EXERCISE: INTENSITY OF COMPETITION IN CASINO INDUSTRY

(PORTERS FIVE FORCES)

INSTRUCTIONS

Read the following description of the casino gambling industry. Respond to the questions that
follow in order to evaluate the intensity of the forces and their impact on the profitability that
can be attained in the industry.

The Casino Gambling Industry in the United States: Expansion and Competition

The overall gaming industry consists of casinos, pari-mutuel wagering (horse racing, dog
racing, and jai-alai), tribal gaming operations, and lotteries. Casino gaming is the largest part
of the overall gaming industry, and the most recognizable form of the casino segment is the
Las Vegas-style properties. Also included in the segment are riverboats, card rooms, and
racetrack casinos (known as racinos).

Although the economic recession over the past few years resulted in less casino revenues for
the industry, 2011 showed a slow but steady recovery. In 2011, gross gaming revenues (amount
of money wagered less the winnings paid to players) totaled $35.64 billion- an increase of 3%
compared to 2010. Table 6.1 shows a breakdown of casino gambling revenue.

TABLE 6.1: CASINO GAMING REVENUE TREND (BILLIONS)

YEAR REVENUE
2002 $28.07
2003 $28.72
2004 $31.17
2005 $32.77
2006 $35.27
2007 $37.52
2008 $36.22
2009 $34.28
2010 $34.60
2011 $35.64

The casino gambling industry is highly regulated and is one of the most taxed industries in the
United States. State governments are the primary regulators, and taxes vary by state. The
money collected through state and local taxes funds programs such as education, infrastructure
projects, youth and senior services, and public safety. At the federal level, casinos are required
to comply with regulations associated with financial institutions (banks and money-lending
organizations) due to the large amount of money that is transferred on the casino floor. The

Dr. Subrat Sarangi Strategic Management

 EXERCISE: INTENSITY OF COMPETITION IN CASINO INDUSTRY
(PORTERS FIVE FORCES)

1985 Bank Secrecy Act amendment added casinos to the financial institution list to prevent
money laundering. The act requires that casinos report every deposit, withdrawal, exchange of
currency, or any other transfer of more than $10,000.

Of the 22 states that have approved commercial casino gambling through 2011, 15 had
increases in gross gaming revenues in 2011, and 13 had increases in gaming tax contributions.

Entertainment Complexes

Commercial casinos in Las Vegas and other centres have added nongaming entertainment
components, such as spas, retail shopping, restaurants, golf courses, and theatre-style shows.
These nongaming components provided a way for properties to differentiate from the
competition and to boost the bottom line.

Native American Casinos

The Indian Gaming Regulatory Act of 1988 gave Native American tribes the right to negotiate
for the development of a gaming facility. Based on data from the federal regulatory agency
known as the National Indian Gaming Commission, more than 200 of approximately 550
Native American tribes in the United States own and/or operate casinos in the nation. The
highest volume projects are on Mohegan and Mashantucket Pequot land in Connecticut.

The growth of Native American-owned gaming creates opportunities for other casino
companies to provide management services. Although outsiders cannot own Native American
gambling facilities, they are allowed to manage properties under contract. It is expected that
the Indian Gaming Regulatory Act will be extended to cover Internet gambling.

Industry Structure

The U.S. casino gambling industry has become more consolidated over time due to acquisitions
and internal growth. The largest company, ranked by casino winnings, is Caesars Entertainment
Corp. This company was taken private in 2007.

Internationally, the industry is growing through expansion of U.S. casino companies. Asian
markets have experienced very large growth. Macau, which is the only place in China with
legalized casino betting, had gambling revenue of $34 billion in 2011, a 42% increase from the
year before. Because of the less favourable global economic conditions, growth is forecasted
to cool down to 18% in 2012. Other markers such as Taiwan and Korea are reviewing casino

Dr. Subrat Sarangi Strategic Management

 EXERCISE: INTENSITY OF COMPETITION IN CASINO INDUSTRY
(PORTERS FIVE FORCES)

gaming, and properties in Singapore should expand the Asian gaming industry. Development
plans for the Primorye Gambling Zone in Russia, near the eastern port of Vladivostok, also
have potential for expanding Asian gaming industry.

Suppliers

Gaming equipment manufacturers supply electronic gaming devices, systems, table games, key
components, and support products and services to the casino gaming industry, These suppliers
are part of a global industry, and they design, manufacture, and market computerized gaming
equipment, systems, and services. Although a larger number of manufacturers have entered the
gaming equipment industry, International Game Technology (IGT) is the nation's largest slot
machine maker and is one of the leading suppliers of gaming products to the world. With a
strong presence in the United States and operations and sales offices in the Asia Pacific region,
the company posted revenues of approximately $2 billion in 2011. It has a strong focus on
research and development, 1,500 employees dedicated in R&D efforts involving engineering,
hardware, elect systems, and software. As a result of the economic downturn, the company
reduced global workforce through restructuring efforts and closed its operations in Japan. CEO
of IGT (Patti Hart) identified a new strategy to transform the company through cloud
technology to deliver casino games remotely. In January 2012, the company bought Double
Down Interactive, which runs a Facebook poker game. The application mimics casino games
but is legal because there is no prize money. Users pay to buy virtual chips, producing revenue.
So while Internet gambling is still mostly illegal in the United States, most gambling companies
and suppliers to the industry are preparing for states or the federal government to change
regulations. The other four other major gaming equipment manufacturers are Novomatic AG
in Austria; Intralot S.A. in Athens, Greece; Universal Entertainment Corporation in Tokyo; and
Scientific Games Corporation in New York.

Internet Gambling

In December 2011, the U.S. Department of Justice issued an opinion that provided states and
lotteries with the opportunity to begin legalizing online gambling for casino games. Proponents
argue that online gambling will be a source of tax revenue. Delaware lawmakers passed a laws
in June 2012 that would make Delaware the first state to legalize online gambling, including
Internet blackjack, poker and slot games. The Delaware law requires the lottery to verify that
residents are within Delaware and to exclude minors. Opponents of online gambling include

Dr. Subrat Sarangi Strategic Management

 EXERCISE: INTENSITY OF COMPETITION IN CASINO INDUSTRY
(PORTERS FIVE FORCES)

convenience stores that sell lottery tickets, Native American Indian tribes, local casino
companies, and activists concerned about gambling addiction.

Globally, the online gambling market experienced strong growth in 2011 with wins of $33.6
billion. Europe's portion of the total was $16 billion and Asia Pacific markets totalled $8.9
billion. The sports betting segment equalled 48.9% and the casino segment totalled 25.5% of
the market's overall value. The market is fragmented with some nations totally prohibiting
online gambling and others having specific restrictions. In 2010, 70 jurisdictions worldwide
allowed online gambling operations. Government regulation is strict; however, due to the
nature of the Internet, policing of various laws is not easily done.

Social Gaming

A new business model for gaming equipment manufacturers involves the creation of social
networking sites. In addition to IGT's acquisition of Double Down Interactive, described
earlier, WMS Industries, the nation's second-largest slot machine manufacturer, created the site
called Player's Life. It is more than just a place for site members to chat and share videos; the
site is connected to a server linked to the company's more advanced slot games. Members play
casual online games and then get the opportunity to play bonus rounds when they return to the
property-based casinos. Casino owners are not aggressively pursuing WMS machines because
they are based on a revenue-sharing model. Besides not wanting to share revenue, the casino
owners are concerned that if online gambling becomes legal in the United States, companies
such as WMS will be having advanced positioning in the online gambling business.

Transportation

For many of the larger gambling properties, customers arrive by airlines, especially business
and vacation travellers. Although fares for air travels rose substantially in recent years, airlines
have offered fare sales. Automobiles are the primary means by which customers travel to
casinos. The smaller, regional, and Native American gambling markets are negatively affected
by the gasoline prices.

Activists

Although many residents of communities where commercial casinos are located support casino
gambling, many other groups do not. Various churches, ad hoc citizens' groups and national
organizations such as the National Coalition Against Legalized Gambling protest legalized

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 EXERCISE: INTENSITY OF COMPETITION IN CASINO INDUSTRY
(PORTERS FIVE FORCES)

gambling because it comes with a high social cost in the form of addiction. Protesters argue
that youth are drawn into compulsive gambling habits at double the rate of adults, and that
gambling has hidden negative economic impacts, such as diverting revenue that would be spent
at local businesses. This, in turn, results in increased costs to the state from bankruptcies,
addiction treatment centres, and the penal system. These organizations also point to the fact
that when state governments depend on casinos for tax revenue, it puts the government in a
compromised position. Government now has a vested interest in encouraging its citizens to
lose money.

Casinos have attempted to address these concerns much like the alcohol companies that
encourage responsible drinking. Most casinos post phone numbers for Gamblers Anonymous
at their cashier windows and provide literature with information on problem gambling.
Underage gambling is not allowed, and many casinos will not even permit minors in the
gambling areas.

Questions

Complete the following and identify the intensity of each of the forces of competition:

(High/Medium/Low)

1. Rivalry among Existing Firms

a) Define the casino gambling industry.

b) What is its level of concentration?

2. Threat of New Entrants

a) What are the barriers to entry into this industry?

3. Bargaining Power of Suppliers

a) Who are the suppliers?

b) Discuss supplier bargaining power.

4. Bargaining Power of Buyers

a) Who are the buyers?

b) Discuss whether the buyers have bargaining power.

Dr. Subrat Sarangi Strategic Management

 EXERCISE: INTENSITY OF COMPETITION IN CASINO INDUSTRY
(PORTERS FIVE FORCES)

5. Threat of Substitutes

a) What other substitutes limit the sales and profits for firms in this industry?

6. Relative Power of Other Stakeholders

a) Who are other major stakeholders?

7. Relative Power of Complementors

a) Who are the complementors?

8. Now that you have analysed each of the forces of competition, discuss the implications
of the above-mentioned levels of intensity.

a) Which forces of competition are most threatening now? Which do you expect will
change over the next, say, five years?
b) What are the implications in terms of profit margins in this industry today? Over the
next five years?
c) As the CEO of a firm in this industry, what actions does this analysis suggest you
implement in order to strengthen your competitive strategy?
d) As an advisor to a potential entrant, would you recommend entry? What steps would
you advise new entrants to take?

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Dr. Subrat Sarangi Strategic Management