The Vegas Guy: Slot Wars

Rhode Island, Delaware and West Virginia -- three of the smallest states in the union -- are responsible for what's about to happen.

In 10 years there won't be a single American living more than 50 miles from a slot machine. And it's for a simple reason: those three states have gotten so rich during the past five to 10 years that all their neighbors are alarmed -- and jealous.

"We have more competing forms of gambling in this country than ever before," says Christa Short, a gaming analyst for the Wall Street brokerage firm Bear Stearns.

"And yet there's still an undersupply of gaming in the United States." In other words, no matter how many states approve riverboat casinos, Indian casinos, video poker in bars, or slot machines at racetracks, we have yet to see the demand curve take even a modest dip.

The more gambling opportunities there are -- even in a worsening recession -- the more people want to gamble.

For the first time you're hearing governors and legislators suggest they can't afford not to have gambling, because billions of dollars are leaving their state every year as people chase slot machine action wherever they can find it.

Thirty states have budgetary shortfalls for 2003, and 10 to 15 of those are expected to pass "racino" legislation, allowing slot machines at racetracks, by the end of the year. There are already 17 operating racinos in the country, mostly along the Eastern seaboard and in the Midwest.

"There is $800 million a year leaving Maryland to gamble someplace else," said Steve Rittvo, a gaming consultant for The Innovation Group. "In Massachusetts, they're losing three quarters of a million to a billion a year. A billion is leaving Pennsylvania. Ohio is losing five billion. And people don't like seeing dollars cross borders like that."

And of all the kinds of gambling a state might consider, racinos are the simplest. In most states the slots at racetracks are handled by the state lottery, with the money going directly into state coffers at the end of every business day. In Delaware, the operation is so efficient that the state takes in $20 million a year per lottery employee.

Compare this to California, which has about 60 Indian casinos and several dozen card casinos, yet makes no money at all on gambling.

The beginning of the whole racino boom occurred in 1992 in the unlikely location of Lincoln, Rhode Island, a small town known mostly for its greyhound racing facility, Lincoln Park.

The state, reacting to the new Foxwoods casino in Connecticut, allowed 400 slot machines at Lincoln Park as well as 400 at the jai alai fronton in Newport, R.I. Now each location has 1,700 machines, with requests to expand to 3,000.

"Slots in Rhode Island have dramatically affected everything," says Dan Bucci, the colorful Chief Executive Officer at Lincoln Park. "We're third in tax collections. First is income tax, then sales tax, and third is Lincoln Park. We operate in the shadow of the two largest casinos in the world, each with $1 billion in revenue, and yet our VLTs (slot machines) represent 70 percent of the state lottery income."

And how did they do that, since both facilities are less than an hour from a popular full-service casino? They did it first with better paybacks than Foxwoods and Mohegan Sun. They have games that pay 99 percent, with a low of 92 percent, meaning they're set so that that much is returned to the gambler. The Indian casinos in Connecticut don't reveal their percentages, but they're assumed to be quite a bit lower.

The second thing they did, according to Gerald Aubin, executive director of the lottery, is make the slot machine companies compete for space in the two Rhode Island facilities.

"If you're a slot machine manufacturer, and you perform at 100 percent of projections," he says, "you gain machines. If you perform at 97 percent, you lose machines.

We have four vendors, and they're so aggressive and competitive now that we get the new popular machines before Foxwoods and Mohegan Sun do. It took us a while, but we learned just how sophisticated the player base is, and what you can do to make them loyal customers."

Still, with such a small number of machines in the state of Rhode Island, the racino boom didn't really get going until Delaware discovered slot machines in 1994.

They allowed slots at three tracks -- Dover Downs, Delaware Park and Harrington -- and quickly became so successful that the rest of the nation took notice. For the first time you had casino gambling right in the center of the northeast travel corridor, and dollars poured in from Maryland, the District of Columbia, Virginia and Pennsylvania, as the racinos were able to cut off the southern flank of Atlantic City, N.J.

The question had always been, "Would tourists travel to a place that ONLY had slots machines, and none of the other bells and whistles associated with full-service casinos?" The answer was a resounding yes.

West Virginia followed shortly thereafter, and Mountaineer Park, a tiny track located at the northern tip of the state, became one of the most successful tracks in the nation, mostly because of gamblers flocking from Pittsburgh.

Now you had West Virginia stealing dollars from Ohio, Kentucky, Pennsylvania, Virginia and Maryland. You had Delaware taking money from all the states south of New Jersey. And you had Rhode Island siphoning people off from the big casinos in Connecticut, as well as taking money from Massachusetts and northern New England.

Connecticut was in a class by itself, with two Indian casinos so large they virtually owned the gambling market for Massachusetts, upstate New York and Long Island, and with the state earning a fat 25 percent of every dollar earned on slots.

It was the little guys taking from the big guys, and now the big guys are finally roused for action.

Racinos make their debut in New York State this year, in addition to six new Indian casinos. Pennsylvania, Ohio, Maryland, Kentucky and Florida are all considering racino legislation. And to defend themselves, Delaware, West Virginia and Rhode Island are all planning expansions -- more hotels, more slot machines, more, more, more.

Wall Street is responding by buying up stock in the almost certain winners in the slots wars -- the manufacturers of the slot machines themselves.

"In Maryland, the stars are best aligned for some kind of quick legislative action," says Rittvo.

"They have an $800 million deficit. Racinos can add 500 million new dollars to the state economy.

The governor is very friendly. Dollars are leaving the state -- an estimated $800 million goes to Delaware, West Virginia, and New Jersey, with two-thirds of it going to Atlantic City. Maryland is a horse racing state, and it's the track purses have suffered. Pimlico is an institution in Maryland, and they want to protect it."

And as states wake up to the earning power of slot machines, they're also asking for a bigger and bigger cut of the profits.

"The state takes 52 percent from us now," says Bucci of Lincoln Park in Rhode Island. "And the new governor says he doesn't get enough! It's really difficult to comprehend the magnitude of the greed of these states. And then the politicians call it a 'subsidy.'"

"There's a tug of war going on between gaming companies and the states," agrees Christa Short of Bear Stearns.

"When Illinois raised its tax rate on casinos last year, Indiana was a big winner (from the casino point of view)."

West Virginia has been the most aggressive of the states, taking 53 percent of the slots income from two horse tracks and two dog tracks.

In addition, the state has a regular lottery, scratch-off games, Powerball, keno and video lottery machines in bars and taverns. (Oregon and South Dakota also allow gambling in bars and taverns.) Table games can be approved by local referendum. In 2002 West Virginia set an all-time record, with $596 million in racetrack sales, a total lottery sale of $849 million, and their 13th straight year of double-digit increases from profits on gambling.

The bonanza has turned legislators into cynics.

"The original argument for gambling, economic development, has gone by the wayside," says Rittvo. "It hasn't come true. Gambling doesn't help the local community. They gamble but they don't spend money on anything else.

"Tourism is an argument sometimes used as a defensive mechanism -- to attract conventions that would otherwise go to places with gambling. But there are basically just four reasons they do it: budget deficits, dollars crossing borders, to prop up the racing industry, and as a defense against Indian casinos. The racino concept works because it allows the gambling to be contained."

But what about all the bad social effects of having gambling on every highway? According to Wayne Lemons, director of the Delaware Lottery, none of the dire consequences predicted by anti-gambling forces have materialized.

"There were four real concerns before passage of our initial legislation," he said. "One was just the expansion of gambling itself -- but since we already had a lottery and pari-mutuels, and since the slot machines are at pari-mutuel tracks, this has not turned out to be significant.

Second was the fear of increased crime near the facilities -- but there has been no significant increase.

Third was a fear that we would breed compulsive gamblers. The lottery contributes $1.5 million a year to compulsive gambling programs -- in a state of only 800,000 people -- and any increase in compulsive gambling is not measurable.

Finally, there was a fear that racinos might have an effect on traditional lottery sales. What's happened is that video lottery income (slot machines) is six times greater than the traditional lottery. The lottery is now the third largest contributor to the general fund. Now, with competition from Maryland and Pennsylvania, our question is: Are we too dependent on this revenue?"

In fact, that may be the question that ALL the states eventually have to answer. If there are slot machines in every state, requiring more and more capital investment to make your slots better than your neighbor's slots -- hotels help, as do shopping and tourism advantages -- then eventually the state lottery directors will be full-time casino managers, and the various states will be running the kind of operations pioneered by gangsters like Bugsy Siegel and Moe Dalitz.

To some extent, it's already happened. The people who gathered here recently at the Racing and Gaming Summit were full of talk about hold percentages, cross-promotions, premium player clubs and the like -- and about half of them were state employees. Only in America.

(E-mail Joe Bob Briggs, "The Vegas Guy," at [email protected] or visit Joe Bob's Web site at www.joebobbriggs.com. Snail-mail: P.O. Box 2002, Dallas, Texas, 75221.)