Islamic State; Yemen is again embattled; Libya is starting to resemble a proxy war.
In the past decade, China’s long-term strategy to be the number one economic power in the world became more obvious to the West. One tactic in that strategy is the “Belt and Road”, a grand design to link China and the rest of the world, giving China a financial stake everywhere from China to Europe and Africa. China is using its gambling hub, Macau, as part of its strategy. The past decade was one of dynamic growth in Macau as casinos invested billions to increase their appeal to international tourists. Annual gaming revenues in Macau have gone from $15 billion to $35 billion. As the new decade begins, China is suggesting that it will make Macau a financial center, possibly bypassing protests and unrest in Hong Kong.
In Europe the scent of independence was in the air. Catalan wanted to separate from Spain, Great Britain voted to leave the European Union, and Scotland then wanted another referendum for leaving Great Britain. The citizens of France did a very French thing, going into the streets and manning the barricades, sometimes wearing yellow vests and sometimes not. Refugees and other immigrants from the Middle East and Africa spilled into Europe, provoking support for right-wing parties throughout the continent.
In the United States, we concentrated on the economy and on consumer spending, which fuels our country. Right now, consumers are spending. But when the decade began, we were not sure that the Great Recession would ever end. Although we were told it had technically ended, in most industries and states that was hard to see. Unemployment stood at 9.9 percent, the GNP for 2009 was $14.449 trillion, and car sales for the year were only $10.3 billion.
At the beginning of the decade, the Dow Jones Industrials Average was at 10,428. But as 2020 dawned, few were talking about a recession, great or lesser. The Dow ended 2019 at 28,538, up 22.3 percent for the year. Unemployment was 3.5 percent, the lowest in 50 years. The GNP was $20.580 trillion, cars sales hit $17 billion, and housing sales were up 25 percent from a decade ago. Foreclosures, government layoffs, and gloom-and-doom forecasts were a thing of the past. But for the gaming industry, the Great Recession shaped the entire decade.
The recession caught local and state governments unprepared: revenues no longer covered expenses. The only U.S. government that can operate year after year with a negative cash flow is the federal government; it can incur as much debt as Congress is willing to authorize. By contrast, local governments were trapped by falling revenues, unbending fixed costs, and limited reserves to draw on. In particular, police, firefighters and other unionized civil servants had agreements for automatic pay increases, liberal health insurance, and generous retirement plans. Layoffs and drastic service cuts became the rule of the day, but rarely can a government cut its way out of a deficit. At some point it is necessary to increase revenues. Enter gaming expansion. Expanding gaming was a common topic in state legislatures, with tough economic times changing many anti-gambling minds.
In 2009, Illinois did not have VLTs. New York, Maryland, Massachusetts and Ohio did not have casinos. Pennsylvania casinos did not have table games. But 2009 was a pivotal year. Driven by the need for more tax revenues, several states passed expansion legislation. Illinois was among the first of the states to use gaming for that purpose. The act that created a legal VLT industry in Illinois was signed into law by Governor Pat Quinn in 2009.
2009 was a very difficult year for Illinois. The state was facing a large budget deficit and billions of dollars of infrastructure projects were desperately needed. Quinn did his best to balance the budget by cutting expenses and raising taxes, but for the capital projects he needed something else. To the newly-elevated governor, video lottery terminals seemed like the perfect solution. Opening the potential revenue stream would be easy and quick: no new bureaucracy would be needed, nor would the state have to find mega-casino companies willing to spend millions for licenses and then billions building new casinos.
The idea that the new revenues could start quickly flowing proved not to be true - it took nearly three years for VLTs to start taking – and making - money. The state’s gaming commission thought it needed to spend time developing regulations and licensing games. Each community could opt out if it chose, an emotional and polarizing decision almost everywhere. Opting out was quite popular in the beginning, but as revenue figures started to come in from the communities that had opted in and had licensed multiple VLT outlets, communities began to revisit their previous decision.
Since VLTs began in Illinois, the annual growth rate for both the number of units and VLT revenues has been in double digits, year after year. At the end of 2013, the first full year of VLT operations, there were 13,000 units that generated $307 million in win; in 2019 there were 33,000 units that generated $1.8 billion in win. There was a negative: casino revenue fell steadily as VLT revenue rose, because some casino customers decided to spend their money at their local VLTs. The state’s ten casinos generated $1.3 billion in 2019, down from $1.6 billion six years earlier. But the combined VLT and casino revenue in 2019 was still about $1.5 billion more than in 2013.
In Ohio in 2009. voters approved a constitutional amendment authorizing four casinos, in Cleveland, Cincinnati, Columbus, and Toledo. Similar measures had failed numerous times in the preceding 20 years; it was the magic of a great recession at work that made the difference. The state’s governor, John Kasich, wanted a bit more tax revenue and more gaming options. He didn’t want VLTs in social clubs, bars, and truck stops, like Illinois – he wanted them limited to racetracks. Kasich convinced the legislature; in 2011 it passed enabling legislation. In 2012, the first year of full casino operations, the casinos posted $430 million in revenues. In 2019, Ohio’s 11 casinos and racinos took in a record $1.94 billion in gambling revenue. The four casinos posted $851 million in 2019, with the seven racinos at $1.088 billion. Since 2012, the cumulative gaming revenue has been $11.9 billion.
Ohio and Illinois are good models for the expansion that took place during the last decade. In those years Kansas, Maryland, Massachusetts, and New York also authorized casinos. In 2019, the total reported revenues, nationally, from casinos, VLTs, online gaming, and sports betting was over $42 billion. Ten years earlier the reported total was $34.3 billion, without no online wagers, and with sports betting only in Nevada. The past decade was also one of significant growth in in Indian gaming. Although no new states authorized Indian gaming between 2009 and 2019, casinos were added in the major markets of California, Oklahoma, and Washington. In the decade, estimated Indian gaming revenues increased from $26.8 billion to over $34 billion.
The decade also saw growth in lotteries and horse racing handle. (Caution: the following numbers are not equivalent to the casinos numbers; they are gross sales, not gross win.) Lottery sales went from $58.2 billion in 2009 to $77.7 billion in 2018. The growth was primarily due to the two nationwide lottery systems: Powerball and Mega Millions each now link 44 state lotteries to their respective big jackpots. Weekly jackpots routinely exceed $200 million and have a dramatic impact on lottery sales. In fact, the dramatic growth and success of Powerball and Mega Million can also be traced to the Great Recession. State lotteries were looking for ways to increase sales, and linking into a national system served that purpose. Horse racing went in the opposite direction during the decade, with the handle dropping from $12.9 billion to $10.8 billion in 2019. Many tracks have remained viable only by adding slot machines in the way that Ohio did. For legislators pushing for slots at the tracks, the battle cry was saving jobs in the industry.
The Great Recession can be given credit for most of the gaming expansion that has taken place in the last ten years. But with the economy now chugging along like a freight train, recession is no longer the driving force. As we enter the third decade of 21 st century, expansion has found a new driver - sports betting.
As a friend of mine said, we might call the upcoming decade the Chris Christie Sports Era of Expansion. When Christie became governor of New Jersey in 2010, the casino industry in that state was in what appeared to be a downward and terminal spiral. Christie worked to get regulations streamlined to make operating a casino easier and less costly in Atlantic City. He worked to rekindle interest in investing in Atlantic City, and was instrumental in getting funding for the uncompleted Revel casino. And he pushed for legalizing sports betting. The regulatory efforts were mostly successful. His efforts at rekindling interest did not bear much fruit; the oppressive competition from Pennsylvania was too overwhelming. But he did get his sports betting legislation
That legislation lead to the Supreme Court. The professional sports leagues alleged that the New Jersey law violated federal law - the Professional and Amateur Sports Protection Act. The U. S. Supreme Court sided with New Jersey. It ruled that without specific federal law regulating sports betting it was up to the states to regulate sports betting within their boundaries.
That decision was handed down less than two years ago. Since then, the national sports handle has already exceed $10 billion dollars and is growing at an exponential rate. Eighteen states have authorized legal sports betting, and more are expected to approve it in 2020. Unlike the casino and VLT expansion, sports betting has not been a one-size-fits-all. Every state frames the issue differently. In some states betting is restricted to a physical location in a casino. In others it is allowed at kiosks in other locations, including in the sports venues themselves. And finally, there are states that permit bets to be made from a mobile device or on a computer. (Katie bar the door!)
No economic situation lasts forever. The national economy is constantly in motion, going either up or down. Today it is definitely going up, but unfortunately that means that a downward turn is certain to happen sometime in the future. However, neither an upturn or downturn is apt to affect the growth of sports betting, at least in the next few years.
There were times during the breakneck expansion of the last decade where it seemed to me that it would all end badly. At some point, casinos would simply run out of new customers and the existing customers would be divided up between so many casinos that no one could make a profit and survive. Sports betting is changing that gloomy forecast.
There are millions and millions of rabid spots fans willing and eager to make a friendly wager. In the desire to convert those fans into customers, betting company operators are not alone. The sports leagues are doing everything in their power to capture part of the action. The leagues are developing technology and techniques for gathering data, which of course will be sold to the betting companies. (Want to bet on whether the next home run will go more than 400 feet?) Also doing its part is the national media. Newspapers, televisions and radio stations and podcasts covering gambling on sports are multiplying like rabbits. And these are still the early days, with the sports leagues and the media just beginning to develop special products.
Whether or not we call the new decade the Christie Sports Decade, it will be the Sports Decade. And for his role, Chris Christie should be an immediate inductee into the Gaming Hall of Fame. The upcoming decade will also see more casino expansion, with Virginia, Georgia, and Arkansas on the short list for 2020. When casinos open in those states, it will be an important story, but not the story. For the foreseeable future, sports betting will be the story of the day, month, and year. In fact, it is going to be one of the major themes in the gaming narrative for at least the rest of this new decade.