And now it's official: On Monday, Gov. Ed Rendell signed into law a bill that will allow up to 61,000 slot machines at 14 sites -- seven of which are racetracks -- across the state of Pennsylvania.
I find this interesting for several reasons.
First is the sheer number of slots. To put this into perspective, the 61,000 potential slot machines would vault Pennsylvania past the 40,000 slots at the 29 commercially owned riverboat casinos in all of Mississippi - the most liberal of the riverboat gambling states, which in all rakes in $2.7 billion in gaming revenue annually. It is also more than the roughly 40,000 slots in the nearby Atlantic City market, which accounted for about $3.5 billion in gaming revenue for the 12 months through the end of May.
For reference, the roughly 210,000 slot machines in Nevada brought in more than $6.3 billion in fiscal 2003.
So who wins, and how much?
The obvious answer is that the slot makers - primarily International Game Technology
But another question is how optimistic we should really be.
Can we expect 61,000?
Initially, the seven racetracks and five of the non-racetrack locations will be allowed 3,000 slots each, with two resort locations allocated 500 slots each. Based on this, we can reasonably assume initial deployment of 37,000 slots sometime over the next couple of years.
However, we should note that the 3,000-slot figure is greater than the slot count at any of the Mississippi casinos, and about as many as at the two Ameristar
And after six months of operation, the Pennsylvania sites with 3,000 slots would be allowed to install up to 2,000 additional slots, which could make each of those slot operations larger than every casino in Atlantic City except for Trump Hotels' Taj Mahal.
Basically, what I'm getting at is that we are talking about lots of slot machines.
And there's another factor. By the time the initial 37,000 slots are deployed, neighboring states - namely Maryland and Ohio - may already have chosen to legalize gaming (an issue we'll discuss in a minute). If that were to occur, then it would seem more likely to me that it will be 10,000 to 20,000 new slots in neighboring states instead of the top end of the legal figure in Pennsylvania, rather than 10,000 to 20,000 new slots on top of the 61,000 in Pennsylvania.
I'm inclined not to assume much more than the initial 37,000 slots in Pennsylvania. However, I also suspect that we will in fact see the other 10,000 to 20,000 other slots -- if not in Pennsylvania, then in neighboring states instead.
What about the casinos?
This is another issue that I don't think is as black-and-white as it might appear.
What seems readily apparent is that the Atlantic City market will be hurt. Where Harrah's, Caesars, and Trump combine to control over 75% of the slot market, those three companies stand to lose the most. However, as we pointed out a couple of weeks ago, Harrah's and Caesars' losses will be offset by gains at properties they own in Pennsylvania, which stand to benefit greatly from new slot offerings.
Penn National
But I also had another thought.
By bringing gambling closer to home, the new slots may be creating a market of thrill-seeking Pennsylvania gamblers for the resort markets to feed on. If the destination resort is in fact a trend in Atlantic City, and not a fad -- i.e., the new Borgata opened last summer is the future of Atlantic City, rather than the exception -- then it's quite possible that Atlantic City may stand to reap the benefits again sometime into the future.
Naturally, that argument also applies to the Las Vegas Strip (see The Logic of MGM-Mandalay).
Interstate spillover
It's really how this kind of thing happens nowadays. Consider this scenario:
You're Nebraska. Every year, some of your residents in Omaha (population: 390,000) take a five-minute drive across the river and drop hundreds of millions of dollars at two riverboat casinos and a racino in a little town called Council Bluffs (population: 60,000).
The problem is two-fold: (1) Gambling is illegal in your state, and (2) Council Bluffs is in Iowa. You don't really want to legalize gambling, and you never have. But Nebraskans are going to gamble anyway, so they might as well deposit their tax dollars in Nebraska instead of Iowa, right?
And that's exactly what's about to happen.
In November, Nebraskans will vote to allow two casinos in their state, most likely in Omaha, to draw the tax dollars back over the river. And this will happen not because Nebraskans want to legalize gambling, but because it makes sense to, and they "might as well."
Take it from the words of an Omaha native:
At a press conference following the Berkshire Hathaway annual shareholders meeting this past May, a local business reporter asked Warren Buffett and Charlie Munger how they would vote, to which Buffett replied: "I will vote against it, but I can sympathize" with the legislature.
And I bet this is the exact scenario that is being played out in Maryland and Ohio. And Ohio might just have it worse: What may be the country's most competitively dominant casino is Argosy's Lawrenceburg, which rakes in 60% of the $700 million-plus Cincinnati market. That casino is in Indiana.
This is just the beginning
Actually, it should probably read: There is no end.
I'll be honest -- I like casinos. I like being able to practice my skills in the poker rooms and at the blackjack table. And when I need to take a minute and chill, I like being able to kill a few minutes and a dollar or two at a penny slot machine.
At the same time, I don't think casinos are for everybody. Most people don't understand the odds, and the vast majority of casino patrons are net spenders. That's OK, so long as the gambler doesn't cross his threshold - something that unfortunately happens much too often.
That said, the legalization of gambling is no longer an issue of what people want or don't want, or like or don't like. It's now merely an issue of tax economics.
Pennsylvania is hardly the first state to go down this path, and it certainly won't be the last.
Fool contributor Jeff Hwang owns shares of International Game Technology, Ameristar Casinos, and Berkshire Hathaway.
