THE PRESENT STATUS OF

THE GAMING INDUSTRY IN

NEVADA
ECON 411, Sixth class
September 10, 2009
William R. Eadington, Ph.D.
Professor of Economics, College of Business Administration
Director, Institute for the Study of Gambling and Commercial Gaming
University of Nevada, Reno
www.unr.edu/gaming
 THIS WEEK’S WAGERS
• All wagers to be submitted to
EC431gambler@gmail.com by 11:59 pm Saturday,
September 12
• Financial markets Spread Betting (as in the UK):
Take Friday’s close to the DJIA; bet on
increase/decrease for Monday’s close. Spread is 5
points in either direction; wager €X per point, up or
down.
– Example: DJIA closed on 9-9-09: 9547; Suppose you
wagered €10 per point on increase; the close on 9-10-09
was at 9627. The bet would have won €10*75 = €750; If you
had wagered on decrease, the wager would have lost €10*85
= -€850
• Opening of NFL Season this week-end: Games to
wager:
– SF+6.5@AZ; O/U 47; SF 3-2; AZ 9-11
– MIN-3.5@CLE; O/U 38.5; MIN 1-1; CLE 11-10
 WHY THE ECONOMIC CONDITIONS OF
2008-2009 ARE DIFFERENT FOR U.S.
CASINOS THAN EARLIER SLOWDOWNS
• Reductions in GGRs of about 5%, except in Nevada
• Low levels of consumer confidence with respect to the
National economic outlook
– Declines for past 6 months; lowest level since 1990; just now
starting to recover
– Consumers in general are going to be more cautious about
discretionary spending under such circumstances
• Corporations are typically much more cost conscious
in recessionary times => Less generous for expense
account conventions in Las Vegas or elsewhere
• The sub-prime mortgage crisis has adversely affected
specific groups in society who are no longer able or
willing to participate in the marketplace
– Households who are in, or facing, foreclosure
– Construction workers, realtors, others in financial services
– Others who fear job loss or related cut-backs in income
 OTHER LIKELY IMPORTANT
ECONOMIC FACTORS
• With challenging economic times, there are fewer
visits per customer per year (because of trip costs),
and lower individual gambling budgets per visit
(because of tighter household budgeting)
• The relative absence of new gaming facilities or
attractions in many markets
– New facilities can create a “must see” effect; as facilities
become older, a portion of the market goes away and is not
replaced by curious newcomers
– Over time, there will be fewer customers with a higher
spend per visit (encouraged by strong “loyalty” programs)
• Financial institutions are increasingly more
conservative in lending to casino companies, which
might slow down expansion plans even more
 LAS VEGAS: WHAT
SPECIFICALLY WENT WRONG
• Summer, 2007: sub-prime mortgage crisis =>
collapse of residential housing market
• Slowdown in economy => cutback on corporate
spending for conventions
• Recession kicks in in 12-07 => cutbacks in spending
by visitors to Las Vegas
• Moribund response to the opening of Palazzo
• Pipeline projects: CityCenter, Encore, Echelon,
Fontainebleau
• Drawing board projects: MGM Kerzner, Sahara, the
Plaza
• Debt crisis for major casino companies in 2008-09
• Dramatic increases in unemployment, foreclosures,
 LAS VEGAS: STILL MORE
TROUBLE AHEAD
• Significant high end mega-casino and meta-
casino projects under construction or put on
hold
– Palazzo, Encore, M
– MGM CityCenter, Hard Rock expansion,
Cosmopolitan
– Fontainebleau, Echelon, The Plaza, MGM-Kerzner,
the Sahara
– Expectations at the beginning of these projects
were quite different than the environment into
which they are opening
• The collapse of the housing market and
problems in the financial sector have put
some of these projects in jeopardy
THE LAS VEGAS STRIP
WYNN LAS VEGAS AND ENCORE
MGM CITYCENTER
STATION RED ROCK CASINO, LAS VEGAS
BOYD GAMING’S ECHELON PLACE
$4.5 billion planned capital cost;
Put on hold July 2008
 BRIEF PROGNOSIS BY
REGION OF NEVADA’S
OTHER CASINO SECTORS
• All affected in varying degrees by Recession
• Laughlin, Downtown Las Vegas: moderate to severe
competition from Strip, Southern California and
Arizona Indian casinos
• Las Vegas locals’ casinos: Competitive but success
dependent on continuing growth
• Reno/Sparks and Tahoe: Serious competition from
Las Vegas & California Indian gaming => Red Rock,
Thunder Valley, Cache Creek, Jackson Rancheria
• Reno locals’ market: Increasing competition
• Rural Nevada: Largely local or cross-border, i.e.
Wendover, Jackpot, Carson City/Carson Valley,
Mesquite; Elko, Winnemucca, Hawthorne, Ely
 Upper California: Population 500,000

Upper Middle California:

Population 11,000,000

Lower Middle California:

Population 2,000,000

Southern California
Population 21,500,000
 CALIFORNIA TRIBAL CASINO
GAMING REVENUES, 1999-2007
($ thousands; approximate)

$9,000,000

$8,000,000

$7,000,000

$6,000,000

$5,000,000

$4,000,000

$3,000,000

$2,000,000

$1,000,000

$0
1999 2000 2001 2002 2003 2004 2005 2006 2007
 Total Slot Machines
California, British Columbia, Oregon, and
Washington
From 1992 to 2008 (Year-End)

110,510
102,964
96,087
100,000
90,036
83,911

80,000
74,147

63,536
65,650
60,000 54,541

40,000

22,653 23,591
22,953
19,703 25,418
20,000
11,342 13,155 14,473

0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
 Washoe County Monthly Gaming Revenue
(All Non-Restricted Locations in $ thousands)
Jan 1996 through Mar 2009
Gaming Rev Trend at 3.43% CGR ARIMA Predicted GGR 12 per. Mov. Avg. (Gaming Rev)

$138,000
$133,000 Revenue Growth Trend at 3.43% Per Year
Monthly GGR would have been $126 mil versus
$128,000 $74 mil, $51 mil per mo or $622 mil per year higher.
This is a 41% drop from trendline. ARIMA predicted
$123,000 value for Mar 09 is slightly higher at $128 mil.
$118,000
$113,000
Washoe Co. Gmg Rev $000

$108,000 Trend
Top
$103,000
$98,000 Lower
Trend
$93,000 Trend Low
Bottom
$88,000
$83,000
$78,000
$73,000
$68,000
$63,000
$58,000
Jan-96

Jul-96

Jan-97

Jul-97

Jul-98

Jul-99

Jul-01

Jul-02

Jan-03

Jan-04

Jan-05

Jan-06

Jul-07

Jan-08

Jul-08

Jan-09
Nov-96

Nov-97
Jan-98

Nov-98
Jan-99

Nov-99
Jan-00

Jul-00
Nov-00
Jan-01

Jan-02

Nov-02

Jul-03
Nov-03

Jul-04
Nov-04

Jul-05
Nov-05

Jul-06
Nov-06
Jan-07

Nov-07

Nov-08
Nov-01
Sep-96

Sep-97

Sep-98

Sep-99

Sep-00

Sep-01

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08
Sep-02

Sep-03
May-98

May-99

May-00

May-01

Mar-02

Mar-03
May-03

Mar-04

Mar-06

Mar-07
May-07
Mar-96
May-96

Mar-97
May-97

Mar-98

Mar-99

Mar-00

Mar-01

May-02

May-04

Mar-05
May-05

May-06

Mar-08
May-08

Mar-09
Wells Gaming Research
 Washoe County GGR Growth Rates
Figure 1-5
Competitive Impacts on Washoe County
Casinos
8% Illustrated by Washoe County & Reno Gaming Revenue Growth Rates
All Non-Restricted Locations 1980 - 2008
67 Tribal Casinos Open in CA(39), WA(20), & OR(8) 93 Tribal Casinos
7%
IGRA CA(57),WA(27),OR(9)
6% 1988 by 12/07
First Wave of Tribal
Casinos
5% Silver Legacy Opened CA Prop 5
March 2000 Second Wave
July 1995
4%
Economic 57 CA Casinos
3% Slowdown 12/07 with
Jan 2001 65,585 slots
2% Thunder
911 Valley
1% 5.82% CAGR 1980-1990 Before Tribal Gaming
Opened
3.43% CAGR 1990-2000 After First Wave Jun 2003
0%
-2.52% CAGR 2000-2008 After CA Class III
-1%

-2%

-3%
Washoe Co. Reno
1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

2000

2001

2002

2003

2004

2005

2006

2007

2008
1999

Source: Wells Gaming Research

 WASHOE COUNTY (RENO) REAL GROSS
GAMING REVENUES 1990-2008
(2008 dollars)
$1,400,000

$1,300,000

$1,200,000

$1,100,000

$1,000,000

$900,000

$800,000

$700,000

$600,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
 WASHOE COUNTY (RENO) CASINO
EMPLOYMENT 1990-2008
35,000

30,000

25,000

20,000

15,000

10,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
 SOUTH LAKE TAHOE REAL GAMING
REVENUES 1990-2008 (2008 dollars)
$600,000

$550,000

$500,000

$450,000

$400,000

$350,000

$300,000

$250,000

$200,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
 EMPLOYMENT TRENDS,
SOUTH LAKE TAHOE CASINOS 1990-2008
12,000

10,000

8,000
EMPLOYEES

6,000

4,000

2,000

0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
YEAR
THE MATHEMATICS OF
CASINO GAMES
“Percentages never lie. We built
all these hotels on percentages. We
stay rich on the percentage. You can
lose faith in everything, religion and
God, women and love, good and evil,
war and peace. You name it. But the
percentage will always stand fast.”
Mario Puzo, Fools Die (1978)
 “Casinos make their living
encouraging people to believe in
systems, in luck, cultivating the
notion that some people are better
gamblers than others, that there is
a savvy, macho personality that
can force dame fortune to obey his
will.”

Peter Griffin, The Theory of

Blackjack
 HOW DO CASINOS MAKE
MONEY AT GAMES & GAMING
DEVICES?
Each wager is offered at a “price” and generates a
“quantity” of the product sold
• As with any other retailer, total revenues for the entire
casino equal price times quantity over all the different
gaming offerings
• Price = House Advantage
• Quantity = Handle
• Unlike other products, there are short term fluctuations
in realized price away from House Advantage, and
therefore performance => “luck”
• Realized Price = Actual Player losses/Actual Handle
 VIEWING CASINO GAMES
AS COMMODITIES
PRICE = HOUSE ADVANTAGE (HA) = “THEORETICAL
WIN RATE”: Limiting value of the ratio of casino
win/handle as number of plays gets very large, or
HA = W*p + L*q per 1 unit wager, where p = probability
of win, q = probability (lose) HA = (Wi*pi +
Lj*qj) over all wagers
W = amount to be won, and
L = amount to be lost (i.e. $1 to “normalize”)
QUANTITY = HANDLE = amount wagered
CASINO EXPECTED WIN =  HAi* Handlei, added up over
all games
 A VERY SIMPLE GAMBLING
GAME
Flip a coin once.
• Heads => You win $1.00
• Tails => You lose $1.00
• EXPECTED VALUE?
• Variation: Heads => You win $0.95
• Tails => You lose $1.00
• EXPECTED VALUE?
 THE AUSTRALIAN NATIONAL
GAME: TWO-UP (Casino version)
Flip 2 coins
• If H and H => win
• If T and T => Lose
• If H and T => Odds; flip again
• If 5 consecutive Odds, lose
• Spinner can bet on 3 consecutive “wins” at
odds of 7.5 to 1
• HOUSE ADVANTAGE?
THE PRICE OF CASINO GAMES
HOUSE HOUSE
ADVANTAGE ADVANTAGE
(Optimal (Worst Bet
GAME Strategy) Strategy)
Craps 1.41% 16.67%
Blackjack 0.5% (+ or -) 5.0% (+ or -)
Roulette
(2 zeroes) 5.26% 7.89%
Roulette (one
zero) 1.35% 5.41%
Baccarat 1.06% 14.44%
Pai gow Poker 2.50% 6% (+ or -)
Video Poker 1.0% (+ or -) 8% (+ or -)
Gaming Devices 5% (+ or -) 15% (+ or -)
Keno 28% (+ or -) 50% (+ or -)
 LOOKING AT THE
PERFORMANCE OF GAMES
AND DEVICES IN NEVADA
• Note the Win Percent (difference
between tables and slots and keno and
sports)
• Compute the “win per unit per day”
• Note year over year “% Change”
 Compare table or gaming device
play on the Las Vegas Strip to
casinos in Reno, Boulder Strip,
Downtown Las Vegas

Fundamentals of Pricing:
• Monopoly or under-supply gives pricing
power to the casino
• What is scarce for the player: time or
money?
• Some players are very sensitive to “time
on the machine” or “time at the table”