Casino Enterprise Management

This, our January 2012 article, marks the fifth year of PwC‘s involvement as the feature contributor in Casino Enterprise Management’s annual gaming industry forecast issue. On behalf of PwC’s National Gaming Practice, we are pleased to share our perspective of the future of the casino and online gaming market with this audience. This year, our forecast extends to 2015, and over this forecast period, we will touch on the changes and challenges in the mature markets, explore the upcoming opportunities in new and developing jurisdictions, and briefly recap the legislative and regulatory trail in the online gaming arena. To better understand the basis for our projections for the future of gaming, we will briefly investigate historical gaming revenue results from 2006 to 2010, focus our attention on estimates for 2011, and our forecast upward through 2015, as well as the drivers behind the 2011–15 estimated 9.2 percent compound annual growth rate (CAGR). The basis for this forecast is PwC’s second annual Global Gaming Outlook: The casino and online gaming market to 2015 (available at www.pwc.com/e&m).


Global Overview

Looking back, 2006 marked a strong period of growth in the gaming industry for each of the regions that we observe in our annual forecast. In 2007, while growth slowed in all markets except Asia-Pacific due to the beginnings of the recession, the year continues to be the one to beat in terms of annual revenues for the United States and EMEA (Europe, Middle East and Africa). Over the next two years, the U.S. and EMEA regions took significant hits as various regional recessions spurred on global economic turmoil. Asia-Pacific, while still reporting double-digit growth of 20.7 percent in 2008, slowed its ascent in 2009 to 7.1 percent year over year (see Figure 1). In 2010, the U.S. regained positive growth, reporting an increase of 0.2 percent as heightened revenue contribution from regional markets offset declines in Atlantic City. Latin America reported an uptick of 5.5 percent due to continued growth in Argentina, and Asia-Pacific shot up an unprecedented 49.7 percent due to Macau’s 57.8 percent growth. By 2010, the year following the official end of the recession (as declared by the National Bureau of Economic Research), although many would argue that the residual impacts immediately post recession were as trying and tiring as the recession itself, the year finished with $117.6 billion in global gaming revenues, marking an annual increase of 9.6 percent.

For 2011, global gaming revenues are expected to increase 12.6 percent to $132.4 billion. The U.S. is estimated to contribute 13.6 percent of the revenue increase in this global pool, Latin America 1.9 percent and Asia-Pacific 86.1 percent. EMEA is expected to end 2011 reporting declines, albeit very slight at 0.8 percent, and it’s a similar situation in Canada, as that region also reports its final year of declines in our forecast period of 1.9 percent.

A resounding theme in our forecast is the continued global re-balance of revenue contribution from the five observed regions. In 2006, the U.S. contributed 57.5 percent of global gaming revenues, with EMEA at 20.8 percent and Asia-Pacific at 13.7 percent. Jumping ahead to 2010, the pie reshaped, as the U.S. contribution decreased to 48.9 percent, EMEA dropped to 13.9 percent and Asia-Pacific increased to a hearty 29.2 percent. Four years from now in 2015, we expect the U.S. to continue with its third year in second position in global gaming revenue contribution with 40.1 percent, EMEA will continue its eighth consecutive year in a solid third position with 10.0 percent, and Asia-Pacific will be the region generating the highest contribution to global gaming revenues with a 43.4 percent contribution (see Figures 2, 3 and 4). This dramatic shift is expected due to the significant openings that occurred in 2010 with Resorts World Sentosa and the Marina Bay Sands in Singapore, and in 2011 by the increase in Macau revenues, which were boosted by higher traffic from the People‘s Republic of China (PRC) mainland and by new hotels.

By 2015, brick-and-mortar casinos are expected to generate $182.8 billion in global gaming revenues. It is no surprise that among the five observed regions, the fastest growing region is expected to be Asia-Pacific with an 18.3 percent compound annual growth rate (CAGR). Latin America, while starting at a lower base of $3.8 billion in 2010, is expected to be the next fastest growing region with an expected CAGR of 8.1 percent, and then the U.S. with CAGR of 5 percent. When considering revenues instead of growth rates, the U.S. is expected to continue in its No. 1 spot through 2012, returning $62.3 billion in gaming revenues, but the region will then be upped by Asia-Pacific the following year, as that region’s revenues top an astounding $67 billion.

United States

Total casino gaming revenue in the U.S. is expected to grow at a CAGR of 5 percent during the forecast period, from $57.5 billion in 2010 to $73.3 billion in 2015 (see Figure 5). When examined further, gaming revenues were essentially flat from 2009 to 2010. A slight increase of 0.2 percent occurs from 2010 to 2011, and the annual growth percentage will increase to 6.1 by 2015. Improved economic conditions in the U.S. are expected to support this growth trend from 2012 to 2015, and a stabilization of the world economies is further expected to contribute to this result. U.S. gaming revenues peaked in 2007, and they are forecast to return and surpass 2007 levels by late 2012, when $62.3 billion in gaming revenues are expected to be generated.



As is occurring in the global pool of gaming revenues, percentage contribution rates by segment in the U.S. are also expected to continue to reshape. Expansion among regional casinos will once again be the overriding factor for the increase in this segment’s contribution rate, and by 2015, regional casinos are expected to comprise 33 percent of total U.S. gaming revenues. In that same year, Nevada casinos are expected to generate 17.7 percent of U.S. revenues, as expansion in the Asia-Pacific region provides even more opportunities for high rollers to stay overseas. Tribal casinos are expected to contribute 45.5 percent to total gaming revenues, and Atlantic City, plagued by new gaming facilities in surrounding eastern states and expansion in existing markets, will contribute only 3.8 percent of total U.S. gaming revenues (see Figure 6).



Nevada gaming revenues peaked in 2007 at $13 billion, and the state is not expected to return to 2007 levels during the forecast period. A modest increase in Nevada revenues of 2.8 percent is expected to occur from 2010 to 2011, and then increases in the low 4-to-5 percent range are expected for the next four years. Nevada is unique in the U.S. region, as the state bears a higher dependency on the high rollers that originate overseas, more so than any other U.S. market. While the beginnings of recovery in Nevada are much welcomed, there are still significant challenges facing operators. In Las Vegas, for example, the remnants of the last construction boom still pepper the skyline, with the steel skeletons serving as a reminder of the state’s last gold rush. Unemployment remains high in the state, as well as in Nevada’s largest feeder market, California. Job growth, which will lead to increases in disposable income, is important for a tourist destination such as Nevada, as the econometrics of gaming require ample disposable income in the home state and across the country.

As Nevada continues to prepare for the arrival of the industry’s revival, and amidst the constant nag of lingering and future sizable debt obligations, glimmers of operator confidence have started to emerge. Caesars Entertainment announced one of the most high-profile developments as of late when, in August 2011, they confirmed plans for the $550 million Project Linq. The project will include a 550-foot observation wheel, and the site will include a restaurant-entertainment district that will be situated mid-Strip. The wheel has been likened to the London Eye, and the physical placement is intended to capture and retain guests within the domain of Caesars’ portfolio.

Nevada is not expected to recreate its 2007 peak during our forecast period, but it is expected to come refreshingly close in 2015 when revenues reach $12.955 billion. In 2009, when Nevada gaming revenues were $10.4 billion, the disappointment in the industry resonated from the fact that these results, on a percentage basis, were 10.4 percent lower than the prior year. However, 2010, with revenues of $10.41 billion, marked the return of positive growth once again. Even though it was a mere 0.1 percent, it was positive growth nevertheless. The following year resulted in growth of 2.8 percent, heralding a second year in positive territory and thus affirming that a trend toward the light was beginning. Over the next four years, it is expected that Nevada will continue on this growth trajectory and recover lost ground, and end mid-decade with revenues of $12.955 billion, representing a CAGR of 4.5 percent.

Atlantic City was the only of the four U.S. regions in 2007 to report lower gaming revenues than the prior year. In 2006, Atlantic City was in its heyday, with $5.2 billion, but each year since that time this destination has experienced revenue and percentage growth declines. By the end of the forecast period, Atlantic City is expected to return revenues of $2.8 billion, nearly one-half of the revenues generated a decade before. While Nevada was able to flourish even as tribal casinos, card clubs and other gaming choices such as lotteries in surrounding states sprouted up, Atlantic City has been unable to establish a stronghold among the vast and pervasive expansion of gaming that has occurred in its backyard. Atlantic City patrons originating from Pennsylvania, New York and Delaware now have the option of racetrack and regional casinos much closer to home, and with the recent legislative approval of casinos in Massachusetts, the pressure on Atlantic City will not be letting up. We expect Atlantic City revenues to be $2.8 billion in 2015, representing a CAGR of negative 4.6 percent.

Tribal casino revenues overall peaked in 2008 at $26.7 billion. This result occurred even as the other U.S. regions were either experiencing declines or flat results, illustrating the recession’s delayed impact on non-destination markets. Unfortunately, this delay created the slight misperception that tribal casinos were immune to the economic downturn. When 2009 brought about the first percentage decline in tribal gaming revenues since the passage of the Indian Gaming Regulatory Act of 1988, it served as a wake-up call to the tribal gaming community. While reporting relatively flat results in 2010, tribal casinos returned to stable growth in 2011, up 3.8 percent, matching and surpassing this segment’s peak performance year. Tribal casinos are expected to continue to report incremental growth through the forecast period and generate $33.4 billion in gaming revenues in 2015, representing a CAGR of 4.7 percent.

The regional casino segment represents the massive count of casinos that are not located in Nevada or Atlantic City, and are not tribal casinos. Regional casinos represent the fastest growing segment in the U.S. due to new gaming in East Coast states; the introduction and expansion of table games in Pennsylvania, Delaware and West Virginia; and electronic table games and roulette in New York. The expansion initiatives on the East Coast are expected to offset some of the sluggish results occurring in the Midwest. While at first look regional casinos might have been spared by the recession, when considering same-store sales, revenues were off slightly from 2008 to 2009. Overall, the regional casino segment is expected to continue to grow and benefit from another batch of new projects. Several companies are vying for licensing opportunities in Florida, and given the preexisting tourism volume, this state is attractive to operators. Our forecast for regional casinos is gaming revenues of $24.2 billion by 2015, representing a CAGR of 7.3 percent.

EMEA

The hardest hit amongst the five global gaming regions continues to be EMEA. Global economic challenges caused a strangle-hold on growth in the region that, in 2009, had revenue declines of 12 percent, followed by a bleak 2010, which ended down yet another 7.2 percent. In 2008, EMEA took a back seat to Asia-Pacific, as that region stepped up to hold the distinction of second biggest gaming region in the world. EMEA continues to react to the uncertain economies that surround her, and 2011 gaming revenues revealed that influence, which ended the year with another decline, this time 0.8 percent. As the world reboots from the collective monetary hiccup that siphoned growth from the region, EMEA is expected to reveal gaming revenues of $18.3 billion in 2015, representing CAGR of 2.4 percent.



Western Europe currently comprises 80.6 percent of EMEA gaming revenue, accounting for approximately $13 billion. Of that region, France is by far the largest market, generating 29 percent, or $3.8 billion, of all Western Europe gaming revenues. Germany is the next strongest market, with 15.7 percent of the region‘s share, or $2.1 billion, following by the United Kingdom (U.K.) with 9.1 percent, or $1.2 billion (see Figure 7). Key developments and trends in EMEA include the long awaited and still stalled development of the 16 new casinos that were expected as a result of the U.K.’s Gambling Act of 2005. Our forecast gives consideration to the eight large and eight small casinos permitted under the act, which ultimately are expected to help fuel U.K. revenues rise to $1.4 billion in 2015, with a CAGR of 2.6 percent. Also on the radar screen for EMEA is the announcement by the Las Vegas Sands Corp. regarding a proposed $21 billion project in Spain to build a Las Vegas-style Strip with 20,000 hotel rooms and convention and retail space. The entire Western Europe region is expected to grow at a CAGR of 2.6 percent from 2011 to 2015, representing $15 billion in revenue.



The Central and Eastern Europe (CEE) gaming region includes data for the Czech Republic, Hungary, Poland and Russia. While Romania and Turkey are geographically located in this region, no legal casino gaming is currently conducted. CEE comprises 8.2 percent of the EMEA region and currently contributes approximately $1.3 billion in gaming revenue. In Russia, since the 2006 law was enacted, limiting casino activity to four remote areas, legal gaming operations have been dramatically reduced. Overall, CEE is expected to generate $1.5 billion in gaming revenues by 2015, representing CAGR of 1 percent.


The Middle East/Africa region of EMEA is comprised solely of the gaming activities conducted in South Africa, where 10.8 percent of total EMEA 2011 gaming revenue originates. Revenues in 2011 are expected to be 2.2 percent higher than 2010, but future gains will be limited, as this region’s National Gambling Act permits only 40 licensed casinos, and currently there are 37. While South Africa did not report gaming revenue declines leading up to the recession, this restriction will constrict future growth potential. The Middle East/Africa region is expected to generate $1.9 billion in gaming revenue by 2015, representing CAGR of 1.9 percent.

Asia-Pacific

The gaming revenue shift to the Far East was brought about by a combination of high demand in a previously underdeveloped jurisdiction, and the somewhat recent presence of new gaming operators that have recreated a Las Vegas gaming experience in and for the Asian market. The gaming revenue growth for the Asia-Pacific region has been more than phenomenal—it has been exponential. In 2010, the region finished the year 49.7 percent ahead of the prior year, with $34.4 billion in gaming revenue, and 2011 closes with a sizable increase of 37.2 percent. By 2013, Asia Pacific is expected to surpass the United States as the largest global gaming region, with $70 billion in revenues, and by 2015 that number is expected to reach $79.3 billion, a CAGR of 18.3 percent (see Figures 10 and 11). 



On a location-by-location basis, Macau surpassed Nevada in 2008 to become the world’s largest casino gaming market, with revenues of $13.5 billion, and by 2010, Macau’s revenues were double that of Nevada. Macau is also by far the largest gaming market in the Asia-Pacific region, with a market share of 73.6 percent, and it is expected to grow at a 21.5 percent CAGR through 2015 to reach $62.2 billion. Growth for this market is primarily driven by new capacity and anticipated better transportation means.



The second-largest market in the Asia-Pacific region as of 2011 is Singapore, with 9.3 percent market share. Singapore nearly doubled in revenues from 2010 to 2011 due to the first full year of operations for Resorts World Sentosa and the Marina Bay Sands, and this area attracts tourism from gaming and non-gaming consumers. We project that Singapore will continue in its No. 2 position for the region, ending 2015 with gaming revenues of $7.2 billion, representing a CAGR of 20.5 percent.

Australia is expected to continue to be the third-largest gaming revenue generator in the Asia-Pacific region throughout our forecast period. The competition from Macau, and now Singapore, has proved troublesome for the country’s operators, and this impact is reflected in the modest gains from 2009 to 2010 and the flat results from 2010 to 2011. Generating 2011 gaming revenues of $3.4 billion, Australia will continue to jockey for market share, particularly from the high roller set that this area depends upon. By the end of 2015, Australia is expected to return $3.7 billion in gaming revenue, representing a modest CAGR of 1.5 percent. Even as new jurisdictions open up and existing markets expand in the Asia-Pacific region—such as those developments being discussed for Japan and Vietnam—Macau, Singapore and Australia are expected to continue to be the region’s strongest performers throughout our forecast period.



Latin America and Canada  

Latin America includes five countries that offer casino gaming, and it continues to be the smallest casino gaming market among the five global regions. In 2010, the region generated $3.8 billion in gaming revenues, and 2011 closes up 7.8 percent with $4.1 billion (see Figure 12). The largest market in this region is Argentina, with 61.1 percent market share, followed by Mexico at 14.4 percent, Colombia at 12.8 percent, and Chile at 11.7 percent. Venezuela, with 2011 revenues of only $3 million, is by far the smallest market and is expected to stay that way, as no new casino licenses have been announced (see Figure 13). Argentina has 45 casinos, all licensed at the provincial level, and 2011 closes with $2.5 billion in gaming revenue. Overall, Latin America is expected to grow to $5.6 billion in gaming revenues by 2015, representing a CAGR of 8.1 percent.       



Canada is the final region in our global forecast, and this country generated gaming revenues of $5.7 billion in 2010, which were 2.9 percent lower than the prior year. Canada currently comprises 5.4 percent of the total global gaming market, and in 2011 closed out the year at $5.6 billion, representing a decline of 1.9 percent. The recession took longer to reach casinos in Canada than it did in other markets because of the new casino openings and renovations that occurred in prior years, sustaining spending growth through 2009 but not beyond. Difficulties in the Canadian feeder/border markets of Michigan and New York lessened tourism from the U.S., as did travel restrictions that included the requirement for U.S. citizens to bear passports when entering or leaving the country. Challenges were furthered when the Canadian dollar strengthened and U.S. consumers continued to wrestle with residual recessionary impacts. Going forward, Canada is expected to generate $6.2 billion in gaming revenues by 2015, representing a CAGR of 1.8 percent (see Figure 14).



Online Gaming

Online gaming is still viewed in many markets as the missing piece of the casino gaming puzzle. The temptation to enter this market is intriguing to many operators, feared by some segments of the population, and wished for by governmental bodies who see online gaming as a taxation opportunity. The era of speaking of this market segment in hushed tones was not so long ago abandoned. While some U.S. operators took what appeared to be a great leap in the early days of the 21st century as they quietly explored online gaming, the effort was simultaneously occurring during a time when overseas operators were already well entrenched in the arena.

The bottom line is that online gaming is occurring across the globe, whether regulators, operators or consumers like it or not. The challenge has not been, nor will it be, to prevent online gaming from proliferating. Instead, the challenge is to ensure that certain regulatory measures are put in place to protect consumers, to ensure that the games are operating as they are intended to operate, and to tax at a rate that is fair and equitable. While it sounds very simple when summarized in three brief quips, the arguments for and against online gaming have become convoluted.

In the U.S., for example, there continues to be debate as to the best structure for online gaming. Should it be federally regulated or should each state take responsibility? For states where critical mass is not an issue, like in highly populated areas such as California, intrastate gaming within a state’s borders seems to make some sense. But for states with less residential population, such as Nevada, federal governance might make more sense. In the U.S., the online gaming discussion is focused on poker, not other forms of gaming such as casino games, and poker is one of the oldest and long-lived of betting games. Poker in the U.S. is a familiar and acceptable form of recreation, thus improving the likelihood of online poker legislation passing in the U.S.

Many, if not most, believe that all forms of online gaming are illegal in the U.S., while some believe that it is simply a matter of interpretation. The U.S. Federal Wire Act of 1961 specifically outlaws placing sports bets over the telephone, and some have interpreted that to mean that all online gaming is illegal. But, then again, what exactly constitutes a phone these days? And more and more have voiced opinions that the Wire Act was referring to sports bets only, and not other forms of online gaming. Herein lie a couple of issues. First, in 1961 there was no Internet. There were no cell phones, either. Some argue that the lack of specificity and, moreover, ambiguity in the Wire Act prohibits a clean and clear ruling, which is why a Supreme Court ruling in this matter would be so meaningful. Until that point, or until one of the several congressional bills that have been introduced on the topic actually passes, companies are expected to continue to judiciously invest research and development dollars with the hope of ultimately offering (for pay) online gaming.

Conclusion

The gaming industry, just like other customer-driven industries, is directly dependent upon the behaviors and personal preferences of the consumer. Acceptability, which is based upon social morays, and availability and access to disposable income, are three key contributors to gaming’s success. The recent economic downturn impacted the global gaming industry more than many thought was possible, and the muffled whispers of a double-dip recession, while currently lacking teeth that cut, still loom as a fearsome fog.

Outside of the threat of another global meltdown, the gaming industry has turned to advances in technology and innovation to support the development of a gaming and fully integrated resort experience. Within a small geographic zone—Las Vegas, for example—there lies in wait a collection of four-star and five-diamond dining and lodging offerings that could be found in any of the largest and desirable cities in the world, all housed under the caption of “casino.” Tribal casinos, also in the U.S., once a scattered assemblage of sprung-tent structures tightly packed with slot machines and easy access, cafeteria-style refreshments, now provide vast and themed resorts with headline entertainment. Across the world, the Far East has expanded into a province of bright lights, resort excitement and gambling options that are carefully and specifically designed to match the cultural preferences and behaviors of its native visitors. Finally, the modest and quaint pubs and boutique venues positioned in locales ranging from the U.K. to Central Europe to South America offer a unique gaming experience and also provide some of the latest and most advanced electronic technology that the world of gaming has ever offered. 

These customer-focused gaming and supporting non-gaming offerings are expected to continue to be pivotal in the resurgence and resurrection of global gaming industry revenues. The digital age of influence has risen up and raised the bar of recreation expectation for an entire generation of consumers. In gaming’s immediate future hovers potential opportunity in the way of expansion into new markets and emerging jurisdictions, capital investment and reinvestment in mature markets, and the step-by-step, stage-by-stage debut of online gaming as an eventual global recreation option. Staying relevant to consumer recreational patterns, preferences and behaviors can be a golden ticket in this industry’s strategy for rebirth.   


Author’s Note: This article is provided for general guidance only and does not constitute the provision of legal advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.



Mary Lynn Palenik is the Director of Development, Research and Analysis for the Las Vegas-based National Gaming Practice of PwC. She has provided analytic perspectives and research on the industry since 1991, serves on several industry boards, holds undergraduate and graduate degrees, and was among CEM‘s first recipients of the Great Women of Gaming. Palenik currently serves as the Editor-in-Chief for PwC’s Global Gaming Outlook, and she is a recurring feature writer for this publication.