Jun. 18, 2006 - When high-rolling casino executives in Atlantic City talk about the emerging gambling market in Pennsylvania, they sound a lot like the maitre d' at a fancy French restaurant commenting on a McDonald's popping up across the street.

They use put-downs such as "slot shacks" and "convenience gaming" to describe the Keystone State, reserving "destination" and "attraction" to identify the Garden State's gaming resort.

So why should Pennsylvanians care about Atlantic City, which for many has been little more than a bunch of slot machines at the end of a cheap bus trip?

Because it's the biggest competitor facing Pennsylvania's newest industry. Because the once-dying resort town is abuzz with construction and investment. And because several of the companies that want to build casinos in Pennsylvania own them in Atlantic City, raising questions about whether they're interested in expanding into a new market or defending an existing one.

As Pennsylvania gets ready to add up to 61,000 slot machines from Philadelphia to Pittsburgh, casinos in Atlantic City are aggressively expanding, building hotel rooms by the thousands and wrapping high-end shops, restaurants and spas around the casino floor. Trying to shed its seedy-casino-town stigma and compete with Las Vegas, Atlantic City is reinventing itself as a getaway for vacationers and conventioneers, with much more to offer than slot machines and blackjack tables.

Predicting how Atlantic City and Pennsylvania will interact is a complex equation that involves factors yet to be settled. The most significant question is who will be building the casinos in Pennsylvania: those with a stake in Atlantic City or those without.

Industry analysts predict Atlantic City could see a small reduction in Pennsylvania day-trippers when slots parlors open closer to their homes. But over the long-term, the new casinos could benefit Atlantic City by introducing more people to gambling and making them interested in trips to the East Coast's gaming capital, they say, especially if Atlantic City companies build Pennsylvania's casinos.

But some of the other companies that want to build casinos in Pennsylvania say they will be a much greater threat than Atlantic City is predicting. They say they will build world-class resorts that draw people from New York and New Jersey, the heart of Atlantic City's customer base.

Despite the uncertainty, one thing is clear: the gaming markets in each state will be starkly different.

Atlantic City has 12 casinos clustered in an 11-square-mile city. Pennsylvania will have 14 casinos scattered throughout a 46,000-square-mile state, with half of them at racetracks. Atlantic City offers blackjack, craps and other table games, which Pennsylvania won't.

Gambling taxes will be much higher in Pennsylvania, estimated to be more than 50 percent when license fees are taken into account. Atlantic City casinos pay 9.25 percent, which allows for more aggressive investment and more giveaways to gamblers in the form of free rooms, free meals and free shows.

The gaming concentration in Atlantic City, the availability of table games and the low tax burden that allows casinos to be generous with freebies will give Atlantic City an edge, some industry analysts say. If anything, Pennsylvania casinos will result in a slight decrease in Atlantic City's day-trippers who don't spend a lot of money, they predict.

"When you have isolated casinos that don't give away anything, you get marginal customers who don't make you a lot of money," said Lawrence Klatzkin, a gaming industry analyst with the investment firm Jeffries & Co.

High-end shopping

A walk through the Tropicana Casino and Resort demonstrates Atlantic City's evolution.

Sitting by a slot machine on the sprawling casino floor was Shirley Slaughter, president of a senior citizens club in Maryland that has taken monthly bus trips to Atlantic City for about 30 years. The bus fare runs about $20 a head, and each passenger gets $8 back to spend at the casino, she said.

"It's great," said Slaughter, of Pasadena. "You get roped in and push that button. We like the excitement, and we like to gamble."

They don't stray much from the casino, she said. Usually, they spend what they can afford, have a buffet lunch and get back on the bus. And they come to Atlantic City because there are no casinos in Maryland, she said.

Meanwhile, in The Quarter, a $245 million Tropicana expansion that opened in November 2004 and features high-end shops and restaurants, Matt Egilmez, 27, of Queens, N.Y., and Dianna Silva, 25, of Philadelphia, strolled the marble floors lined with fake palm trees. It was their first time to Atlantic City, an overnight trip, and they plan to return.

In The Quarter, guests can dine on veal cutlet and stuffed mushrooms at the Italian restaurant Carmine's. Shoppers can buy a $3,195 pearl-and-diamond necklace or pick up a 1.7-ounce bottle of "Blackberry and Vanilla Musk" perfume at Bluemercury Spa.

"We're not big on the casino," Egilmez said.

"We came for the beach and a change of scenery," said Silva, standing outside a P.F. Chang's restaurant.

'Not just gambling, strippers'

There were similarly contrasting scenes of the old and new Atlantic City down the strip at the Showboat Casino.

On the first floor, buses queued up outside a hallway that looks more like a Greyhound terminal than a resort. Senior day-trippers sat quietly in chairs waiting for their rides home.

Hours later upstairs, the younger crowd rolled in for a concert at House of Blues, a hip, new venue added to increase the casino's appeal. Rock band Gov't Mule played beneath smoke and colored lights while the audience swayed and clapped to the rhythm. Gray-haired 50-somethings in tie-dye shirts mingled with scruffy-faced 20-somethings in jean shorts and baseball caps turned backwards.

The city's marketing slogan is "Atlantic City: Always Turned On." But Mark Longhurst, who drank a beer while watching the Gov't Mule concert, suggested a more direct slogan: "Atlantic City: It's not just gambling and strippers anymore."

"There are more high-rise hotels and great live acts that draw more people," said Longhurst, who lived in New Jersey for 10 years before moving to Florida. "There's live music at just about all the casinos. And good acts, not just old has-beens."

91 percent occupancy rate

Casino operators in Atlantic City have reasons to be optimistic.

Atlantic City drew 35 million visitors in 2005, and its 12 casinos made $5 billion in gaming revenue. Casinos are filling hotel rooms as fast as they can build them, and the rooms are fetching more per night.

In 2001, Atlantic City casinos had 11,432 hotel rooms that rented for $78.13 a night and an average occupancy rate of 91.5 percent, according to the New Jersey Casino Control Commission. By 2005, the number of casino hotel rooms jumped more than 30 percent to 15,122 rooms. The average rate climbed more than 20 percent to $94.86 a night, and the occupancy rate held steady at 91.3 percent, according to the commission.

The momentum is expected to continue.

An additional 10,000 hotel rooms are anticipated over the next several years, with $1.5 billion in projects either under way or about to break ground. They include an 800-room expansion at the Borgata Hotel Casino and Spa, a 954-room tower at Harrah's Atlantic City that will be the tallest building in the city at 557 feet, and an 810-room tower at Trump Taj Mahal.

Of course, there are the non-casino attractions. The 320,000-square-foot outdoor mall Atlantic City Outlets -- The Walk, which links the city's convention center with casinos through a strip of name-brand shops such as Polo Ralph Lauren and Liz Claiborne, is an example of the city's effort to give visitors something to do beyond the casinos. The 15-block mall has been so successful that it is being expanded and will double in size.

'Pennsylvania ... good for us'

Given the investment outlook and visitor trends, Atlantic City isn't sweating Pennsylvania casinos at all, said Jeff Vasser, executive director of the Atlantic City Convention and Visitors Authority. Actually, it's looking forward to gambling getting more exposure, which could create more players and heighten interest in Atlantic City, he said.

"They're going to find gaming to be a great form of entertainment, and they're going to want to come to where the big boys play," Vasser said.

"If someone wants to pull a lever on a slot machine, they won't have to go far," he said. "If they want great shopping, dining and entertainment, they're going to come here. We think Pennsylvania will be good for us."

Jim Perry, president and chief executive officer of Trump Entertainment Resorts, said Atlantic City will distinguish itself as a destination.

"It will combat the onslaught of convenience gaming," Perry said. "Convenience gaming is very different."

Gaming interests in both states

Of course, not everyone is betting that Atlantic City is Pennsylvania-proof.

How the markets interact will depend largely on who gets permission to build casinos in Pennsylvania.

The list of aspiring casino operators includes four companies that own casinos in Atlantic City. Trump Entertainment Resorts, which owns three Atlantic City casinos, wants to build in Philadelphia. Harrah's Entertainment Inc., which owns four Atlantic City casinos, has a bid in for a racetrack slots parlor in Chester and a Pittsburgh casino. Boyd Gaming Corp., which owns the Borgata, wants to build a casino in Limerick Township. And Aztar Corp., owner of the Tropicana, has proposed a casino hotel in east Allentown. With the exception of Harrah's plan in Pittsburgh, all are within reasonable driving distance of Atlantic City.

Meanwhile, other applicants have no stake in Atlantic City. For instance, Matzel Development wants to build a casino resort in the Poconos, and Sands BethWorks Gaming, a partnership that includes Nevada-based Las Vegas Sands, is eyeing the vacant Bethlehem Steel site for a gambling, shopping and entertainment complex with a historic theme.

Klatzkin, the gaming analyst, predicts that Atlantic City companies would have an incentive to steer Pennsylvania customers to Atlantic City, where taxes are significantly lower.

"What I see is that Pennsylvania is basically going to be a funnel for Atlantic City," he said. "If the slots licenses go to companies with properties in Atlantic City, like Harrah's, Trump or Aztar, they'll send their good gamblers to Atlantic City where taxes are lower. If you're paying 54 percent versus 9.25 percent, where are you going to send your customers?"

Competing with Atlantic City

Representatives with Matzel and Sands bristle at the suggestion they'll build two-bit casinos that draw only gamblers who live nearby. Both companies say they intend to compete directly with Atlantic City by creating destinations that draw from the same Northeast market.

"It's an unfair characterization to say Pennsylvania will be slot shacks and convenience gaming," said Dennis Gomes, a former Aztar executive working with Matzel on its Pocono casino proposal, which would include a 12-acre lake. "That's where I think these guys are wrong. Some will be true destination resorts with everything and more than any place in Atlantic City. I think it's something Atlantic City may be afraid of."

Officials with Sands BethWorks Gaming, the partnership eyeing Bethlehem, say their lack of a stake in Atlantic City should give them an advantage in obtaining a Pennsylvania license. They are proposing a casino resort that incorporates historic structures on the Bethlehem Steel site. William Weidner, president and chief operating officer of Las Vegas Sands, said any Atlantic City companies trying to build casinos in Pennsylvania have "an inherent conflict of interest."

"It's only logical that if a place like Aztar has $1.2 or $1.3 billion invested in New Jersey, you'd want to protect it and you'd want to steer people to where you have a lower tax," Weidner said. "You'd use your Pennsylvania project as an outpost to find customers. It's an inherent conflict of interest from day one."

Gary Simpson, senior vice president of finance and development with Aztar, disputed that his company sees Allentown as an outpost to steer customers to Atlantic City. And Atlantic City companies have the advantage of knowing the Northeast market and having customer bases on which they can build, which should give them a competitive advantage in Pennsylvania, he said.

Pennsylvania and Atlantic City will be comparable to California and Las Vegas, where California has scattered Indian casinos serving day-trippers and Vegas is the getaway, Simpson said.

"We've looked at the Allentown/Lehigh Valley market as a stand-alone opportunity, not as a defensive play for Atlantic City," Simpson said. "I think there are two advantages to the Atlantic City operator: The existing database of local customers, particularly in northern Jersey, and also the desire of customers to see something different."

The debate, for now, rests in the hands of the Pennsylvania Gaming Control Board, which is scheduled to begin deciding in September which casino companies will get a piece of the action in Pennsylvania.

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GAMBLING

IN ATLANTIC CITY

Casinos: 12

2005 visitors: 35 million

2005 casino revenue: $5 billion

Casino hotel rooms: 15,122

Slot machines: 42,488

Table games: 1,273

Sources: New Jersey Casino Control Commission, Atlantic City Convention and Visitors Authority

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