Atlantic City: The New Las Vegas?
From the Print Edition:
Rudy Giuliani, Nov/Dec 01
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In gaming company boardrooms across the country and in the casino offices of this East Coast resort, the rumblings are in full swing about just what The Borgata, a billion-dollar hotel palace, will do for the once dilapidated but now relatively prosperous gambling mecca.
At first glance, there's no question that the project has triggered a wave of other investments. In a city where no new significant construction had taken place for nearly 10 years, the transformation is startling. There's a $300 million tower of rooms at the Tropicana; a multimillion-dollar pier project at Caesars with shops and restaurants; a new hotel room tower at Harrah's; and three mega-luxury villas for high rollers at the Hilton. The Sands is getting renovated. Claridge, newly acquired by Park Place Entertainment, the operators of Bally's and Hilton, is set to undergo a sweeping renovation and upgrade.
But just below the surface there's a wellspring of skepticism that the new developments can ever alter the basic nature of Atlantic City -- a magnet for a middle-market crowd that produces some of the highest gambling revenues on the planet. Until recently, the 12 casinos in Atlantic City typically produced gambling revenue on par with the 27 casinos on the Strip in Las Vegas. With that kind of performance, it shouldn't come as a surprise that some casino operators in Atlantic City resisted the early stages of The Borgata's development, which by its very upscale concept promised to force other operators into new, and expensive, investments. One big-time player, Donald Trump, threw up obstacles at every turn of the process. While Trump himself is now publicly supportive of the plan, Mark Brown, the president and chief executive of the Trump Hotel and Casino Resorts, is clear about the long-term prospects: "Atlantic City will never be Las Vegas. We just have to make sure we continue to do as well as we have."
Robert Boughner, the chief executive of The Borgata, which is being erected by Boyd Gaming Corp. with an investment from Kirk Kerkorian's MGM Mirage company, isn't ready to accept the status quo, declaring "Atlantic City will become much more of an overnight destination than it has in the past."
Other casino executives echo that sentiment, believing at least in part that the new hotel will expand the market, and begin to fill new direct flights that are planned into Atlantic City's airport from places like Chicago and Detroit and other major cities. But there's less certainty in those executives' voices when they begin to speculate about whether a newly invigorated Atlantic City will draw the whales, the extremely wealthy gamblers from places like Asia or Latin America, or even Silicon Valley and Seattle.
The two visions of Atlantic City exist side by side. No one is willing to gamble that doing nothing is the right answer. But no one is willing to abandon, or even dramatically alter, Atlantic City's traditional appeal to a market that has proven to be so lucrative.
With good reason. A recent visit to Atlantic City on Friday the 13th shows why: the place is mobbed.
"I don't believe in bad luck," says Harry, an 80-year-old high roller from Westchester County, New York, in for his usual weekend of craps. "Bad days, good days, yes -- but not luck." He's taking a dinner break in a restaurant overlooking the baccarat tables. With him is Tom Fiore, the Taj's senior vice president for national marketing -- the guy who gets to schmooze premier players like Harry, making sure they bring their business to the Taj and enjoy every amenity there, except winning too frequently.
Winningswise, says Harry, this hasn't been a good year. So it helps that the penthouse suite -- with panoramic views of the Boardwalk and the ocean that almost make Atlantic City look attractive -- is free, along with the vintage French wine, the briny oysters and the thick porterhouse steaks done pink, just the way he likes them. Harry deserves regal treatment. "Eighteen years ago, he was placing $25 bets," explains Fiore, 39, who has choirboy looks but gains a decade in toughness when he talks shop. "Now, he's up to $10,000 a roll." Fiore is tired. He's just flown back from the Midwest, where he visited a 68-year-old player who lost a million dollars after 31 straight hours at the Taj's blackjack tables. "Wonderful guy -- I just wish I could have spent more time with him," says Fiore. Harry's response: "Yeah, so he can come back and lose another million."
Harry usually flies here on a plane chartered by the Taj. But most of the nearly 34 million annual visitors to Atlantic City arrive by ground transportation, about a third of them by bus. These visitors are just plain folks like the widows Dotty and Mary Lou from Brooklyn, who twice a month spend a day here (a three-hour bus trip each way and five hours in the casinos). It's a Tuesday morning when their motor coach, packed with aging blue-collar and barely middle-class men and women of every race, crosses the bridge into New Jersey. For the next two hours, there is silence aboard. But then from the wetlands, a flock of white herons explodes into flight above billboards of Johnny Mathis, Barbara Mandrell and other perennials of the gambling circuit. The towering casinos, incongruously large for a city of 39,000 inhabitants, come into view, and a buzz of excitement stirs the bus for the final 30 minutes as gamblers talk about their favorite slot games and their budgets. "We won't lose more than $50 apiece," says Dotty, 76. "If the money's gone, we'll walk the Boardwalk until it's time to go home." She and Mary Lou play only the slots because they are too intimidated by more experienced players at the card, roulette and craps tables. The bus pulls into Bally's. Instead of a "player development exec," a "greeter" climbs aboard and hands out bonus packets of free-meal slips and coins for the slots.
A quarter-century after New Jersey legalized gambling, Atlantic City is itching to morph into a classier gambling mecca that will attract more Harrys and fewer Dottys and Mary Lous. But the simple reality that Atlantic City already has nearly as high gambling revenues as Las Vegas makes everyone a little nervous, and more than a little protective of the status quo.
"When I tell people this -- even smart businessmen -- they look at me like I'm crazy," says Donald Trump. "So we have to be doing something right."
But Las Vegas, as Trump well knows, makes almost half of its total revenues in nongambling operations -- hotels, food and beverage, entertainment and shopping -- while the comparable figure for Atlantic City is only 20 percent. "We have to redesign ourselves like Las Vegas did and become more of a destination resort," says Speros A. Batistatos, president and chief executive officer of the Atlantic City Convention & Visitors Authority. That means many more hotel rooms, activities that can attract nongambling family members, and a lot more flights into Atlantic City's vastly underused airport. It also means overcoming a deep-seated image problem as a second-rate town. "If there were a slogan for Atlantic City," says Jason Ader, a gaming, lodging and leisure industry analyst for Bear, Stearns & Co., "it might be the words of comedian Rodney Dangerfield: ëI don't get no respect.'"
It is in light of Atlantic City's tremendous desire to be taken seriously as an eventual Vegas-style destination resort that the campaign mounted by casino operators and other boosters can best be understood. Decayed housing and similar signs of urban blight have been demolished and replaced with $200 million in new, publicly subsidized residences and green spaces. The entrance to the city has had an $85 million makeover so that visitors are now welcomed by waterfalls and fountains and a 90-foot-tall laser lighthouse. A $268 million convention center, second in size only to New York's Jacob Javits Center in the Northeast, opened four years ago. And this past July a $330 million tunnel was opened, considerably easing traffic flows.
In terms of private investment, the most visible evidence of a new era will be The Borgata, a casino resort jointly owned by Boyd Gaming and MGM Mirage that is scheduled to open in the summer of 2003. The Borgata hopes that it will attract more upscale players than the usual Atlantic City casino resort. "We did a lot of market research and focus groups," says Boughner, The Borgata's boss. "What we heard at all levels was that people wanted to trade up." They wanted more hotel rooms, better meals and shows, even luxury goods stores -- in short, something to do in Atlantic City besides gamble.
The public clamor, apparently, was so great that The Borgata redrew its blueprint, almost doubling its hotel space to 2,010 guest rooms, raising a rose bronze, 40-story tower and fitting in 11 restaurants, a spa, boutiques and three acres of gambling space. Even before ground was broken, The Borgata -- which means "hamlet" in Italian -- had outgrown its name and its original Tuscan village theme. "We now see its design as a juxtaposition of traditional Tuscany and modern Milan," says Boughner, who has hung a framed motto on the corridor wall outside his office that reads: "The chief enemy of creativity is 'good taste.' "
Boughner, a brawny 48-year-old New Yorker who headed to Las Vegas as a teenager and stayed, talks with the MBA vocabulary that casino operators affect nowadays. When he remembers the magic moment that persuaded him to become a casino executive -- the very first time he emptied the slot machines at a Vegas hotel -- he makes it sound like an accounting experience: "I could see the economics of this business was pretty compelling." To explain why Atlantic City casinos must be prepared to invest money in classier boutiques, restaurants and entertainment, even though returns from these luxury businesses will be less than those from gambling, Boughner uses the analogy of a supermarket. "Snack foods provide the highest profit margins and the butcher section the lowest," he says. "But unless you deliver the entire retail experience, you risk losing customers. If you don't offer sirloin, you won't get a chance to sell the Doritos."
Perhaps because he has seen cycles of growth and stagnation in Las Vegas, Boughner views the desert casino capital as something less than an infallible model for Atlantic City. He thinks the image of Vegas as a family destination is overblown. The amusements and nurseries created for young children are gone or going. "Strollers and rollers don't mix very well," he says. Rather than repeat Vegas's mistakes, he believes that Atlantic City should aim for a different family clientele -- baby boomers who will invite their aging parents for a two-day gambling and spa experience at a place like The Borgata.
For a long time, Trump was The Borgata's personal nemesis. For two years, his lawsuits delayed the tunnel project on which The Borgata's construction was predicated. Trump claimed he opposed the spending of municipal and state money on a project that would directly benefit a casino -- an interesting piece of reasoning since his own three casinos along with those of other operators have long benefited from tax breaks and public projects. Probably a stronger motivation for Trump was that his arch rival, Steve Wynn, the Vegas casino king who was planning a Mirage resort called Le Jardin Palais next to The Borgata, would have been the prime beneficiary of the tunnel. Also, Trump's casinos are burdened with so much debt -- $1.7 billion in junk bonds and other high-interest loans -- that after debt service little is left over from gambling revenues to carry out the expansions necessary to compete with amenities offered by The Borgata or the casino resort Wynn had in mind.
But Wynn is no longer a problem. Last year, his Mirage Resorts Inc. fell victim to a takeover by Kirk Kerkorian's MGM Grand Inc. hotel-and-casino empire. The merged company, MGM Mirage, which is trying to digest its $6.4 billion acquisition, decided to suspend Wynn's Atlantic City project and instead assume Mirage Resorts' responsibility in its joint venture with Boyd Gaming to develop, manage and operate The Borgata, a deal entered into in 1996. Nowadays, Trump sounds unconcerned by the prospect of new competition. "The Borgata is a plus for us because new people will come down to Atlantic City," he says, in an interview at his Fifth Avenue headquarters overlooking New York's Central Park. "Then those people will look around for a place they really like. So, I think everybody will be hurt initially, but our properties are so spectacular that we'll end up having more business than ever."
Until now, Trump has used his charisma to gain a business edge over competitors. The other casino operators are anonymous executives who are more comfortable making pitches to institutional investors than glad-handing high rollers. Only Trump has the public profile and chutzpah to put his name on his casinos and his face on billboards. When prospective premium clients refuse to take cold calls from Tom Fiore, the Taj player development executive, he can prevail on Trump to phone them personally and invite them down to his Mar-a-Lago estate in Palm Beach for a weekend. "We had maybe the biggest blackjack player in the country here last night -- he came all the way from California," says Fiore. "And Donald called three times just to make sure he was having a good time." The guy, who lost an undisclosed amount, left behind $81,000 in tips, according to Fiore.
Of course, Trump, who also has a sizable real estate development business to run back in New York, doesn't have the time to call more than a few players. But Fiore has methods of his own to attract premium players. He has enticed several of Harry's high-roller friends over to the Taj, including a real estate developer who will put up to $200,000 in play in a single evening. On the edge of the baccarat pit, Fiore points out a middle-aged New Yorker in a cream and gray outfit. "He's been coming to Atlantic City for years, and I finally got him over here for the first time tonight," says Fiore. "He's a $40,000-a-night player. I say, forget the million-dollar guys and go for 100 like him who will play 10 straight hours." Given time, the house always wins.
At a blackjack table, Fiore greets another player, whose pile of chips is undergoing a serious meltdown. The man complains that the suite he had taken for his father and himself hadn't been cleaned when they showed up that afternoon. Fiore promises to investigate, and then does a double take when he notices the guy has a dirty fork sticking out of his shirt pocket. "Gamblers can be hard to figure," he says as he walks toward the craps tables. "I mean, they'll put all this money in play and yet they wouldn't consider shelling out $500 for a good suit." He greets Harry, who is $31,000 down. To cheer him up, he gives him a baseball autographed by Derek Jeter.
Last year, Atlantic City took in $4.3 billion in gambling revenues, and the Taj led all casinos with $552 million. This explains why the Trump people are a lot less keen about transforming Atlantic City than the other casino operators, most of whom own properties in Las Vegas as well. "We do very well -- we crush some of the casinos in Las Vegas," says Brown, the Trump Hotel and Casino Resorts CEO. "People go to Las Vegas with a different mindset than here. They're on a three-, four-day vacation. Most people come to Atlantic City for a few hours; they gamble, eat and then go home. I'm not sure we should change to be more like Vegas. We should be ourselves."
This is the sort of smugness that Batistatos, the convention boss, finds annoying. "We're not nearly as far along as we should be as a destination resort because for years we suffered from a lack of leadership," he says. "There was a perception that all we had to do was build the casinos and the rest would fall into place. Nobody stood up and said, 'That's not enough.'" Batistatos reels out a vision of Atlantic City as a "smaller, friendlier, more ethnically rich version of Las Vegas," where people will rediscover the Boardwalk and the beaches, appreciate a history that includes the Miss America Pageant and the early careers of Frank Sinatra and Dean Martin, and take advantage of deep-sea fishing, sailing and nearby golf courses.
But Batistatos's vision seems a bit of a mirage when one considers the insurmountable obstacles posed by limited plane connections and the acute shortage of hotel rooms. Atlantic City's airport may have one of the longest runways in the world, as its boosters always claim. But aside from a few flights from Florida and the Midwest, the latter route just started this year, there is no regularly scheduled air service, and major airlines refuse to consider making Atlantic City a destination unless the casinos guarantee to buy blocks of seats. That's an idea whose time hasn't come. "We don't have 50 people from, say, Cleveland coming in every day," says Brown.
Then there's the problem of where the airborne newcomers would stay, anyway. In 1999, only 4.2 million hotel room nights were available in the Atlantic City casinos for their 37 million visitors. By comparison, approximately 32.8 million room nights were available on the Las Vegas Strip for 33.8 million visitors. Atlantic City hopes to increase its 16,000 hotel rooms to about 20,000 in the next four years. But that won't be nearly enough to turn the place into an overnight destination. Favored customers -- that is, heavy gamblers -- account for the 94 percent occupancy rates at the Atlantic City casino hotels. That ratio isn't likely to change. Even The Borgata's 2,000-plus rooms will be mostly turned over to what Boughner calls "enthusiastic players."
An increasing emphasis on identifying and courting the loyalty of heavy gamblers -- known as "avid experience players" or AEPs, in the anodyne business language of the casino world -- is marking the emergence of a "new" Atlantic City more so than plans for new hotel rooms and scheduled flights. In terms of zeroing in on such high rollers, no casino does a better job than Harrah's. Five or six years ago, Harrah's became concerned about slowing revenue growth among its 22 casinos spread across the country. Management decided that ways had to be found to pry more dollars from the avid experience players -- those 20 percent of gamblers who account for 80 percent of revenues. A computerized database was set up to track the 19 million people who have bet in a Harrah's casino. "Now we know our customers' preferences: what kind of games they like, what food they prefer, what shows they want," says Tim Wilmott, the eastern division president of Harrah's Entertainment. "And based on this player preference information, we drive all our marketing." So, a decision was made to end all busing to Harrah's Atlantic City casino because lower-income day-trippers like Dotty and Mary Lou were taking up too much time on the slots.
"We operate our business with the mantra that all customers aren't created equal," explains Wilmott. The mantra is enshrined in what Harrah's calls its Total Rewards Program. Operated along the lines of a frequent-flyer mileage program for airline passengers, the program rewards the heaviest gamblers with access to VIP lounges, star-studded entertainment, gourmet items in Harrah's restaurants and access to more secluded spaces on the gambling floor, with "Diamond Card" customers getting the quietest, most exclusive precincts. But with privileges come responsibilities: avid experience players must gamble often enough at Harrah's to avoid losing Total Rewards Program points; if their attendance at Harrah's drops, the assumption is they are giving business to competitors. "We create certain penalties that will exclude customers from better services and privileges if they split their gaming budget with other casinos," says Wilmott. It can be embarrassing for a couple to be told by the smiling hostess at the entrance of the Diamond Card space that she's awfully sorry, but they've lost their rights to gamble with the elite.
Curiously, slots account for almost all the gambling at Harrah's, even in the snootiest Diamond Card spaces. When New Jersey legalized gambling by popular referendum in 1976, the state decreed that no more than 75 percent of gambling space in the casinos could be turned over to slots. This was because the gaming tables, which are devoted to cards, roulette and craps, were thought to project a more classy aura -- worldly European or exciting James Bond images of skilled opponents going mano a mano against each other and the house. Slots, on the other hand, evoked the dumb luck of a lonesome gambler, mindlessly pouring coins into a machine.
But the recent relaxation of the 75 percent limit reflects the reality that most gamblers prefer slots. Even at the Taj, which generates the highest table wins in Atlantic City, slots account for 62 percent of revenues. Casino operators insist that it isn't a question of the dumbing-down of players, but rather a result of the increasing sophistication of slots. The old one-armed bandits -- with three reels of fruits or numbers operated by a spring-loaded mechanism attached to an outside handle -- are long gone. In their place are computer-operated reels offering top jackpots that can result from one of a billion possible outcomes. This allows a casino to tender six- and seven-digit-dollar prizes that will attract bigger bets. Slots have also been made more entertaining with bonus games featuring video and audio clips from old television shows like "The Addams Family," "I Dream of Jeannie" and "Jeopardy" that have a nostalgic appeal for the 50-somethings who account for much of the business. And the more recent slot machines include bonus games like "Battleship" that offer the illusion that a player's strategy and skills might affect the outcome.
But slots are still a matter of dumb luck. "Regardless of what the scam-artist books may say, there is no way for a player to affect the outcome of a normal slot machine," writes Frank Legato, one of the leading gambling analysts, in a recent issue of Casino Player magazine. Nor are payback percentages a function of any one game's programming, adds Legato, but rather "they are a result of casino policy." In Atlantic City, casino policy has turned the local slots into some of the stingiest in the United States. According to Casino Player's Slot Chart, Atlantic City slots average a 92 percent payback, while those on the Las Vegas Strip have a 95 percent payback.
The beauty of slots for casino operators -- and for the institutional investors that look closely at their bottom lines -- is their predictable cash flow. Junkets for high rollers can bring 35 percent profit margins and gaming tables will average 15 percent returns. But high rollers on a winning streak can ruin a monthly or quarterly earnings report. It's so much more comforting to count on an 8 percent take, day after day, year after year, from slots.
So, the Atlantic City casinos are basically slot machine palaces. The trick for operators is to give them each a distinct personality that will attract a profitable market segment. The Trump properties have decided to draw customers who identify with Donald as a high roller in real life. Harrah's wants big gamblers who are upscale enough to drive up in their own cars, as opposed to the hordes who come by bus. The Tropicana is planning New York-quality restaurants and West Coast-like nightclubs to attract a younger, hipper crowd.
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