Trying to guess the future is an old game, albeit updated in 2020 with some pandemic twists. It is a great game to play, but very hard to handicap. These days, everyone is playing it in some fashion, trying to figure out what they need to protect them from the next disaster. Some are saving money; some continue to hoard toilet paper. Businesses are cutting expenses to be leaner and more efficient and to brace themselves for hard times. Investors are buying into what they believe will be the future trends, products, and services. Whatever your strategy might be, however, it’s all ultimately a crapshoot. The nature of future disasters is unknown and so, therefore, are the things one will need to survive. Equally difficult to predict are the collateral outcomes.
In 2007, stock trader and statistician Nassim Taleb published The Black Swan. The book was both a new way at looking at investing in stocks and a warning that bad things happen unexpectedly. Taleb is Lebanese and lived through the Lebanese civil war. He did not trust the world; in his experience, bad things tended to just happen, with no notice. Taleb carried that belief into investing; his strategy was to invest with the idea that something unexpected will happen to upset the apple cart. His book, and his philosophy, directly challenged the standard notion that things would largely remain as they are, with incremental improvements over time.
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The pandemic has taught us that things do change, and not always for the better. Taleb is right: unexpected things, Black Swans, happen regularly. Stock market plunges, recessions, wars, international trade crises, flu epidemics, hurricanes and earthquakes, and volcanic eruptions occur. The big ones totally disrupt both the economy and normal, everyday life. They set off a chain of reactions that change society, sometimes permanently. Pearl Harbor, 9/11, and the 1918 flu pandemic are in that category. Other, lesser events, like the 1970s gas crisis or the stock market crashes of 1987, 2008, and 2011, had shorter-term consequences. The economy, and society as a whole, recovered fairly quickly, for the most part, from those events.
The current pandemic promises to have lasting consequences, although it is really too soon to predict what those consequences might be. But that’s part the charm of the great guessing game: predicting future outcomes and, if you’re so inclined, maybe putting some money on your favorite. Early results for the gaming industry indicate that one of the favorites to stick around is online gambling. The first indicator of the potential of online gambling was the complete absence of casino revenue from mid-March through until the end of May, and, in some states, June, July, even August. That absence made every corporation, state, and city dependent on casino revenue acutely aware of their vulnerability.
Two states retained some gaming revenue: New Jersey and Pennsylvania. Those states both have online gaming, and it continued to function and produce cash flow for the casinos and tax revenues for the states during the closure of the casinos. The online activity did not make up all of the lost revenues and taxes, but it helped. It also attracted the attention of casino operators, lawmakers, and investors, and pointed to a possible alternative future for the gaming industry.
Before the pandemic, online gaming did not have broad support, outside of a few major gaming companies and some lawmakers in states desperate for more tax revenue. Now, however, we have seen the Black Swan. No one could have reasonably predicted the extent of the economic impact of COVID-19, but now that we’re here, planning that reflects the lessons still being learned from the pandemic has understandably become the norm. One of the lessons learned is the importance of cash reserves; if you have enough cash in the bank, you can exist for quite a while even without any fresh revenue. The lesson, then, is to reduce your expenses and save more cash.
The second part of that lesson is that a larger and more diverse income stream is essential. The companies that operate in New Jersey and Pennsylvania and have online gaming have seen very clearly just how important that uninterrupted cash flow can be. The lesson is not lost on lawmakers, either; already, several other states are discussing the possibility of online gaming. A lawmaker in Indiana, for instance, has expressed plans to introduce legislation in the next session. And investors are taking the lesson, as well. This might be the time to put some money into companies that offer online gaming. Or at least that is what Barry Diller thought.
Diller, through his company Interactive Corporation (IAC), bought $1 billion of MGM Resorts’ stock, about 12 percent of the company, two weeks ago. Diller and IAC CEO Joey Levin have since joined MGM’s board of directors. “We are energized and excited to make this investment in MGM,” Diller said, adding that his company was interested in an “area that currently comprises a tiny portion of (MGM’s) revenue – online gaming.” In other words, IAC thinks MGM can grow that tiny bit of revenue into something that justifies a billion-dollar investment.
Diller may be right, but the transformation will not be instantaneous for either MGM or the gaming industry in general. The legalization of online gaming will have to happen one state at a time, and it will be a long, slow, expensive, and tedious process. It will have its champions, and it will have its opponents. But the time is probably right to launch a campaign. The economy has been totally disrupted, and consumer spending is changing dramatically. People are spending much more money online and are using cashless payments wherever and whenever possible. And, not incidentally, consumers are now looking for things to do when their world falls apart and they are forced into isolation. They are finding those things online. The stars, as they say, are in alignment. Or are they?
This is what makes the great guessing game so difficult. It is certain that major changes are taking place. But whether the changes are permanent is not so certain. Will people permanently stop going to movies, bars, sports events, concerts, and casinos? Will they forever forego cash for cards? Two, five or ten years from now, will we as a society have returned to all of those public gathering places that were so popular before the pandemic? Barry is betting that more will stay home to gamble than before. He is betting with his head, not his heart. We do not all have a billion dollars to invest, but we do all have the opportunity to play the game. Each of us has that has a choice. You can put your money, time, and effort into what you like and want in the future, i.e., bet with your heart. Or you can bet with your head and gamble on what you believe is the likeliest outcome. Either way, you are playing the game and betting on future outcomes. Get your bets down, folks. The dice are ready to roll.
