Aug. 20, 2003 - Tuesday's opening of the Pala Casino's $105 million hotel and spa expansion is only the latest salvo from the San Diego gambling market.

San Diego's tribal casinos make more money than the two Connecticut Indian behemoths, Foxwoods and Mohegan Sun, and the city ranks with Las Vegas, Chicago and Connecticut as the nation's most powerful locals casino markets, industry experts said.

They predicted San Diego area casinos will increasingly tap into Nevada gaming revenues.

Although experts said the biggest hit is likely to be felt by casinos in Laughlin, Jean, Primm and downtown Las Vegas, smaller and pre-1989 Strip resorts could also feel the pressure from San Diego-area casinos, they said.

Bear, Stearns & Co. last year estimated that San Diego-area casinos, including Pala, Barona, Pauma, Pechanga, Harrah's Rincon, Sycuan and Viejas, had about 16,275 slot machines.

Compact renegotiations, believed to be in temporary limbo because of the effort to recall the state's governor, are expected to allow tribes to significantly increase their slot machine counts above the current 2,000-device max.

Eliminating a prohibition on non-card-based casino games could allow craps and roulette, which are now forbidden.

Even though none of the San Diego-area tribes have the kind of freewayside locations Las Vegas locals operators prefer, the market's slots produce numbers far superior to any Las Vegas property.

Quality tribal casino management, California demographics and a slot supply/gambler demand imbalance in San Diego are expected to combine to drive the market's success.

"With San Diego and all of the other Southern California markets, there has to be some erosion of the Las Vegas market," said Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno. "With Pala, (Harrah's Entertainment-managed) Rincon, and Pechanga, you've got a real corridor of destination resorts. They'll (hurt) the comparable markets first: Primm, Laughlin, downtown. But as these properties continue to add (slot machine) supply, there will be an impact on Las Vegas."

The Las Vegas impact is hard to predict, but the oldest and weakest of the Strip casinos are likely to be hurt the most, he said.

"It's a Darwinian process," Eadington said. "For a long time there was a thought in Las Vegas that the (California tribal casinos) would never move beyond sawdust joints. There was a lot of complacency."

Coast Casinos Chairman and Chief Executive Officer Michael Gaughan said Tuesday that the San Diego tribal market is an exceptionally lucrative market.

"I think these places will devastate Laughlin, Reno and downtown (Las Vegas)," Gaughan said.

Barring a major terrorist incident, he said modern resorts on and around the Strip will be able to withstand the growing competition from San Diego and Palm Springs tribal casinos.

Mandalay Resort Group spokesman John Marz said Mandalay Bay, Luxor, Excalibur and Circus Circus on the Strip haven't reported declining California business.

"Would the numbers be higher if it weren't for California?" he asked. "I don't know."

But business at Mandalay Resort's two Jean casinos has been seriously squeezed by the availability of Las Vegas-style locals casinos in California, and additional investment to reverse the slide isn't likely, he said.

"Are we going to invest (substantially) in Jean?" he asked. "No, we're not."

The Pala property's expansion raises the hotel-casino's total cost to about $225 million. The Pala Band of Mission Indians has about 890 members, and the casino is the band's primary economic locomotive.

"The expansion will be a plus because it will help us to provide education, health care and scholarships," Pala Chairman Robert Smith said. "The casino has been really beneficial."

Pala now has 507 hotel rooms, including 85 suites.

A 10,000-square-foot spa with 14 treatment rooms and a resort-style pool also opened Monday.

The big moneymakers, of course, are the casino's 2,000 slot machines and 77 table games -- about as many as New York-New York.

Pala opened its 1,000-seat cabaret in June, with Jay Leno headlining, and opens its 2,000-seat outdoor Palomar Starlight Theater today.

Pala CEO Jerry Turk said the Pala Band's expanded hotel-casino is poised to market beyond the sweet demographics of San Diego, Orange, Riverside and Los Angeles counties.

"We now have a true destination, and we'll expand our marketing to Las Vegas, Arizona, Reno and Northern California," Turk said.

Pala Casino joins the nearby Pechanga and Harrah's Rincon as northern San Diego County properties that combine the upscale gaming environments of top Las Vegas' locals casinos like Suncoast or Green Valley Ranch with access to some of the country's most affluent metropolitan areas.

Farther south, Barona Valley Ranch has its own hotel as well a top-flight golf course.

Station Casinos Chief Financial Officer Glenn Christenson said he thinks the growth of the San Diego casino market won't hurt Las Vegas.

"It's a terrific market and growing," Christenson said, suggesting that Southern Californians could learn to gamble more, similar to the way Station's bread-and-butter Las Vegas locals' do. "(If they) spend more of their disposable income for gaming, (the growth of the San Diego market) could help Las Vegas."

Eadington questioned Christenson's opinion that the spread of gaming could teach Californians to gamble more, creating new potential Las Vegas customers.

"About five years ago that was a popular argument," Eadington said. "But (ultimately) people will choose a more convenient location, all things being equal."

Turk said casino industry insiders know how strong the San Diego market is.

"The market probably generates about $750 million (in cash flow) a year," Turk estimated. "There's not a property in Las Vegas that wouldn't be envious of us."

Deutsche Banc equity analyst Marc Falcone said he thought Turk's cash flow estimate for the San Diego-area casinos was conservative.

"San Diego has the highest concentration of $200-million-plus cash flow producers in the country," he said.

And he wasn't leaving out Las Vegas.

That's right, San Diego has more properties that make more than $200 million in cash flow in a year than does the gambling capital of the world, he said.

Falcone predicted Turk and the Pala Band would continue to succeed.

"Pala was one of the first top-quality properties in the market," he said. "It's extremely well-designed and the expansion gives them hotel product."

Pala is five miles east of Interstate 15 on California Highway 76.

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