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" The Aladdin is a disaster. No magic lamp will fix this unimpressive, badly run casino hotel, a $1.3 billion debacle on some of the best Strip real estate. It&amp;#039;s not just that the doors are small and too close to the street or that the service is confused. To understand why the Aladdin&amp;#039;s fate is sealed, you have to understand a little about how the Vegas casino business works.  See, one of the reasons I&amp;#039;m popular at parties is that I greet everyone thusly: &amp;quot;Guess the average daily profit on a slot machine in a casino on the Vegas Strip.&amp;quot; Everyone I&amp;#039;ve asked, even those good at math, and even those who know that the twenty-five biggest casinos average more than two thousand slot machines each, has guessed from $1,000 to $15,000. The actual number: about $110. And that&amp;#039;s gross profit--money jammed in minus money pouring out--so it doesn&amp;#039;t include the cost of the machine or the massive outlays for taxes, power, marketing, maintenance, staff, and free drinks. As for the Aladdin, its slots average about $80. Beneath all the glitz and vice and showgirls, the casino business looks a lot like the grocery-store business: skinny margins on commodity products with failure and success relying solely on management skill and real estate. At the moment, a couple of factors have the Vegas grocers on the ropes. But long term, the business is healthier than it might appear, and there&amp;#039;s a good way to play the trend in the short term. THE PROBLEMS Oversupply. There are now 125,000 hotel rooms in Las Vegas. For most of the last few years, about 90 percent of them were occupied on any given day--a singular achievement in the hospitality business. But last fall, occupancy rates started falling, a trend that has continued into this year, when the figure hit 80.3 percent. It&amp;#039;s not simply a question of too many rooms, but fewer people. Overall January and February visitor volume fell 1.8 percent versus last year, and February casino revenue fell a brutal 12.6 percent year over year. That means the pricing on those rooms comes under pressure; Bear Stearns points to an 18 percent drop in the rate nonconventioneers will be paying this year. Electricity. Think of Vegas and you think electricity--endless lights, sounds, elevators, and the rest. A typical Strip property uses about as much juice as ten thousand homes. By summer, when the desert heat makes the air staler than the mummified jokes Jay Leno trotted out at Bally&amp;#039;s, electricity rates will have increased nearly 50 percent from last fall, including a brutal 25 percent across-the-board casino rate hike. Southern Nevada will need to buy more than 2000 megawatts of supply on the open market, where prices have skyrocketed with California&amp;#039;s energy crisis.  The Economy. It&amp;#039;s not just Nevada&amp;#039;s woes. California provides about a third of Las Vegas&amp;#039;s annual visitors. Just as higher energy costs and a slowing economy are squeezing Cali leisure spending, Indian gaming in the Golden State is starting to emerge. The result: Auto traffic from California to Vegas dropped 4.3 percent in the first two months of 2001. THE OPPORTUNITY Excellent management. When MGM bought the Mirage properties last year, the latter&amp;#039;s flagship Bellagio, arguably the prettiest and poshest hotel in the city, was running at about a 14 percent return. Paring expenses from $1.8 billion to $1.6 billion and increasing cash flow from $260 million to $300 million means that the yearly rate of return is now up to 18 percent. Much of the credit belongs to Bellagio president Bobby Baldwin, the ex--poker champ and Steve Wynn loyalist who stayed on after his pal had been vanquished by MGM&amp;#039;s takeover. Left to his own devices, Baldwin&amp;#039;s as good a manager as he is a Hold&amp;#039;em player. Innovation. The casino business attracts some of the most creative thinkers, financiers, and developers in the world. The Vegas elite turned up their noses when Sheldon Adelson promised to tear down his blue-collar Sands and replace it with a stunning hotel-casino that would also house massive conventions. The prevailing wisdom was that a property could go after conventions or the high-end Vegas vacationer but not both. So when he opened the Venetian amid labor woes and an unfinished canal attraction, with only half of the shops and restaurants ready, you could almost hear the snickering. I spent a couple hours with Adelson at the time and felt pretty sure that someone who relegated himself to a bare-bones office and a small bowl of ice cream with chocolate syrup might have a better shot at competing than his executive-suite rivals believed. Today, Adelson&amp;#039;s closing in on the last laugh. All the retail is open (I had a terrific dinner at Wolfgang Puck&amp;#039;s Postrio in March), and the casino is humming. Moreover, the Venetian has about 50 percent more meeting space than the rest of the top-ten Strip properties combined. With convention attendance rising 16.4 percent in the first two months of 2001, that&amp;#039;s a good place to be. Then there&amp;#039;s the Steve Wynn factor. Wynn bought the Desert Inn last year, home to a rich legacy of Vegas history, including Howard Hughes and Dan Tanna. He&amp;#039;s been unsuccessful so far in raising money to do something with the sprawling 220-acre property, but one of the worst wagers in Vegas is a bet against Steve Wynn. Revenues from all over. People everywhere remain compelled by the chance to get lots for a little. The numbers being posted by casinos outside Nevada are awfully impressive, and the Vegas-based casino companies are capitalizing on them. One way to measure a casino is by its &amp;quot;win per position,&amp;quot; the average amount of profit per seat at a table game, sports book, or slot machine. In Vegas, each spot produces about $212 a day. At Mandalay&amp;#039;s Grand Victoria, a miserable floating casino in Elgin, Illinois, the daily average is a whopping $804. While those numbers tend to dip as more casinos open, plenty of states have caps on licenses that ensure high margins, making for a near-riskproof investment for well-run casino companies. In Detroit, MGM Mirage earned back its entire investment in just two years. Resilience. I know, gambling on riverboats and Indian reservations is supposed to spell doom for the Vegas casinos. But the Strip has been written off many times before. Alan Gordon, senior vice-president of gaming at Bank of America, recalls how everyone was writing Vegas obituaries when Atlantic City casinos first opened. &amp;quot;They&amp;#039;ve been talking about the overcapacity of Las Vegas since before I came here in 1982,&amp;quot; he says. &amp;quot;Yes, there are challenges, but even the best Indian properties are not Strip properties. You can&amp;#039;t go from the casino at the MGM Grand, the world&amp;#039;s largest hotel, to the Bellagio&amp;#039;s world-class collection of art. That&amp;#039;s only here.&amp;quot; THE PLAY While it&amp;#039;s increasingly looking as if Vegas has hit a plateau, Jason Ader, gaming analyst at Bear Stearns, predicts that the next period of growth is four to five years away. &amp;quot;Something will come along that will make the current monuments look pass\u00E9. Like the Bellagio did to the Mirage--which everyone said couldn&amp;#039;t be topped--someone will do to the Bellagio.&amp;quot; I agree with Ader, and I think stocks like MGM Mirage, Harrah&amp;#039;s, and International Game Technology (a leading maker of gaming equipment) are solid value plays for the long term. MGG has the best portfolio of geographically diverse properties, while Harrah&amp;#039;s continues to dominate the slots trade and the rest of the middle market. But I buy stocks when the next wave is on its way rather than at its peak. The problem with gaming stocks right now is that some have already posted excellent returns over the past year. (Harrah&amp;#039;s is up 70 percent, IGT 130 percent.) Moreover, the reason they held up so nicely as the rest of the market crumbled is troubling. As the growth sectors (Internet, biotech, and so on) disintegrated, investors sought refuge in casino stocks. With the Internet and biotech sectors recovering and with less money in the market altogether, I fear the casino stocks could feel some short-term pain. That&amp;#039;s too bad. But consider: In 2001 and 2002, the gaming industry is expected to generate $4.5 billion in free cash flow. Since the casinos are no longer building much, nearly all of that cash can be deployed to buy back stock or pay down debt. What&amp;#039;s all this mean? Bonds, baby. The high-yield debt, particularly that of the high-quality, diversified companies with operations in many geographical areas, will show improved credit risks. All of them pay at least 8 percent, with the Venetian (whose stock is not publicly traded but whose debt is) paying even more. Junk bonds on a Vegas casino sound awfully risky, I know. But if you believe, as I do, two things--that people will always love to gamble and that cash generation is king where high-yield bonds are concerned--then this gamble just might have the sweetest payoff. "^^<http://www.w3.org/2001/XMLSchema#string>
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