Harrah's Improves Its Odds

Harrah's Entertainment (NYSE: HET  ) is once again showing off its marketing machine.

Third-quarter revenues and profits were hurt by higher taxes in Illinois, Indiana, and Iowa. Atlantic City also dropped off due to competition from MGM Mirage (NYSE: MGG  ) and Boyd Gaming's (NYSE: BYD  ) Borgata. Pre-opening expenses at the Showboat in Atlantic City hurt profits further.

Cross-market play jumped 15%. This contributed to a 2.2% overall increase in both revenues and profits to $1.14 billion and $0.93 per share, respectively.

For now, forget the numbers
Numbers can't possibly do justice to the magnitude of what Harrah's accomplished this quarter.

When the summer began, Harrah's riverboat operation was a far-flung collection of second-best properties, some at less-than-competitive locations in their respective markets. Harrah's brand -- despite its formidable marketing machine -- struggled to attract high-stakes table game play. In some markets, the company was also at a disadvantage in its play for its core retail (low-stakes) slot players.

But Harrah's has taken three significant steps toward improving its competitive positioning in the new jurisdiction markets.

Step one: trim fat, exit Vicksburg, Miss.
All four riverboat casinos in Vicksburg run on the same road off I-20. To the south is Alliance Gaming's (NYSE: AGI  ) Rainbow, which is nothing special. To the north are Ameristar (Nasdaq: ASCA  ) , Isle of Capri (Nasdaq: ISLE  ) , and Harrah's.

You can't get to Harrah's without passing Ameristar. As you get off the highway, Ameristar's large hotel is on the right and in full view, and its companion riverboat to the left is the largest in the market, accounting for 35% to 40% of the market's revenues.

In recent years, Ameristar has taken advantage of its location by putting capital to work, adding amenities and gaming capacity. Ameristar now owns almost half of the blackjack tables, 40% of the craps tables, and the first coinless slots in the market.

At the far end of the Vicksburg market, Harrah's smallish boat simply can't compete in its current state. As Ameristar continues to eat up market share, it put Harrah's to a decision: Build a reason to drive past Ameristar and Isle of Capri, or get out.

At $225 million in total revenues, Vicksburg isn't a large enough market to warrant a struggle. Rather than throw money at a problem that isn't worth fixing, Harrah's saved its resources and announced the sale of the property to privately held Columbia Sussex on June 30.

Step two: purchase Horseshoe Gaming
With its pending purchase of Horseshoe, Harrah's accomplishes quite a bit. Harrah's smallish current property sits at the farthest end of the $1.2 billion Tunica, Miss., market. In the bottom tier of the nine-property market, this wasn't even Harrah's first failure in Tunica.

Buying Horseshoe Tunica, the premier property in the market, gives Harrah's significant opportunity to compete against Park Place's (NYSE: PPE  ) Grand Tunica and Mandalay Resort Group's (NYSE: MBG  ) Gold Strike for the high stakes players in the market. Again, location is key, as Horseshoe Tunica shares the closest cluster to Memphis.

In Chicagoland, Harrah's had already owned two second-best properties in the $2.1 billion, nine-property market. While it's questionable why Harrah's would even want a third property in the market, Horseshoe Hammond is the best positioned in the market, a mere 15-minute drive from the Loop.

And with the sale of its boat in the Shreveport/Bossier City, La. market, Harrah's essentially swapped its #2 boat for Horseshoe's #1.

Step three: coinless slots
Coinless slots represent a major advance in gaming -- for the casino and the patron. But to really appreciate it, you've got to understand how slots work.

You'd think that when you drop a coin in the machine, it recycles itself out when you win. What really happens is that coin goes straight into what is known as the "drop box." The coins that get paid out are already in the "hopper," which pays out when a winning combination triggers it.

Of course, you can only stuff so many coins in the hopper, which is why coin-pay slots can only pay up to a certain number of coins. This means that jackpots -- even as small as a $60 payout on a nickel machine -- require a time-wasting hand-pay from a slot attendant. Also, the hopper needs to be filled frequently -- more human labor.

Coinless slots can pay out higher jackpots without a hand pay, meaning less labor. And there's no more hopper fills. Instead, an occasional "paper fill" is all that's needed. All of this means fewer slot attendants and lower labor costs.

Paper also benefits the patron by allowing seamless transition between slot machines of any denomination, and it also saves time spent waiting for the machine to spit out coins. More time spent gambling.

Coinless slots and competitive advantage
These coinless slots also have competitive consequences, and Harrah's is playing catch up. At the end of 2000, Ameristar purchased its St. Louis and Kansas City properties from Station Casinos (NYSE: STN  ) . But along with an increase in capacity came coinless slots -- more than 90% of Ameristar's 3,300 slots in St. Louis are coinless, as are roughly half of its 3,100-plus slots in Kansas City.

While coinless slots are obviously not the sole cause, Ameristar has taken the lead in both markets over the past year -- even without a hotel in St. Louis. Until Harrah's receives its order from IGT, only its 5-cent video slots and a few token traditional reel slots at both Harrah's Maryland Heights (St. Louis) and Harrah's North Kansas City are coinless.

Even with Harrah's marketing advantage, coinless slots have given Ameristar something of a first-mover advantage. The addition of coinless slots at Harrah's will both relax a portion of Ameristar's competitive edge and provide operational efficiencies.

Position improved
Clearly, Harrah's has stepped up and created a formidable presence. Fending off a sure date with competitive mediocrity, Harrah's has dumped two second-best properties and replaced them with three market leaders. It has gained a valuable brand and taken the next step both competitively and operationally with coinless slots.

Beyond a doubt, Harrah's is a much better bet to compete across the new jurisdiction markets today than it was just a few months ago.

Jeff Hwang owns shares of Ameristar Casinos and can be reached at JHwang@fool.com. The Motley Fool is investors writing for investors.


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