Is the gambling industry really recession-proof?

[Qbins Missile Crisis]

One of the trusted truisms of modern business is that the casino and gambling industries don't suffer the same fluctuations as the general business community.

When the economic cycle goes into a downswing, so the theory goes, people still need the psychological release that comes with gambling. In short, people who like to gamble will gamble. I even saw a stat once that indicated that lottery revenues actually increase during recessions, but I can't find that link now.

Sure, there might be a small decrease in the amounts people gamble during tough times, but in general they still like to keep their hands in the game. Hence the term "recession-proof".

Or so the theory goes - until now.

The Nevada Gaming Control Board last week released its monthly figures for February. The kind folks at the Las Vegas Review-Journal posted them the other day, and they weren't pretty.

The article explains the many ways February seemingly lined up perfectly for maximum revenue potential, yet it still saw the Vegas strip casinos experience a three percent drop in gaming win revenue from last February.

Ouch! Or as the article says, "OK, now it's time to panic."

It is now becoming glaringly obvious that the current recessing economy is undoubtedly being felt in Sin City.

The question is, "If recessions haven't hurt Vegas before, why now?"

Personally, I think there are lots of reasons why this recession's affect on the gambling industry - especially Las Vegas - could be very different from previous economic slowdowns. But first you have to look back at previous recessions, and how Las Vegas fended them off.

For one thing, Vegas only really became a gambling destination in the 40's and so the novelty plus the lure of the Rat Pack in the 50's was more than enough to offset the mild recessions of the mid-1950s.

During the oil shortage of the 70's the mob still had its hooks in the city, which kept profits artificially high - and Las Vegas was still catering to the degenerate crowd that was going to Vegas expecting to strike it rich. Those are the very people who lose the most. It was probably around this time that the "recession-proof" theory started to take hold.

During the 80's and 90's Vegas was transforming itself into a family vacation destination and catering to a whole new demographic (ie. yuppies and boomers) that was eager to experience Vegas (and casino gambling in general) for the first time. We forget that it has only been in the last 15-20 years that casinos have proliferated the continent. For millions of Americans, for most of their lives the only way they could experience a casino was to travel to Las Vegas. Either way, the recreational gambler was born as a target demographic. This increase in market size was more than enough to offset any general economic crises during this period.

Finally, the "recession" that happened earlier this decade wasn't even a recession by a lot of standards. And it certainly wasn't serious enough to affect the newest generation of Americans who had grown up with gambling and saw nothing morally wrong with going to the casino and losing a few bucks as part of an evening's activities.

So what is different about this recession?

Simple. Competition, stagnation, and the downside of recreational gambling.

The Las Vegas target market is changing too. They have grown up being able to regularly travel to a local casino to play blackjack or poker. With casinos available in virtually every state, there is no need for Americans to waste valuable dollars on stuff like airfare and accommodations as part of an expensive trip to Vegas, when they can get 90% of the thrill for the price of a cab fare. Maybe it's not the same as the real thing, but it's a lot more cost effective. Sure, they like being able to walk down the Strip with a beer in their hand, but after they've done that trip a couple of times, well, now it just seems kind of tired and not really worth going into debt over - not when they are worrying about their next mortgage payment.

As well, the latest generation in the Vegas demographic is a LOT less hypnotized by the glitz and glamor of Las Vegas. The lure of celebrities isn't quite the same when you regularly get bombarded by images of somebody's famous crotch or Britney's latest public humiliation - or most likely both simultaneously.

Finally, there is the fact that gambling revenues have grown so much in recent years because of the growing acceptance of the idea of recreational gambling. Gambling for fun is harmless, and as American society came to accept this fact, more and more Americans were free to gamble without feeling stigmatized. It is probably the greatest success of the modern casino marketing industry that they were able to so effectively change the perception of gambling in the American psyche.

But it is a mature market now, and the downside of relying upon recreational gamblers for the bulk of your profits is that recreational gamblers, by their very definition, only gamble for fun - and they don't gamble what they can't afford. When times get financially tough for the purely recreational gambler, they will decide that they actually can not afford to go to the casino tonight.

Really, all of this underscores a reality that should be construed as a positive. The fact that the gambling industry is no longer recession-proof, is proof that gamblers are no longer all degenerates, and actually are regular people who know how to make smart financial decisions.

Wrapping up

But don't worry about Las Vegas, they still made literally hundreds of millions of dollars in February. And once the economy turns around, they'll start seeing profits increase again.

My only worry is the parallels I see between the obsolete traditional land-based casino industry and the recording industry.

About a decade ago the recording industry, which had grown very fat and complacent, began having its profits eaten by modern technology. Rather than changing their business model to suit the times, the RIAA instead wrote a textbook on how not to handle a situation wisely. A decade later, the recording industry is in ruins, and they missed out on a huge opportunity and gave it all to iTunes.

Similarly, the traditional land-based casino industry has grown very rich, fat and complacent, and is about to be thrust into an unfamiliar situation where profits stop rising. And again, there is a modern technological competitor in online gambling that can be viewed as the scapegoat or a saviour. The traditional industry has a chance to embrace the future and the idea of online gambling. Instead the traditional industry, as evidenced by the actions - or lack thereof - of the American Gaming Association (AGA) may be following the disastrous path of the RIAA and trying to hamper the growth of online gambling.
Let's hope they smarten up.

April 16th, 2008
Covers.com