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Atlantic City’s Downfall: Lessons Learned the “Hard Way”

September 16, 2014, 07:00 AM

As of late, it seems as though the main headlines in the casino business no longer revolve around big wins for the gaming industry, but rather devastating losses – the kinds of losses that no future economic or legislative jackpot the industry might be lucky enough to encounter will ever reverse. Yes, I am referring to the fact that four of Atlantic City’s twelve casinos either already have or are expected to “fold their cards” and permanently close during 2014 – a violent occurrence which will result in the loss of thousands of jobs, millions of tax dollars, and forever change the way that financial backers of casino gaming companies evaluate the risks associated with future investment opportunities in the space.

For anyone who has been following this industry over the past decade, the news hardly comes as any surprise.  I, for one, have been saying since 2008 that Atlantic City will one day be a six or seven casino town. To this end, I thought it would be both timely and appropriate to take a few moments to identify some of the lessons that the casino industry and its many stakeholders have unfortunately been forced to learn the “hard way” (pun is intended) over the past few years. Although some of these lessons are as simple as those which can be found in a sixth-grader’s standard public educational curriculum, I remain astonished at how frequently they are disregarded and/or misunderstood by people of far greater intelligence than me.

Lesson #1: Basic economic principles apply to the casino gaming industry, too

As rudimentary as this may sound, the root cause of most of the distress facing United States gaming operators can rather simply be explained by analyzing the laws of supply and demand. In many jurisdictions, gaming supply has increased while demand for the product has not, resulting in a state of market disequilibrium - there is no simpler way for me to make this point.

Refer to Atlantic City, for example. In 2006, at the peak of the market, its casino revenues approximated $5.2 billion. At the same time, two Pennsylvania casinos had only just begun their operations during the late fourth-quarter of that year generating total gaming revenues of approximately $31.6 million. Fast forward to 2013 where Atlantic City ended the year with $2.87 billion of casino revenues, a staggering 45% decline from 2006, and ask the question, why? The answer is relatively straightforward; by 2013 neighboring Pennsylvania’s gaming supply had expanded to 12 casinos, which generated approximately $3.1 billion in annual casino revenues!

While this example may oversimplify the explanation for Atlantic City’s decline since other factors such as a deteriorating national economy and new supply in other jurisdictions beyond Pennsylvania, such as New York, also contributed, the underlying thesis that I am trying to establish is commonsensical – in any industry, the revenue pie is only so big and can only be cut into so many slices before one company’s gains must come at the expense of another. It is my belief that many gaming jurisdictions across the United States are either already at or quickly approaching this type of zero-sum condition. In the future, we should expect to see continued contraction in gaming jurisdictions across the country until market equilibrium is once again established.

Lesson #2: Casino gaming is not the panacea for financial problems of state and local governments

In recent months, a number of states have announced that everything from veteran care to educational funding may be at risk due to declining tax receipts associated with contracting casino gaming revenues. Some analysts have even questioned the feasibility of the City of Detroit’s plan to exit from bankruptcy due to its reliance on future gaming tax revenue which has been trending downward over the past two years.

In the past decade, citizens and elected officials alike have pushed for expanded gaming as a convenient fix for budgetary shortfalls. This strategy is no longer viable in today’s overcrowded casino market where tax collections associated with future casino revenues are no sure bet. State and local governments should learn from the woes of Atlantic City (whose general obligation bonds have now been downgraded to junk status due to the precipitous decline in casino revenues) and develop more viable and creative strategies to balance their budgets.

Lesson #3: Innovation is required across all industries, even that of casino gaming

There is a looming problem brewing across the casino gaming industry that will one day reach epidemic proportions – the deflation of the baby boomer bubble.  Baby boomers, who have long propped up the casino business as a result of their insatiable appetite for slot machines, continue to age on while their younger millennial counterparts show little inclination to play these games.

While there are a few explanations for this phenomenon, I personally believe the single most significant cause is the casino industry’s failure to innovate over the past 50 or more years. Compare a modern slot machine to one from yesteryear and but for a digital screen and perhaps a Michael Jackson or Avatar decal on the side of the box, the conceptual framework behind the game is very much the same – a reel full of different symbols spins around, lands in some winning or losing combination and the cycle repeats itself again, and again, and again. While this concept may have been particularly intriguing prior to the advent of modern technologies that can provide much more exciting entertainment in the palm of one’s hand through today’s standard smartphone, it has lost its appeal to millennials who are uninterested in spending their money on the less sophisticated thrills of a bygone era.

In any industry, innovation remains key to long-term survival. The casino business, unfortunately, has not kept up with the times. The gaming industry needs to find other ways to package and sell games of chance – perhaps modernization through video game-like platforms is one potential option. The four empty casino-resort buildings in Atlantic City should serve as monuments to the importance of innovation for long-term business survival.

Lesson #4: Sometimes, what happens in Las Vegas only happens in Las Vegas

One of the more high-profile casualties of the Atlantic City market, the Revel Casino Hotel (“Revel”), was developed under the premise that wealthy, time-constrained patrons, including businessmen from Wall Street and elsewhere along the East Coast, would forego the time consuming airplane ride to Las Vegas in favor of the less onerous drive through the Garden State Parkway. Under this thesis, $2.5 billion was invested into Atlantic City’s most recently constructed mega-casino-resort, which featured all of the amenities and opulence that could be found at a property located in the heart of the Las Vegas strip.

This thesis was almost immediately proven wrong. Barely a year after opening, Revel, citing misaligned marketing and customer acquisition strategies amongst other factors, filed for Chapter 11 bankruptcy. A little more than a year later, it filed for Chapter 11 bankruptcy a second time before finally closing its doors for good when a buyer for the property could not be found.

The Revel story serves as a cautionary tale regarding the critical mistake of thinking that the energy and allure of Las Vegas can be duplicated by simply building a Vegas-like property outside of the Las Vegas market.  Lots of people who travel to Las Vegas do so because they want to get away – sometimes because they truly want to escape from more familiar surroundings and experience new things and other times because they want to engage in the type of wild behavior that wouldn’t be proper in their own back yards, yet is completely appropriate in Las Vegas. For this reason, Las Vegas through thick-and-thin, will always have its appeal – it is a unique market which simply cannot be duplicated anywhere else in the universe. Many of well-intentioned developers have learned the hard way that trying to duplicate Las Vegas in other regional gaming markets across the United States usually doesn’t work. 

Alexander A. Calderone
Managing Director | Calderone Advisory Group
Alex A. Calderone CPA/ABV, CGMA, CTP, CFE is the Managing Director of Calderone Advisory Group, LLC, a boutique turnaround consulting and litigation support firm serving the national middle market. Calderone has provided turnaround management, expert witness, and valuation services to numerous gaming operators and their creditor constituencies spanning across North America and beyond. He can be reached at
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