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Sunday, April 24, 2011

The first Baccarat dollar probably costs $30 million a year-and other gaming industry economics

During his 1Q'11 conference call transcript(http://tinyurl.com/Wynn1Q11), renowned gaming industry veteran Stephen Wynn(majority owner of listed integrated resorts player Wynn Resorts) gave some good insights into the industry economics. Discussing the steep entry barriers to opening a gambling business, he explained that if a person who is in the resort and casino business, wants to have a Baccarat game, the price of admission is very high. You need to be constantly working that market, contacting and maintaining relationships with those customers. You have to have a sophisticated organization that can make the credit decisions and execute collection appropriately. Appropriate to a highly levered industry though, the the first dollar of Baccarat probably costs you $30 million a year. But then you can open the door to $200 million of it .

In fact, though the integrated resort theme was itself an effort to reduce the cyclical nature of gambling, it has ended up intensifying it. Casino operators in Las Vegas decided to make themselves hotel/convention centre owners, rent out space for luxury goods/entertainment shows like Cirque De Solil etc, all hoping that playing the dual themes of entertainment and business meetings would reinforce the core gambling business. This integrated resort theme has been imitated globally and in fact, the top operators are using this play to try cracking the last frontier 'Asia'. Anxious to brand themselves as tourism hubs(and not merely offshore gambling joints), countries like Macau/Singapore have fallen over themselves to offer entry to these resorts(despite the hiccups in the Cottai strip at Macau). But still, the cyclical nature and the operating leverage stay. Skilled staff are not people whom you can discard at leisure. And capex/opex savings can be only done to a point without compromising on the overall service experience. So I would say that investors in these resorts should note that the operating leverage at times exceeds that of airlines-after all you cannot avoid flying but you can avoid visiting these integrated resorts.

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