Monday, June 25, 2007

Casinos, depreciation and competition

I have long been a skeptic of the revenue claims made by Pennsylvania slots parlor gambling advocates. My basic bone of contention is that the long run steady state revenue expectations assume Pennsylvania will outdraw Las Vegas and Atlantic City on a per machine basis despite hosting very boring and generic slots parlors.

The initial reports have been positive in the per machine win levels for the first four casinos that have opened. Ten casinos either have opened since or are scheduled to be opened after the above report was filed. However, Erie is acting as a leading indicator of how the regional markets are adapting to the new competition. The Post Gazette is reporting that Erie is facing problems as the newness factor is wearing off.

But as more competition has arisen, its daily win per machine -- the amount retained through customers' losses -- has dropped from $308 in March to $240 in April, $233 in May and $208 last week, the first week of operations of The Meadows Racetrack & Casino....Presque Isle Downs' biggest competitor is instead the Seneca Allegany tribal casino in Salamanca, N.Y., which added a hotel in April and expanded its number of slots and table games. The Indian casino is a little more than an hour from Erie,

I have always accepted the notion that Pennsylvania due to its population could support generically competitive and profitable slots parlors, but no more than that as the parlors are generic and bear no significant comparative advantage over other nearby alternatives. Once the fourteen parlors are open, the micro-local quasi monopoly profits that are being enjoyed by the first movers will be diluted. Furthermore, we can expect out of state reactions.

For instance, some West Virginia racinos are introducing table games as a response which should help them protect their market as table games are more interesting to watch while wandering around the playing floor than slots machines and smoking eighty three year olds who sit there waiting for their next heart attack. Atlantic City will lose some of their marginal traffic to the Philadelphia area casinos, but they have the ability to escalate their offers much more readily than the Philly-3's ability to state more than "We're Closer!!!!"

I hope I am wrong on this one, and that there truly is a pile of gold at the end of the rainbow, or at least a voucher of wonderment after the state played nine rows at five credits apiece, but I don't think so. Pennsylvania's gambling options are generic so we should only expect generic returns.

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