Casinos gamble they can weather downturn

updated 3:19 p.m. ET March 25, 2008

LAS VEGAS - In a town enthralled with its own mythology, Las Vegas would like to hold on to one myth in particular these days: Gambling is recession proof.

It's conventional wisdom characteristic of a city and an industry far more accustomed to boom than bust, but it's just not true, experts say. Gamblers, whether motivated by compulsion or hope, don't necessarily double down when the economy spirals and belts tighten.

"It's an old idea that has very little relevance and maybe no relevance to the United States today," industry analyst Eugene Christiansen said.

Christiansen and others trace the notion to decades old economic research conducted when gamblers' options in the U.S. were limited to horse racing and a handful of Nevada resorts. Such tight supply ensured demand for gambling was steady.

"They fared pretty well," said William Eadington, a professor of economics and director for the University of Nevada, Reno Institute for the Study of Gambling and Commercial Gaming. "Part of this was a pent up supply of gaming product."

Not so in 2008, when 48 states have some form of legal gambling and millions of Americans are within driving distance of a slot machine. Casino companies today have moved gambling to the mainstream of the U.S. tourism and entertainment industry and have moved themselves into the competition for consumers' discretionary spending.

MGM Mirage chief financial officer Dan D'Arrigo said his company sees no difference between the way consumers manage their gambling dollars and the entertainment and lodging spending that has grown to make up the majority of casino companies' revenue.

"They're all in one bucket," he said.

With the housing market tanking and gasoline and food prices rising, operators are seeing the effects of that bucket being emptier than it used to be. Still, gaming companies are going ahead with resorts that will add thousands of new rooms in Las Vegas.

A survey of 19 states with casino or race track gambling found about half saw gross gambling revenue drop in December 2007 from the year before. In January 2008, the portion grew to 12 of the 19 states, including Nevada. The state saw gambling revenue fall nearly 5 percent from a year ago to $1.06 billion, although analysts note it's too soon to discern a clear downward pattern.

Harrah's Entertainment Inc., the world's largest gambling company by revenue, noted several soft patches in its fourth quarter earnings report.

Because companies have started to cut budgets for employee travel and conventions, booking cancellations have increased and attendance has dropped at major conventions, Harrah's chief executive Gary Loveman said.

Room rates are "off a bit," he said, and consumers who don't use the company's loyalty rewards card — typically low-rollers — have been the first to drop off.

MGM Mirage noted similar weak spots, despite reporting a revenue increase of 4 percent, which was aided by a rush of foreign investment. Dubai World, the investment arm of the Dubai government, completed a joint venture giving it a 50 percent stake in the $8.1 billion CityCenter megaresort on the Las Vegas Strip.

While the CityCenter development remains a bright spot on the horizon, other smaller projects face uncertain futures due to the shaky credit market. In January, the Cosmopolitan, a casino resort under construction on the Strip, defaulted on a $760 million construction loan from Deutsche Bank and appears to be moving toward foreclosure. Questions also have been raised about the future of The Plaza, a 3,500-room resort modeled on The Plaza Hotel in New York.

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