May 28, 2003 - ATLANTIC CITY, N.J.--Gary Loveman of Harrah's Entertainment Inc. pointed to what he sees as an even bigger threat for gaming than a sluggish economy making gamblers stingier. Taxes. 

"The problem for all of us is the risk that one state after another will respond to better [revenue] performance by casino companies with ever-increasing taxes," said Loveman, Harrah's Entertainment president and chief executive officer. 

"Until we slay that dragon," Loveman told the Seventh Annual Mid-Atlantic Gaming Congress here last week, "that will be the principal risk -- unpredictable taxation." 

Loveman and other heads of Atlantic City's major casinos weighed in on pending taxes proposed by New Jersey Gov. McGreevey and gave a forecast of the coming year. They talked about protecting their market share amid flashy new competition and about adjusting to changing preferences as gaming celebrates its 25th anniversary in Atlantic City this month. 

The Borgata Hotel Casino & Spa, set to open this summer as Atlantic City's first new casino in 13 years, is expected to dramatically affect business. 

"We think that, certainly, we have something to offer that will bring people that have never been to Atlantic City before," said William S. Boyd, chairman and chief executive officer of Boyd Gaming Corp., which, with MGM Mirage, is bankrolling the $1 billion Borgata. "We hope and expect to grow the market with our product." 

But the industry is off to a slow start after a record year last year. 

Inclement weather, the war in Iraq, and a weak economy caused 2003 first-quarter gross operating profit at Atlantic City's 11 casinos to plunge 12 percent to $237.6 million, according to statistics released last week by the New Jersey Casino Control Commission. 

Collectively, the three Trump casinos had their best year ever in 2002, but revenue was down at all three for the first quarter ended March 31. Trump Taj Mahal reported net revenue of $118.5 million, down from $124.9 million from a year ago; Trump Plaza Hotel and Casino posted $70 million, down from $75.9 million; and Trump Marina Hotel Casino had $58.5 million from $63.2 million. 

The 12 casinos (prior to the December merger of Claridge Casino Hotel with Bally's) produced gross operating profit of $1.2 billion for 2002, up more than 9 percent, on net revenue of $4.2 billion, up nearly 3 percent. 

Gamblers lost a total of $4.38 billion to Atlantic City casinos in 2002, nearly a 2 percent increase over the year before. The industry's profit margin last year was 26.8 percent, up 2.8 points from the year before. 

Consolidation over the last five years has helped to rein in costs and improve the bottom line. 

The three companies that own a majority of the casinos -- Park Place Entertainment Corp. with three, Trump with three, and Harrah's Entertainment with two -- are increasingly sharing executives and functions among their casinos and achieving economies of scale, according to the chief executives at the conference. They also are making do with fewer employees, with just under 45,000, or about 4,400 less than five years ago. 

Park Place Entertainment, the leader in market share in Atlantic City, merged the Claridge with Bally's at the end of last year, eliminating some costs. 

New technology, such as coinless slots, also is expected to boost revenue and cut personnel costs. The Borgata will be the first casino in Atlantic City to introduce a completely coinless slot system that uses only ticket credits and tokens. Existing operators are expected to follow suit. 

The innovation comes as slot-machine play continues to be the revenue powerhouse for casinos here -- winning nearly 4 percent more in 2002 than in 2001, for a total of $3.26 billion. Table games, by contrast, continued their slide in popularity, with revenue declining nearly 4 percent to $1.12 billion. 

"Slot machines have a much higher profitability margin and require less personnel and are very popular," said Lawrence Klatzkin, gaming analyst for Jefferies & Co. Inc. 

Industry-wide, slots represented nearly three-quarters of all casino revenue in Atlantic City in 2002. 

"We're putting more slot machines on the floor from a variety of manufacturers, using a variety of gaming denominations," said Wallace R. Barr, chairman and chief executive officer of Park Place Entertainment. "We've been adapting very well to the market demand and following a very simple policy of giving our customers what they want." 

Last year, Harrah's Atlantic City overtook Bally's as the city's leader in cash flow, or gross operating profit, with a record $184.2 million, up nearly 16 percent. Harrah's put some of it back into capital investment by opening a fourth hotel tower and adding nearly 1,200 slots. 

First-quarter numbers for 2003 show Harrah's with a 40.8 percent profit margin and with net revenue up nearly 10 percent. Only Harrah's and Atlantic City Hilton reported cash-flow gains compared with a year ago. 

Sands Casino Hotel -- one of two independent casinos in Atlantic City (the other is Resorts Atlantic City Casino Hotel) -- reported the steepest cash-flow decline, down 75 percent to $2.3 million, which it blamed on poor weather and elimination of most table games and cutbacks in slot marketing. 

At Harrah's, "our margins have never been better in Atlantic City," Loveman said. 

Industry observers predict the new Borgata will pressure existing casinos into a marketing war to stay competitive. 

"If they do that," said Roger Gros, editor of Global Gaming Business magazine, "that really impacts their bottom line." 

The Borgata is a key part of a $2 billion building boom around town. Besides new hotel towers at Harrah's, Resorts, and Harrah's Showboat Atlantic City, dining, entertainment and retail projects are sprouting up, including a $250 million retail complex at the Tropicana Casino and Resort. 

But Paul E. Rubeli, chairman of Aztar Corp., which owns the Tropicana, said his company would have postponed the retail project if it had known of McGreevey's proposed increase in the casino gross revenue tax from 8 percent to 10 percent, as well as a 6 percent sales tax on casino comps and a 7 percent hotel tax to help close a projected $5 billion budget deficit. 

"With uncertain future taxation, the risk goes up," Rubeli said. "It's as simple as that. And then you don't do the project." 

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