California Tribal Casino Opens Hotel Putting Further Pressure on Northern Nevada Gaming

The Sacramento Bee reports on the opening of a 300-room hotel, spa and amphitheater at the Thunder Valley Casino, north of Sacramento. This is bad news for gaming properties in northern Nevada. Northern Nevada has definitely been hit by the recession as well as the explosion of tribal gaming in California. By adding lodging to their property, Thunder Valley is even that much more of a draw for gamblers that want to spend the night at a property, but not drive all the way to Nevada. This is a good move for Thunder Valley and bad for Northern Nevada.

I had a post last year that discussed a radical approach to helping Lake Tahoe and Reno hotel casinos compete - putting legal brothels in the properties. That idea was discussed in a Casino Operations class at UNLV last spring and it was not rejected out of hand by the students. What should be noted is that I'm not the first to pose the idea. The mayor of Las Vegas, Oscar Goodman, posited the same idea for Sin City back in 2007. He took some heat for his position, but an opinion piece in the Las Vegas Review Journal supported him. I do too. It makes sense for Las Vegas but makes even more sense for Northern Nevada gaming properties. In fact, it might be a matter of survival.

To Combat Gaming Slide, What Do Reno and Lake Tahoe Do?

As discussed in other posts, the gaming industry is learning that they are no longer recession-proof. By diversifying their revenue streams to rely more on lodging, entertainment and food and beverage, they now are more susceptible to the economic variances in the greater hospitality industry.

Even before the recession, Nevada gaming has been facing an increased threat from other gaming competition. Data provided by the American Gaming Association (AGA) states that casino gambling, at one time found only in Nevada, now exists in 33 states. Tribal casinos alone now exist in 29 states. According to the National Indian Gaming Commission (NIGC), Indian gaming generated approximately $26 billion in revenue in 2007. The AGA also cites that since the early 1990s, online gambling has grown significantly, generating just shy of $6 billion in revenues in 2005, before the passage of the Unlawful Internet Gambling and Enforcement Act (UIGEA). We'll discuss in an upcoming post whether that law actually impacted the patronage of online gambling sites by Americans.

Las Vegas, being a destination attraction in addition to being a gambling mecca, has fared better with regard to gaming competition than the Northern Nevada gaming markets, Reno and Lake Tahoe. These markets have definitely felt the impact of tribal gaming operations in Northern California. For residents in Northern California, if you want to gamble, why drive to Nevada when outstanding properties are less than an hour's drive away? In the last year, gaming revenue in Reno is down 10%, South Lake Tahoe down 23%, North Lake Tahoe 20%. For Reno, this continued the downward trend that begun back in 2007, not just with the recent recession.

It can be estimated that for a gaming property, market share is inversely proportional to the square of the distance from the population center to the property. In other words, the closer you are to the customers, the more customers you should get. As an example, consider two gaming properties near a major city. One is twenty-five miles away and one is fifty miles away. Based on the formula, the property that is fifty miles away would be expected to have a market draw one-fourth of that of the closer property.

The Lake Tahoe and Reno properties are essentially falling victim to their distance from major population centers. The only way to solve that problem directly is to have an earthquake severe enough to move San Francisco and Sacramento about 100 miles or so northeast. That likely isn't going to happen anytime soon. The casinos in these markets provide the same product that the population in Northern California can get much closer to home, with the sole exception of sports betting.

According to Michael Porter's theory, in a competitive market, successful participants can pursue one of three generic strategies. They can pursue either a low cost, niche or differentiated strategy. The Northern Nevada markets may be pursuing a low cost strategy, but it may not be translated to the casino floor. Proper application of this strategy would entail lowering the house advantages on their games to attract demand. People likely would be willing to travel farther to gamble at a location that gives them a better chance of winning.

At first glance, this appears to be a potential useful strategy. It may not be effective, long-term, due to the ability of the tribal casinos to match that innovation. All the low-cost strategy may likely do is commoditize the gaming product, lowering the profits of the overall industry, and leaving the Reno and Lake Tahoe gaming properties in the same competitive disadvantage. Those markets may actually fail sooner, then the tribal casinos would restore their house advantage to prior levels, not having to worry about Northern Nevada competition, then de facto non-existent.

Another approach is to push their advantage in being able to offer sports betting. Unfortunately, sports betting isn't the largest revenue producer in a casino, and isn't likely to become that ever. In addition, the law notwithstanding, dedicated California sports bettors can place their wagers with online bookmakers or their local bookmaker, without having to drive to Nevada.

The most radical inspiration for Reno and Lake Tahoe actually lies to the south. Las Vegas is known as "Sin City." The slogan, "What happens in Vegas stays in Vegas," is very well known. Leveraging Las Vegas and Porter's theory, Reno and Lake Tahoe may differentiate by offering something that can't be copied by competing California tribal casinos. Sports betting is good, but not sufficient. The radical idea is to bring the legal brothels, now restricted to areas outside the major Nevada cities inside the hotel-casino properties. This approach is the most radical because it completely moves these casino properties fully into the adult entertainment realm, otherwise known as the three B's: Bets, Booze and Babes.

If patrons had more on their minds than gambling and drinking, the properties could offer something more in their facilities without the patron having to leave the property and travel. All elements of this entertainment offering would be available under one roof. With regard to these kind of services being offered in a hotel environment, they are not uncommon in Asian hotel properties. In those properties, the definition of "massage" may be a bit broader than is customary elsewhere. Not all properties would desire to offer this element and instead try to differentiate by being family-oriented. If that is occurring now, it doesn't appear to be very effective in countering the California-based competition.

Brothels integrated with the hotel-casino, catering to both men and women, would be definitely a unique but controversial differentiator. It is likely that these services are indirectly available now, but due to this indirect nature, the true advantage isn't being captured. The offering must be convenient and immediately available for those patrons wishing to buy. This does not exist today. Of course, proper layout and location of these "salons" would be required, but with a multi-story hotel-casino property, this can easily be accommodated, similar to the club floors for frequent stay program members that most hotel chains employ.

There will be a need to be a change to Nevada law as well as potential zoning changes and regulatory modifications to allow this offering, so this last ditch effort, if seriously considered, would be an indicator of the severity of the competitive situation.

Fantasy Sports Attracting Investment

A good sign an industry is "hot" is when venture capital investment flows into it. The Fantasy Sports industry is one such industry. Fantasy Sports can be considered a subset of the Media and Entertainment industry. With over 15 million Americans participating in fantasy sports, and major players like Yahoo, CBS and the major sports leagues involved, the industry is hot - and venture capitalists are zooming in faster than cheetahs on motorcycles, and have been for a couple of years.

Venture deals involving fantasy startups such as Atomic Moguls, Rotohog.com and Yardbarker attest to the attractiveness of the industry to venture capital firms. In addition to VC funding of fantasy sports sites, related sports-themed sites, such as PicksPal, NBX, FanIQ and PROTRADE also have obtained funding.

Knowing that the space is hot is a good thing, but VCs operate in a herd mentality, and what is hot and fundable can change in a heartbeat. As someone who back in 2000 founded a startup and received a $14+ million Series A from a Sand Hill Road VC, I know well the spectrum of emotions and machinations that take place when deciding, pursuing and obtaining venture funding. My startup got its funding right before the tech bubble burst. A couple months of delay and no funding would have been available.

If you decide to pursue venture funding, be aware that it will be very similar to applying for credit. The more you need it, the less available it will be and vice versa. The more you need it, the more expensive (i.e. more ownership percentage and control) you will need to turn over to the venture capitalist or angel investor. However, if you've done a good job, and your need for investment may in fact be better served by a loan, you will be in much better shape to negotiate a good venture capital deal, if you decide to go that route.

With my new startup, I am not looking at venture funding first. In fact, I'm not looking for it at all. So far, the progress to date has been done by bootstrapping. That's not to say that no money has been required. So far, easily $100K+ has been spent, similar to moving up to and through an initial Angel round. The more you can do on your own, you'll be in a better position.

There are some that take VC money because they need to ramp up fast to capture market share in their particular space. That may be a very legitimate approach. My personal bias is that if the industry niche being pursued has low barriers to entry and the winners may be determined more by marketing "carpet bombing" to reach critical mass quickly, I'd be looking for something else to pursue. All else being equal, VCs prefer companies that have sustainable competitive advantages. I agree with that perspective. In a gunfight, what do you prefer to have - a pistol or a tank?