Gaming goes soft


Las Vegas CityLife

November 1998

Pride goeth before the fall.

Whether referring to the ever-cocky Steve Wynn or Las Vegas' entire gaming industry, that biblical injunction may never be truer than it is today. Who else but Wynn would brag that Bellagio is the kind of hotel God would have built if he had the money? Where else but Las Vegas would such nonsense be worshipped?

But this isn't about religion or hackneyed comparisons with Sodom and Gomorrah. This is about business. And the louder the hucksters shout on the Strip, the more desperate and hollow they sound.

Just two years ago, Wynn himself warned that Las Vegas was in danger of being overbuilt. His widely quoted address advised Nevada gamers to concentrate on quality, not quantity. That admonition has been flushed down the collective memory hole, as Strip hotels have embarked on an unprecedented building binge.

In addition to Bellagio's 3,000 suites, 17,000 more rooms are due to come on line in the next 18 months. Boosters from the Chamber of Commerce to UNLV say the construction craze will make a bigger and better Las Vegas. These shills pooh-pooh suggestions of a glutted market, noting that Wynn proved the naysayers wrong with the Mirage in 1989. They predict he will turn the trick again.

Such unbridled optimism has become conventional wisdom here. The bulls may not be running on Wall Street these days, but they're stampeding on the Strip.

And that's spreading a lot of bullshit.

'A shakeout coming'

Despite all the fawning over Wynn & Co.--we've stopped counting the number of times he's been called a "genius"--there are cracks in the vanity. Tourism numbers are down. Gaming revenues are squishy soft. Airline traffic is down. High-rolling baccarat players have disappeared in the Asian rubble. And now full-scale Nevada-style gambling looms in California.

"I think we've seen our best days as a gaming venue," says UNLV history Professor Hal Rothman. "It looks like all bets are off. There's a shakeout coming."

Rumors are swirling that Station Casinos and Boyd Gaming will be sold within 60 days. Neither company would confirm those reports. But it's no stretch to say many second-tier casinos are teetering. Tellingly, the Tropicana, Riviera and other aging properties are taking a wait-and-see approach before making any investments.

They may be holding back because they're not holding much money here. As gaming revenues slump, so have stocks. Even though the index of 14 gaming companies has plummeted 40 percent in the past year, advisers aren't finding any bargains.

Things look particularly bleak north of Spring Mountain Road, says David Ehlers, president of Las Vegas Investment Advisors. He was stunned to see the Stardust announce a $24 million face-lift at a time when its revenue and margins are in a tailspin. "That's a bit like locking the door after the horse is stolen," he says.

If Bellagio is going to take the Strip to the next level, it's taking a circuitous path. Analysts forecast the hotel will pull an estimated $53 million in business from its sister resort, The Mirage. Ehlers calls that the "crater effect." What's worse, Bear Stearns estimates only a 13.2 percent net return on investment in Bellagio's first year. That's significantly lower than the 20 percent initially yielded by Mirage and Treasure Island.

Mirage Resorts spokesman Alan Feldman takes the prognostications in stride. "There is a big discussion on financial performance, but that's not going to impact whether people will vacation at Bellagio. We'll let the public decide."

At this point, the public isn't sure. Certainly the market dynamics are different than a decade ago when The Mirage opened. Las Vegas' room occupancy rates, while still above national averages, are lower today. Many hotels are slashing nightly rates and offering discount promotions this fall, typically a strong tourist season. Even Bellagio hedged its hyped-up elegance by installing nickel slots. And even then it had empty rooms three days after the grand opening, according to Bellagio employees.

Workers on the Strip are seeing a different attitude among customers--and they say it spells trouble. Not only are tourists betting less, but they're demanding more, says Brian, a Flamingo Hilton worker who didn't want his last name published. Increasingly, employees feel squeezed between stingy patrons who don't tip and bottom-line managers who won't comp.

"It's just not fun anymore," he says. "The bean counters are in control."

After 14 years, Brian and his wife are ready to leave Las Vegas.

Colony and colonizer

Casinos have been getting out of town for years, of course. And that may be the nub of the problem. Nevada-based gamers are investing more than $15 billion (the equivalent of 10 Bellagios) in Mississippi, New Jersey and throughout the Midwest. And we're not just talking about chintzy boats in moats. Wynn's Le Jardin in Atlantic City and Beau Rivage in Biloxi are being touted as full-service resorts and convention centers. MGM and Circus Circus have similarly grandiose plans for Detroit.

The casinos' outward-bound experience is sound business, according to Wall Street. Prudential Securities analyst Joe Coccimiglio says while revenues are declining in Las Vegas, they are improving just about everywhere else. "In mature markets like the Las Vegas Strip, where room rates and occupancies are under pressure, simply adding rooms negatively impacts the market," he says.

Has the city finally reached its saturation point? Has its gaming growth curve flattened for good? Is the expansion of casinos in other markets coming at our expense?

UNLV's Rothman, author of the new book Devil's Bargains: Tourism in the Twentieth Century American West, answers with a little history. He notes that this desert oasis started as a quintessential colony, built with mob money and then becoming a corporate cash cow. But the out-of-towners didn't feel any deep loyalty to Nevada. In fact, Rothman writes, "Only the legalization of casino gambling in Atlantic City and large profits that investors raked in persuaded East Coast and California banks that Las Vegas might be a legitimate place in which to invest."

From this perspective, rootless investors driven by the imperatives of profits are placing increasing pressure on Nevada casinos. Which explains the corporate wanderlust that has pushed gaming into 26 other markets across the country. The colony has become the colonizer.

Still, Rothman believes Las Vegas can reinvent itself, and generate new business. Having evolved from Sin City to Disneyland, it is ready for the next transmogrification.

"There are two basic revenue flows, gaming and tourism," he says. "We're going to see more emphasis on entertainment...a luxury experience for the middle class. There's new stuff coming on the Strip that will knock your socks off."

The mysterious project is tightly under wraps, but there is speculation that Wynn plans a major attraction on the parcel he purchased just south of Bellagio. Whatever it is, it'll be big, since he paid more than $100 million for the 10-acre plot fronting on Harmon Avenue.

Gaming's critics, including former Las Vegas City Councilman Steve Miller, are not impressed.

"I predict that by the year 2000 Nevada will begin to experience a recession, a recession of our own making," he says. "The gaming companies that expanded into other markets will admit that their profits have begun to lag in Nevada because of outside competition, but they will be more than happy because their total bottom lines will increase nationwide."

The threat from within

Though not numbering himself among the naysayers, longtime Las Vegas developer Mark Doppe thinks Nevada may be headed for a fall, or at least a major correction. "We could see a 20 percent contraction in the gaming market," he says. "And that's dangerous because we are the largest one-industry town in the world."

It is ironic, then, that local boosters and unionists talk glowingly about Las Vegas as the "next Detroit," as if that were something to aspire to. This myopia clouded recent economic forecasts, which have badly overestimated gaming revenues. The most recent report from Carson City banks on a 5 percent increase next year. In contrast, analysts outside the state, who arguably have a clearer vision of the big picture, are predicting a rate that is half that. By 2001, Pennsylvania's WEFA forecasting group sees that dwindling to a dismal 0.4 percent.

As in every other company town, government officials do their bosses' bidding. Gov. Bob Miller, the pliable superintendent of the plantation, has frozen state government hiring in an attempt to avoid a deficit precipitated by the rosy fiscal scenarios. Yet, during this election season, the only serious talk about tax hikes was directed toward the public and away from the casinos.

Unions bow and scrape, too, as evidenced when the Culinary threw its early support to casino-friendly Republican gubernatorial candidate Kenny Guinn. Though Guinn favors right-to-work laws, he was perceived better than state Sen. Joe Neal, the Democratic rival who brazenly called for an increase in the gaming levy. Labor's complicity and cravenness know no bounds, as long as casinos keep accepting card counts to organize workers.

In this context, the National Gambling Impact Study Commission pales as a threat. While the casino industry demonizes the commission as a bunch of right-wing demagogues, Steve Miller has a different view. He offered to take the panel on a guided tour he's dubbed "Las Vegas Behind the Mirage." Sightseeing opportunities include a look at Arizona Charlie's placement between two senior apartment complexes, the casino shuttles that serve HUD-funded housing projects, and the proliferation of neighborhood slot joints.

The panel, which comes to town Nov. 10-11, has expressed no interest in a firsthand probe of Las Vegas' seamy underbelly. But it's sure to get an earful from national casino opponent Tom Grey, who will be representing the National Coalition Against Gambling Expansion. Neal, too, will be heard as he joins a panel discussion on local employment issues. Neal's opening came when Wynn stepped down. The casino mogul reportedly was miffed at the addition of Otis Harris, a local businessman who is aligned with Miller's populist crusade against the spread of gaming.

Whatever the commission recommends next year, it's doubtful that any federal taxes or regulations will imperil Las Vegas as much as the casinos and their flunkies.

Though they enjoy the world's lowest tax rate, Nevada gaming companies are taking their hordes elsewhere. In turn, our desperately dysfunctional state officials prostrate themselves in a vain effort to keep gamers happy.

They co-opt the Las Vegas Convention and Visitors Authority into a publicly funded marketing tool for hotels. The Legislature passes more tax breaks on everything from promotional chips to artwork. The Athletic Commission lets convicted felon and borderline psychopath Mike Tyson back into the boxing ring because he's good for the gate. (Remember when Caesars Palace used to pay old Joe Louis to stand around as a novelty item? It's the same ol' freak show.)

Yet there's no containing the footloose casinos. If Wynn hadn't been rebuffed by Connecticut, Florida, England, Australia and British Columbia in recent years, there might be no Bellagio today. But wait awhile. When the next big recession hits--and it's coming, experts say--cities, states and nations will grasp at gaming as their economic salvation.

Will that be a good thing for Las Vegas? Will locals still be writing obsequious letters to the editor, praising the brilliance and civic-minded vision of our casino moguls? Don't bet your house on it.