Adams Analysis 

Vol 12, Issue 2

   2nd Quarter 2016 

An Analysis of Gaming News and Trends by Ken Adams
Atlantic City: a Resort on the Ocean 
and Possibly on the Edge
 
Ken Adams
Atlantic City now has only eight casinos, but is that too many?  What is the right number of casinos for the Atlantic City of the 21st century? Atlantic City, from its beginning 160 years ago, has been a playground for the leisure class.  A railway line was built connecting Philadelphia to the beaches of the Atlantic Ocean and the city was on its way to becoming one of the nation's premier resort communities.  Thus from its first days as a resort, Atlantic City was dependent on the fine people of Philadelphia for the core of its customers.  It was not an exclusive arrangement; Atlantic City was free to attract anyone it could, but the citizens of the City of Brotherly Love had few other options.  Philadelphia could be relied on to provide both long-stay vacationers and day-trippers.  The rest of the region provided the frosting on that cake.  The importance of the relationship between Atlantic City and Philadelphia was obscured after casinos were introduced in 1978.   Because there were no other casinos in the country except Nevada, Atlantic City attracted gamblers from up and down the East Coast. A hundred million people lived within driving distance of Atlantic City; if they felt like gambling, they were likely to visit the beachside resort.  Philadelphia still provided half of the gamblers on the Boardwalk, but because Atlantic City was so outrageously successful no one noticed.
 
From 1978 until 2006 the home of salt water taffy and the Miss America pageant seemed to be living a charmed existence.  Even with Indian casinos in Connecticut and Indian casinos and racinos in New York, the casinos in Atlantic City were on an ever-upward revenue spiral. The turning point came with the introduction of casinos in Pennsylvania.  After years of revenue growth, April in 2007 saw revenues fall 9.9 percent.  Since that fateful year, revenues have declined month after month and year after year. It has been painful for the city and its casinos; there have been multiple bankruptcies, fire sales and even closures. In 2014, four of the city's twelve casinos closed.
 
It took years for most observers and politicians to realize the downward trend was not temporary.  But now everyone understands the fundamentals have changed and there will be no recovery.  The customers who drove the casino resort industry in Atlantic City for nearly forty years had found new homes and other places to spend their money.  It is not unlike the fate of the famed resorts on the Boardwalk in the first half of the 20th century.  From the turn of the century until World War II Atlantic City was called the World's Playground.  It was called that primarily because it was easily accessible from all of the major metropolitan centers on the east coast.  It was the largest and most fully developed resort area and during the depression alcohol was readily available.  However, after the war most people had cars and could go other places; flights to Florida, the Gulf Coast and California were reasonable and of course, one could buy a drink anywhere. The city fell into disrepair and a state of despair much like today as the once famous and busy hotels closed or converted to other uses.
 
In fact no one seemed to recognize the degree to which Atlantic City depended on Philadelphia until Philadelphians stop going to the beach to gamble. As everyone knows the status of gaming in the Northeast has changed dramatically and casinos are common throughout the region; even Pennsylvania has casinos. Suddenly the old faithful Philadelphia became quite unfaithful.  Casino gaming started in Pennsylvania in 2007 and with its advent the customers in Philadelphia and the rest of Pennsylvania stopped going to Atlantic City. And it was the beginning a of nine year slide for casino revenues.But after all those years, there finally is a ray of light at the end of Atlantic City's tunnel.
 
Of course, that bit of hope requires us to ignore the government of New Jersey's heavy handed methods, the threat of two more casinos being authorized by voters in November, the possibility of slot machines at airports or any other harebrained scheme a lawmaker dreams up to pander to the voters.  It is a lot to ignore, but we must if we are to find any joy at all in Mudville.  And at least for the moment, there is cause to celebrate; Atlantic City gaming revenues were up 8.1 percent to $215 million in April and for the first four months, revenues were up 4.4 percent to $818.8 million.  April's year-over-year comparison is the best it has been since April 2006. To top it off, casino profits were up 31 percent for the first quarter; only the sad, tired, recently emerged from bankruptcy Trump Taj Mahal reported a loss for the quarter.   Given the difficulty of the last few years any increase in casino revenue is really good news; and it is the first time the eight remaining casinos are doing more revenue and making more profit than in the previous year. 
 
The decade-long collapse of the resort has been traumatic for the city and the state; before the current crisis both had grown quite complacent and spent their share of gaming revenues freely.  But now the city is on the verge of bankruptcy and the state is desperately searching for revenue to replace the cash from Atlantic City.  For awhile, the politicians fought to save Atlantic City and find a way to bring it back to its glory, but except for the mayor, everyone has given up.  The governor and state legislature are not confident the city government can manage the city on its own.  And there is growing pressure to add at least two more casinos in the state outside of Atlantic City closer to the New York City market.  A referendum on the subject will be on the November ballot. 
 
The politicians may have surrendered, but the surviving casinos have not.  They are fighting efforts to expand gaming in the state and at the same time doing whatever they can to attract customers.  I say the operators have not surrendered, but that is not completely true.  Some have given up. Caesars-nee Harrah's has closed two casinos, the banks ended Revel's short life and two Trumps gave up the ghost.  Throughout the troubled years, only one casino, Borgata, has not wavered or lost its enthusiasm for the market.  It opened in 2003 and has dominated the market since and always been profitable.  However, suddenly Borgata is in transition.  It is owned jointly by Boyd and MGM, but in May, Boyd announced it was selling its fifty percent share in Borgata to MGM.  There are two messages for the city in the deal; Boyd has lost faith in the market and its stomach for the fight.  This is a chance for Boyd to monetize its share and strengthen its position in Las Vegas.  On the other hand, MGM is making a nine hundred million dollar statement that it has confidence in the property and the long-term viability of  Atlantic City.
 
With few exceptions, no one has expressed that much faith in the city in years.  MGM is paying $900 million for half of Borgata; other sales in recent times have been as low as $30 million and none more than $200 million.  MGM's putting a $1.8 billion price tag on Borgata is significant.  Until that announcement discussions of casinos in Atlantic City had centered on doom, gloom and more closures. As Boyd was making its announcement, Fitch Ratings was predicting four more casinos might close if other casinos open in New Jersey.  Even without the addition of other casinos, analysts in December predicted that at least two more casinos would probably close due to increased competition from other states.
 
Something has to give and according to analysts the first to go will most likely be Bally and Taj Mahal.  That would leave six casinos in Atlantic City, half of the number in 2014.  The worst case scenario would be more casinos in New Jersey and then at least two more casinos would be in jeopardy.  It is a simple case of supply and demand - there is too much supply in Atlantic City for the demand.  In common business wisdom, if the market aligns its supply with the demand, then the remaining casinos will be profitable.  For years, I have been among the observers saying AC has too many casinos for the volume of customers and therefore the weakest of the casinos should close; leaving the survivors an opportunity to be profitable. 
 
Now, however, I am beginning to question that logic.  It occurs to me that there might be a minimum number of casinos necessary for the market to remain viable.  A minimum population to remain viable is becoming a common analysis in biology. How many bears does the Pacific Northwest need to insure that bears will still exist in a hundred or in a thousand years in the region?  How many fire ant colonies insure the survival of the species in Arizona?  To frame the Atlantic City problem in those terms, instead of asking, "how many casinos can operate profitably in Atlantic City, one might ask "what is the minimum number of casinos required to keep the resort viable?" 
 
According to Wikipedia, a minimum viable population is the smallest possible size at which a biological population can exist without facing extinction from natural disasters or a random genetic variation. The term is used in the fields of biology, ecology, and conservation biology.  Applying the term to casinos in Atlantic City occurred to me after reading numerous predictions for the failure of additional casinos.  Four more failures would leave four casinos lining the famous shores.  And that suggests the question, are four casinos enough to make a viable and profitable casino resort?
 
In the past when writing about the problems of Atlantic City, I have used Reno as a model for the process of decline and readjustment.  But at this point, my model fails.  Superficially Reno and Atlantic City have shared the same fate.  Both had an era when they were the second most popular gambling destination in the country and very profitable.  Long before Atlantic City felt the bite of competition, Reno was in trouble. Beginning in the 1990s, Indian casinos in Washington, Oregon and California captured Reno's customers and kept them closer to home. The six million tourists who came to town annually in the 1980s dwindled away to two million and change.   Year after year, casinos closed in the Reno-Sparks area and the buildings have either been torn down or repurposed.  The surviving casinos have been forced to either concentrate exclusively on the local citizenry or a mix of locals and over-night tourists.  
 
It is difficult to say what Reno's fate might have been if Tesla and a technology revolution had not come along. Today, Reno is no longer a casino town, although it still has casinos.  It is fast becoming a high-tech city.  Employment is up, the real estate market is behaving in a prerecession manner and a bright future sits happily in everyone's mind.  Reno dodged the bullet because there is more potential in the region than just tourism.  As Atlantic City faced more and more competition, I have frequently referred to Reno's fate and the lessons to be learned, but the comparison no longer works.
 
Atlantic City does not have any of the advantages that give Reno potential. There are only forty thousand people living in Atlantic City, it is not in a central or convenient location, it does not have limitless unused land or a favorable tax structure.  In over 150 years, Atlantic City has had only one major industry and purpose - it has always been a resort. It was a place for people to go to escape the summer heat, to sit by the sea and relax.
 
And that brings me back to the question; how many casinos does Atlantic City need to maintain its existence as a casino destination?  In the model from biology, when there are too few members the species is vulnerable to extinction from events that leave a stronger species unharmed.  So for example a Hurricane Sandy hitting an Atlantic City with only four casinos could totally wipe out the industry. If all of the buildings were destroyed by a storm, it is highly unlikely they would ever be rebuilt.  First, because money to rebuild would be very difficult to find; and second, because the operators would probably look at it as an opportunity to escape with a bit of insurance money in their pockets.  In 2006 due to an argument over the budget, Governor Jon Corzine shut down the government during the Fourth of July weekend. In the process the Casino Control Commission was closed, which in turn forced the casinos to shut their doors. In a time when only four casinos existed, that too might push the industry over a cliff.  A depression, a war or any other major crisis could be the proverbial straw to break the camel's back. 

That may be part of MGM's bet.  MGM could be contemplating an Atlantic City with only one casino, an MGM Atlantic City.  It would fit into MGM's overall strategy of seeking licenses in major metropolitan markets with little or no competition.  MGM has the dominant casino in Detroit; it will have an exclusive in Springfield, Massachusetts and National Harbor, Maryland.  However, I am not certain that strategy works in Atlantic City. I think the city depends on a group of casinos, together the eight casinos have nearly 12,000 hotel rooms; Borgata has 2,700.  One casino standing alone would have a mere fifth of the number of rooms Atlantic City had at its peak and only a small fraction of the number of restaurants, entertainment options, slot machines, table games or any other form of amusement a gambler might seek.  If Borgata was the last man standing it could not hope to attract the same crowds that twelve or even eight casinos have drawn in the past. Borgata and Atlantic City need more than one casino.   I don't know what the viability number is, but I do think the city is getting close, especially if two more casinos close in the next couple of years. 

But that is just my opinion, isn't it?
 
Ken Adams