In October 2013, analysts of the most popular in the United States magazine Time reported that the gambling market in the United Stated reached a saturation point. Why did it happen? As long as the revenues of casinos grew from year to year, more and more states began to welcome the legalization of casinos and other gambling establishments to get higher tax revenue from gambling. And at the moment, the land-based casinos are available in 40 of the 50 U.S. states. Many of them are trying to seek opportunities to expand their activities to the Internet.
It means that there are a lot of casinos. They have even appeared in those regions of the country, where there are a small number of players to provide their profitability.
In addition, gamers are playing in the brick-and-mortar casinos less than before. The peak of gambling industry income was observed in 2007. The casinos of the United States earned $37.5 billion. Then there was a small decline, and in 2012 the annual income of gambling establishments almost reached the record-breaking season and was equal to $37.3 billion. In 2013, the revenues decreased, which allowed analysts to speak about the saturation of the gambling market. But in 2014 everybody saw a dramatic decline in revenues, namely approximately 30% per year! It was possible to talk about the crisis in the gambling industry of the United States, but in 2015 the unexpected thing happened: the gambling market began to grow.
The Decline in the Income of Casinos in 2014
Before we start considering the causes of this sudden growth, let's discuss the results of 2014 for basic gambling U.S. states.
- Las Vegas
Throughout its history Las Vegas has had periods of both boom and recession. At the moment, Las Vegas is still the center of U.S. gambling and captures 75% of the gambling market. Most of the casinos in Las Vegas are controlled by three major monster companies:
- Las Vegas Sands Corp.
- Wynn Resorts Ltd.
- MGM Resorts International.
And they agree that the number of visitors in Las Vegas have returned to the levels of the economic recessions, and the amount of money spent per player has decreased. However losses of Las Vegas casinos have not been so great thanks to the skillful marketing that has covered the income deficit by receiving revenue from related non-gaming products. Restaurants, shops, clubs, shows and entertainment centers have partially compensated for the losses of casinos.
- Atlantic City
Four out of twelve casinos closed their doors in Atlantic City in 2014, which caused a huge budget deficit of $3 billion for New Jersey. It almost ruined the image of the governor Chris Christie, who was going to run for the president of the United States the next year. In addition, the troubles of casinos in Atlantic City, such as Donald Trump's Taj Mahal Casino, which announced its bankruptcy, or Revel Casino, which was closed and put up for sale, gave occasion to other states to doubt the expansion of the casino network on their territory.
However this recession was more or less predictable, since the gambling business in Atlantic City had been in decline during six years, and it was not a secret, because with the increase in the number of casinos in neighboring Pennsylvania and Delaware, players from these states had lost the need to travel to Atlantic City.
- Mississippi
In Mississippi, the affairs were also going badly. Two casinos were closed among ten so-called Indian casinos in 2014, including the largest Harrah's Tunica Casino. Such large establishments, which are managed by such a powerful operator as Harrah's, are closed very rarely.
The Collapse of the Forecasts of Tax Revenues
According to the reports of Associated Press and ABC News, the income from operations is behind the forecasts in states that have recently legalized casinos, including Ohio, Maryland and Pennsylvania.
- Ohio
Gambling in Ohio was legalized not so long ago, just in 2009. According to estimates of the Department of Taxation, Ohio should receive about $640 million of the additional annual tax revenue. The current amount does not exceed $267 million per year.
- Maryland
In Maryland the tax revenues from the casinos were also hundreds of millions of dollars lower than it had been predicted. Forecasts of 2008 had assumed that in 2013 the tax revenues would reach $1.36 billion a year. But in 2014, the existing casinos in Maryland generated only $833 million in tax revenues. Nevertheless, tax revenues in the last five years brought $2.3 billion to the state treasury, and the governor of the state is not going to lose this source of income. In August 2014, the fifth casino in Baltimore was opened. It was called Horseshoe Casino Baltimore. And in 2016, Prince George will open in Maryland the sixth hotel MGM National Harbor, whose construction will cost the state a tidy sum of $925 million. According to the Washington Post, more are more voters of Maryland oppose the expansion of the gambling industry. Currently, their number is 38%. However more than half (53%) voters approve the construction of new casinos in the state.
- Pennsylvania
This is the only successful state based on the results of 2014. As soon as one third of the existing gambling establishment had been closed in Atlantic City, Pennsylvania became the second-ranking state on the income after Las Vegas and left Atlantic City behind.
The legalization of table games in Pennsylvania occurred only in 2010. Only slot machines had been allowed before that. Therefore, forecasts of tax revenues in 2008 were considered only for gambling machines and reached $2.54 billion annually in tax revenues. The current revenue from slot machines was $2.32 billion in 2014. If we took into account the table games, the total tax revenues in 2014 were equal to $3.07 billion.
Competition between States
Due to the close proximity of the states their competition is growing on the east. The collapse of Atlantic City, in particular, can be attributed to the development of establishments, operating in Baltimore, Maryland and other nearby states. Massachusetts and New York are also going to legalize gambling, but now government officials of these states tend to avoid overestimating the potential tax revenues from gambling.
The opposition to the expansion of the geography of gambling has the opinion that there is no sense to open casinos in states where the population is poorer and a fewer number of people can afford such entertainment as casinos. The counter-evidence of lobbyists of gambling legalization in all states is the fact that inhabitants of the state without legal casinos will visit the neighboring states to play. Thus, states without gambling will lose potential tax revenues in favor of the neighboring states that have casinos.
However the general consensus of analysts was the following: new establishments are just a split of the existing market. For example, Mark Nichols, professor of economics at the University of Nevada, Reno, expressed in the following way:
Casinos have surely reached the point when they have just started to split the market. At the moment, we see clear signs of this process.
Good News for Regional Casinos
And there was an unexpected turning point in 2015. In its recent announcement, the magazine Money reported a surge in revenues of regional casinos.
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Five out of six casinos in St. Louis reported about receiving higher income in January 2015 compared to January 2014. The average growth of their income was 6.7%. The three casinos from Detroit received 15% more revenue for January of this year in comparison with January of the previous year. Even in Connecticut, where gambling has been in decline for many years due to higher competition, revenues in recent years have increased.
The renaissance of gambling was also observed in Atlantic City. In January, eight casinos, which had remained in business, got 19% more income than in the same month of 2014. What can be added if these eight casinos received in January of this year the income by 1% more than twelve casinos had obtained in January 2014!
Maryland slightly distorted the overall picture, which showed that revenues of casinos were declining within two months in a row, namely in December and January. Indeed, in November 2014 the State Treasury received a record $90.2 million and in December this sum was $85.6 million, and in January it hardly reached $84.9 million. However the record revenues in the late summer and autumn of 2014 were primarily explained by the opening of the new Horseshoe Casino Baltimore in August. By 2015, the novelty of this casino was faded and the state revenues slightly decreased. But in general the income in Maryland in January 2015 increased by $18 million or 28% compared to the same month a year ago. That's a lot, even taking into consideration the fact that a year ago this state had one casino less.
Causes for Growth
What is the reason for the seemingly sudden surge of interest in gambling? Many analysts indicate low gas and gasoline prices as a key factor. We remember the epic fall of oil prices in the previous year. Therefore, the gasoline became cheaper in the United States and now Americans are paying on average 78 cents for a liter of petrol. Gas prices were falling with a lag of three months, and now the Americans have the lowest prices for natural gas and gasoline since March 2004.
It is still necessary to take into account the difference between the regional casinos and the federal ones. When people used to fly in Las Vegas or Atlantic City to play during the weekend, the casinos that are located in their state provide the opportunity to quickly get to them by car and play almost every evening or night. The cheap gas and gasoline can save money that can be spent on the slot machines or table games at their casinos nearby.
In addition, analysts have noted an increase in the number of players and explained it by the fact that the opportunity to have fun at the casino is now available for low-income customers. This also happened due to lower prices for gas and petrol: more and more people had extra income to spend on entertainment.
Anyway, if we accept the concept that low gas and gasoline prices lead to benefits of regional casinos, we can not assume that this paradise is forever. The gas and gasoline prices in the United States are derivatives of the crude oil price, and if you have noticed, its price has been slightly growing since February. Yes, the prices are still quite low compared to the last year. They afford the average American to make a trip to the nearby casino. But who knows how long it will last? Nevertheless, the economic team of Morgan Stanley predicts that 2015 will be the best year since 2006 for the U.S. consumers and for regional U.S. casinos.
