Bay State casinos may hurt neighbors

It appears to be a foregone conclusion that Massachusetts is gaming's next big expansion market.

The state's governor and legislative leaders are on board with a bill calling for three Las Vegas-style casinos and a slot machine parlor, all located in separate geographic regions of the state, including metropolitan Boston.

Opposition has gone silent.

The measure sailed through the state's House of Representatives more than a week ago by a better than 4-to-1 vote. The senate is expected to pick up the debate on Monday.

Nevada's slot machine manufacturers are ready to fire up the production lines for an estimated 10,000 new games that will be needed to fill the casino floors. Operators such as Las Vegas Sands Corp. and Caesars Entertainment Corp. -- whose chairmen have longtime ties to Massachusetts -- are planning their responses to the anticipated request for proposals.

Union Gaming Group Principal Bill Lerner estimated that a Boston-area casino could generate up to $1.5 billion annually in gaming revenues. The other two casinos could produce between $380 million and $430 million in gaming revenues. The tax rate for the casinos is 25 percent.

So why is Deutsche Bank gaming analyst Andrew Zarnett throwing words of caution into the mix?

Zarnett, who follows the industry's holdings in the high-yield bond market, told investors in a research note that Massachusetts casinos could lead to additional gaming expansion in the already saturated Northeast casino market.

If Massachusetts moves forward with its casino bill, Zarnett predicted that Maine, Rhode Island and New Hampshire could also explore gaming expansion through either the legislative process or a voter-mandated referendum.

"Casino expansion is a hot topic in many states these days that are facing severe budget shortfalls," Zarnett said. "It is difficult to predict the outcome of such legislation in a nonelection year."

Clearly, casinos in Massachusetts cause concern for the two Indian casinos in neighboring Connecticut. According to a study, 35 percent of the revenues for the Mohegan Sun and Foxwoods come from Massachusetts residents.

Back in June, Zarnett cautioned that gaming expansion in Illinois and Ohio could hurt casinos in neighboring states, such as Indiana. Massachusetts would not only hurt Connecticut, but could damage the already-decimated market in Atlantic City, which has seen three years of declining gaming revenues because of the economy and competition from Pennsylvania.

"Historically, it is well documented that competitor products closer to the source market negatively impacts casinos in neighboring states," Zarnett said. "The percentage of cannibalization has increased, especially in this economic malaise."

If casinos open in new states, it becomes a matter of convenience for gamblers. The recession has zapped the wallets and spending habits of consumers. They have less free time to spend their reduced discretionary income.

Instead of traveling to casinos in Connecticut, Atlantic City or any other nearby destination, customers have been and will continue to remain closer to home.

Zarnett told investors last week that the recession has pushed income levels back to 1996 figures.

"(It) reinforces our view that the current climate of economic stagnation continues to negatively impact leisure spending," Zarnett said. "This is supported by the weak jurisdictional data we have witnessed over the last three years and continues to this day."

The Northeast gets even more complicated by casino openings on the immediate horizon.

The Aqueduct Race Track's 190,000-square-foot casino -- with 2,280 slot machinelike video lottery terminals and nearly two dozen electronic table games -- opens in October in the heart of New York City. The Revel project will add a new resort to Atlantic City next year while a casino in Maine operated by the Silverton opens in the spring.

New York is exploring additional casino expansion, including a project in the Catskills.

With Massachusetts seemingly holding all the aces in the deck, the question is whether other states will ante their way into the game.

"Should any of these gaming expansions come to fruition, the end result will be more saturation on the East Coast gaming market, adding more strain on Connecticut casinos," Zarnett said.

Howard Stutz's Inside Gaming column appears Sundays. He can be reached at hstutz@reviewjournal.com or 702-477-3871. He blogs at lvrj.com/blogs/stutz.
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