That’s how JP Morgan analyst Joseph Greff described the online sports-betting bill enacted by the New York State Lege. The latter essentially caved to Gov. Andrew Cuomo (D), giving control of OSB to the state lottery. Instead of the one-operator solution proposed by Cuomo there will be … wait for it … two. Big whoop. Those two casinos will be enabled to host four ‘skins’ on their Internet platforms. So, as we predicted, somebody (maybe a lot of somebodys) are going to be left out in the cold. The ‘Net platform providers will each pay Albany $25 million for a 10-year concession plus an annual levy of $5 million to the host casino “to alleviate the constitutional requirement that sports wagers are placed at casinos.” No tax rate has been announced but both Greff and Credit Suisse‘s Ben Chaiken anticipate it will be steep, probably in the 50% range, another Cuomo object of desire.
The cure may be worse than the disease. Greff, for one, finds himself with more questions than answers. For instance, what’s the difference between a platform provider and an OSB operator (Cuomo tipped his hand here by taking a meeting with DraftKings)? The bill calls for a minimum of four skins but what’s the maximum? Who gets to choose the skins, the state or the private sector? Will Native American tribes be eligible to compete? Will they sue the state and how might this delay the launch? Greff foresees the Empire State going live by the start of NFL season, as the bid process will begin July 1 with a truncated, 30-day RFP period. Regulators, says Chaiken, have five months to decide, which kind of shoots that NFL-kickoff target in the keister. The New York Gaming Commission gets to play King Solomon, depending on how much Cuomo tries to interfere.
“Net-net, this is probably not the windfall for the state in terms of tax revenues nor is it the big equity-value enhancing opportunity for the mobile Sports betting operators that it could have been if NY adopted a model more like New Jersey’s,” concluded Greff. “Our sense is that the meaning of platform is somewhat open ended at this point, and could include someone like DKNG which owns SBTech, to be considered a platform provider, or Kambi,” added Chaiken, who predicted that the bidding process would be complicated by companies trying to outdo each other in how much tax they’re willing to pay.
On the upside, he predicts that “extra points” will go to whomever partners with a tribal operator (undoubtedly because the tribes have exclusivity over a great deal of real estate). The “[a]pplication will include, among other items, a scenario analysis based on various numbers of platforms and mobile wagering operators: the estimated GGR to be generated and tax rate paid to the state, number of mobile operators the platform will host, geolocation capabilities, experience in other markets, customer acquisition model, speed to market.” A couple of outright losers are MGM Resorts International and Genting Group (and perhaps Las Vegas Sands), as acceleration of Five Boroughs casinos was left out of the bill.
It’s all in keeping with higgledy-piggelty way in which New York’s casino industry has evolved. An exposé by one of our favorite gaming writers, Muhammad Cohen, blames the dysfunction of the political establishment, which has driven decisions on everything to casino locations to tax rates. For instance, Resorts World New York slots pay 66%, those at Resorts World Catskills 37% and OTBs with slots in Nassau County pay 60% to Albany, while tribes chip in 25%. Mind you, operators agreed to those rates and we’re not sure the Cuomos of this world can be blamed for the fact that upstate casinos like Resorts World Catskills projected $903.5 million in gross gaming revenue in 2019 but delivered only $610.5 million. But the state bought those blue-sky figures instead of taking a more skeptical (and prescient) view. This exercise in economic engineering brought in $108 million less in tax revenue than expected.
“The paradox that is gaming in New York begins with the unassailable fact that gaming is largely a creature of the political process, wholly dependent on decisions that are rarely put through an economic calculus,” reports Spectrum Gaming Group. “Often, the decisions have been more dependent on what is politically achievable or advantageous.” Layers of gaming—racinos, upstate casinos, OSB—have been cobbled on as the budget crisis of the moment dictates. Cohen argues that by taxing revenues, not profits, the state has driven down casino investment. We haven’t seen evidence of that—look at the billion-dollar wad Genting blew on the Catskills—and besides, who taxes casino profits alone? It’s just not done. “At the same time,” argues Strategic Marketing Advisors Managing Director Matt Landry, “operators languish under tax schemes that are clearly past an inflection point and do not appear to benefit either the state or operators.” For instance, taxes on free play militate against aggressive pursuit of customers.
Also, the decision to replace fracking income with upstate casino revenue ensured that gaming would go where the disposable income wasn’t, ignoring the disproportionately lucrative New York City market. Instead, siting of casinos was predicated on low income and employment rates. Hence the Catskills, for instance. Then you have Cuomo, who has “frequently changed his mind on gambling issues during his decade as governor.” As Landry puts it, “New York does not miss an opportunity to miss an opportunity.” They’ve certainly muffed it with OSB.
On a happier note, Station Casinos got an upgrade from Greff, who forecast it would ride strong regional and strengthening Las Vegas Strip trends to $559 million in revenue this year, $586 million the next. That could even be a conservative assessment, as Greff didn’t model any real estate sales into his projections—and Station is looking to sell. He sees Station as benefiting from the movement of players from comatose casinos such as the Palms, the Fiestas and Texas Station to reopened properties, improving the latter’s margins. He says this dynamic will not be changing anytime soon. (Bad news for erstwhile employees of the closed casinos.) “Moreover, we think there is upside potential in our future forecasts related to a return in its older, core customer (65 years and older), which should complement/provide a cushion related to its presently favorable growth in new, younger casino patrons.” Could that younger demographic resuscitate the Palms? We think it might well do so (remember, Station has talked about repositioning the market niche of the property) but Vital Vegas‘ Scott Roeben predicts the Palms won’t reopen—under Station ownership, that is.
Rather than liquidating MotorCity casino in Detroit, as we had expected, the Illitch family is doubling down—and in an unlikely market. According to The Press of Atlantic City, they’ve bought as much as 50% of Ocean Casino Resort. We hope this doesn’t portend a managerial shakeup, as CEO Terry Glebocki has the place firing on all cylinders. However, the Illitches are backing a winner and they’ve got an impressive track record in Motown, where they’ve been creeping up on MGM Grand Detroit. Does this mean a Little Caesars pizza franchise will be cropping up at Ocean? We’ll have to wait and see.
Las Vegas may not be able to live so large next year, at least where water consumption is concerned. Lake Mead is at 40% of capacity and, as it falls to levels not seen since the Thirties, federally mandated cutbacks in water allocation are coming. Said Central Arizona Project board member Alexandra Arboleda, “We could be experiencing this for a long period of time, and I think the more we can have an ethic of conservation in Arizona, the better off we will be.” “This is going to be a really important year for understanding how the region responds to drought because we’ve seen such dry conditions throughout the West,” added Elizabeth Koebele, an assistant professor of political science at the University of Nevada-Reno. The only consolation seems to be that, according to the CAP, the cutbacks will incremental and have been planned years in advance.
As for Sin City, “we do not expect there to be any reduction in supply to municipal customers.” But Vegas relies on surrounding states for agricultural product and that’s where the cuts will fall the heaviest. “We are confident that we can continue to meet our community’s water demands, so long as we stay focused on conservation,” said Spencer Mack of the all-powerful Southern Nevada Water Authority. We have to stay focused on conservation because the drought we’ve been experiencing, the implications of climate change going forward, it is serious. And it is going to be incumbent upon everybody to continue to use less.” That sound less than optimistic … yet blessedly realistic. At least if you want fresh housing, come to Nevada, where the average home’s age is 23 years.