Casino Reinvestment and Expansion

Under the new paradigm of declining economic conditions across a broad spectrum of consumer spending, casinos face a unique challenge in addressing how they both maintain profitability while also remaining competitive. These factors are further complicated within the commercial gaming sector with increasing tax rates, and within the Indian gaming sector by self imposed contributions to tribal general funds, and/or per capita distributions, in addition to a growing trend in state imposed fees.

Determining how much to “render unto Caesar,” while reserving the requisite funds to maintain market share, grow market penetration and improve profitability, is a daunting task that must be well planned and executed.

It is within this context and the author’s perspective that includes time and grade hands-on experience in the development and management of these types of investments, that this article relates ways in which to plan and prioritize a casino reinvestment strategy.

Cooked Goose

Although it would seem axiomatic not to cook the goose that lays the golden eggs, it is amazing how little thought is oft times given to its on-going proper care and feeding. With the advent of a new casino, developers/tribal councils, investors & financiers are rightfully anxious to reap the rewards and there is a tendency not to allocate a sufficient amount of the profits towards asset maintenance & enhancement. Thereby begging the question of just how much of the profits should be allocated to reinvestment, and towards what goals.

Inasmuch as each project has its own particular set of circumstances, there are no hard and fast rules. For the most part, many of the major commercial casino operators do not distribute net profits as dividends to their stockholders, but rather reinvest them in improvements to their existing venues while also seeking new locations. Some of these programs are also funded through additional debt instruments and/or equity stock offerings. The lowered tax rates on corporate dividends will likely shift the emphasis of these financing methods, while still maintaining the core business prudence of on-going reinvestment.
Profit Allocation

As a group, and prior to the current economic conditions, the publicly held companies had a net profit ratio (earnings before income taxes & depreciation) that averages 25% of income after deduction of the gross revenue taxes and interest payments. On average, almost two thirds of the remaining profits are utilized for reinvestment and asset replacement.

Casino operations in low gross gaming tax rate jurisdictions are more readily able to reinvest in their properties, thereby further enhancing revenues that will eventually benefit the tax base. New Jersey is a good example, as it mandates certain reinvestment allocations, as a revenue stimulant. Other states, such as Illinois and Indiana with higher effective rates, run the risk of reducing reinvestment that may eventually erode the ability of the casinos to grow market demand penetrations, especially as neighboring states become more competitive. Moreover, effective management can generate higher available profit for reinvestment, stemming from both efficient operations and favorable borrowing & equity offerings.

How a casino enterprise decides to allocate its casino profits is a critical element in determining its long-term viability, and should be an integral aspect of the initial development strategy. While short term loan amortization/debt prepayment programs may at first seem desirable so as to quickly come out from under the obligation, they can also sharply reduce the ability to reinvest/expand on a timely basis. This is also true for any profit distribution, whether to investors or in the case of Indian gaming projects, distributions to a tribe’s general fund for infrastructure/per capita payments.

Back in 1996, the explosion of online casino gambling swept the world. The United States had been a large part of this, and many gamblers had turned to online casinos for all of their gaming. For many years, these casinos continued to be played unabated. Unfortunately, back in 2006, legislation was passed that made it slightly difficult for online casinos to continue to operate. This legislation, sneaked in by piggyback through the Safe Port Act, would be named the Unlawful Internet Gambling Enforcement Act, and it became a thorn in the side of the online gambler, the online casino, and all payment processors there in.

The Unlawful Internet Gambling Enforcement Act of 2006, or the UIGEA, had, in a nutshell, prohibited banks and payment processors from processing transactions that would correlate to online gambling. This has not only complicated loading accounts, but also withdrawing. While USA online casinos have continued to operate, they have had to use payment processors that would circumvent these restrictions. Sadly, the UIGEA was not even set to go into effect until December of 2009, thought the implications of the legislation had fall out that would be nothing short of catastrophic for many online gambling companies, especially those that relied heavily on the United States market.

The UIGEA had hamstrung many of the operations around the world that utilized the American market in order to stay ahead in profits, all the while keeping losses to a low. The implications ran deep, damaging many companies operating these casinos. Not only had some of the larger, publicly traded online casinos taken a major hit to the price per share, which in turn hurt the shareholders of those companies, but also cost the companies profits from the United States Market. PartyGaming comes to mind specifically, though other large gambling firms had taken a hit. Additionally, many executives in charge of several of the online casinos, including Anurag Dikshit, one of the early founders of PartyGaming, had been indicted and fined for their involvement in online gambling – despite the fact that these companies had been based outside of the United States. Payment processors had also been significantly impacted, as many of these financial companies had taken a blow from federal persecution, which, in some cases, amounted to hundreds of millions of dollars in seizures. Sadly, the UIGEA had not even been invoked in many of these seizures. Rather, the Wire Act of 1961, a law that had been passed years before the Internet was even beginning to develop into what we see today.

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Despite the laws that had begun to inhibit online casino gambling, many online casinos continued to accept USA players. While several of the larger brands of online casino had been stripped from the United States market, many others had remained steadfast in their dedication to delivering casino gaming to the American market. Though there are online casinos still operating in the USA, the choice has become limited. In order to focus on a marginal market, online casinos accepting American login binomo players had to provide a service of higher quality. That having been said, those online casinos have had to outclass the older forms of casino software that had removed themselves from the American market.

There are currently three major brands of casino software that have yet to cease operating within the United States. These brands have no intention on leaving the American market, and still out perform those that have already left USA players high and dry. Real Time Gaming, or RTG, Rival Gaming, or simply Rival, and Odds On, also known as Vegas Technology, are the three types of casino software still accepting Americans. Each carries its own unique features, though they universally out perform those who have left the United states behind, including Microgaming, Playtech, and others. While some of the individual casinos operating under these brands have decided not to content with the contention of the United States government, nearly all of them continue to supply USA players with high quality casino gaming.

Casinos powered by RTG are one of the superior three. Real Time gaming has brought high quality gaming to players throughout the United States. Their superiority comes through the digital eloquence of their games. Rather than delivering tired, bland tables games and slots, they have taken steps to ensure that each player will enjoy the smooth graphics and game play of their casino. Real Time Gaming casinos supply their players with enough diversity to remain entertaining, as well as huge bonuses for their players. Casinos outside of the United States, particularly Microgaming casinos, will almost always fall short in terms of bonuses. Through integrated security, these casinos under the RTG brand also remain the most secure.

The second brand of casino gaming comes through Rival Gaming. Rival Gaming has created and subsequently distributed a unique series of games. These games, the Interactive Slots, have brought a whole new level of entertainment to slot games. Rather than the standard spinning of the reels, Rival has raised the bar to the pinnacle of casino gaming. Their table games have also been a huge hit, bringing in players who seek simply to play cards, dice, or other table based casino games. Though players outside of the United States may enjoy the Interactive Slot, there is no international online casino that blocks American IP addresses that offers anything remotely similar to the power and variety of the I-Slot.

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