Slots revenue forecast looks high to some

By Mark Belko,
Pittsburgh Post-Gazette
Thursday, February 23, 2006

Forest City Enterprises believes it can generate $617.7 million a year in slot machine revenue from a Pittsburgh casino, a figure that is far higher than the estimates produced by both its competitors and outside consultants.

Forest City presented the estimates in a letter to Mayor Bob O’Connor and Allegheny County Chief Executive Dan Onorato in an effort to make the case that the Station Square casino would produce the most tax revenue for the state, city and county.

The number is not only higher than the $400 million-a-year estimates advanced by Forest City competitors Isle of Capri Casinos Inc. and Detroit businessman Don Barden, but it’s also greater than those calculated by a New Orleans company that studied the issue for state Sen. Vincent Fumo, D-Philadelphia, before the slots law was passed in 2004.

That study, by The Innovation Group, predicted that 2006 revenues from the Pittsburgh market could vary from $320.6 million to $369.2 million, depending on a number of variables, including the number and location of other Pennsylvania slots parlors.

In addition, a separate study completed by Spectrum Gaming Group for a client who was considering the Pittsburgh market forecast yearly revenues at a “worst case” $211 million, a “moderate” $287 million, and a “best case” $320 million.

The $617.7 million estimate was developed by Christiansen Capital Advisors, a national gambling research firm hired by Forest City to do an analysis of the Pittsburgh market.

Sebastian Sinclair, president of Christiansen Capital Advisors, was unmoved by the lower estimates produced by other consultants. He said he was “very comfortable, as comfortable as comfortable can be” with the revenue projections his firm developed for the Pittsburgh market.

The calculation was based on a formula that included a number of factors such as population, per capita income, the urban location, competition from other markets, access, and gambling spending in comparable regions.

While the $617.7 million may be high compared to estimates done by other consultants, he said it is not so when stacked up against comparable markets.

According to Christiansen-supplied statistics, the Kansas City market produced $603.9 million in slot machine revenue last year. While there are no slot machines in Cincinnati, the market generated $636.5 million in slots revenues for neighboring Indiana casinos in 2004. St. Louis produced $829.5 million in revenue in 2004.

Mr. Sinclair said Pittsburgh is “at least the second best” market in Pennsylvania, perhaps behind Allentown.

Albert Ratner, Forest City board co-chair, said the Christiansen estimate was comparable to projections supplied by Harrah’s Entertainment, the gambling powerhouse that will run the Station Square casino.

He said Forest City asked Christiansen to verify the Harrah’s estimates. He said the $617.7 million figure is actually on “the low side” of the projections supplied by both.

Harrah’s, he added, believes Pittsburgh offers the best opportunity in the state, since there’s little competition from other casinos and the region has a propensity for gambling.

Still, others are skeptical of the estimate.

Paul Girvan, managing director of The Innovation Group, described $617.7 million as “a bit of a stretch,” particularly given that competition will still remain in West Virginia.

“If you’re doing $600 million in Pittsburgh, what’s left for the other guys? Show me that whole picture. You have to cannibalize the West Virginia properties to the point of bankruptcy. I don’t think anyone foresees that happening,” he said.

Factors like population density, casino location, distance from competitors, and the size and attractiveness of the facility were part of The Innovation Group’s calculations for Pennsylvania.

John N. Thompson, a University of Nevada Las Vegas professor who produced a report for Gov. Ed Rendell, also questioned the Christiansen numbers. To get to such a level, a Pittsburgh slot machine would have to generate wins on par with much larger markets like Chicago.

“I just think it’s a little high. Can it be done? People do crazy things, but, yeah, I don’t think it will be done,” he said.

“I don’t know how Christiansen measured this. You can make everybody in Pittsburgh a gambleholic, I guess.”

Forest City told Mr. O’Connor and Mr. Onorato it was confident it would meet the projections. Among its reasons it said Harrah’s marketing, in particular its rewards program, and its customer base were unmatched in the industry and had the potential to bring players from elsewhere.

But Mr. Thompson said he does not believe Pittsburgh will attract many people from other places, particularly when there are no table games.

“I think it’s a big stretch,” he said. “Nobody flies anywhere to play a slot machine.”

Mr. Barden has called the Forest City estimate “pie in the sky.” To get to that number, the average take per slot machine would have to be $423 a day for 4,000 machines or $564 a day for 3,000, he said.

He said he is budgeting $276 a day and that the industry average is $200 to $400 a day. The daily average for the 81,751 slot machines in play in the northeast was $256 last year, according to a Northeast Slot Report compiled by Gaming Industry Observer.

The Forest City estimate also would equate to daily averages higher than those produced by Atlantic City slot machines and those at Connecticut’s Mohegan Sun casino, considered an industry leader in slots. Last year, that casino’s 6,217 machines each averaged $386 in daily revenue.

However, Mr. Sinclair said comparing wins per machine is misleading because it is primarily a supply and demand issue. In other words, the fewer slot machines you have, the higher the win per machine will be.

Joseph Weinert, vice president of Spectrum Gaming, said the Forest City projections would put the Station Square casino in the “upper tier” of slot machine performers.

While his company predicted a high of $320 million for Pittsburgh, Mr. Weinert said that was based on a “significantly lower level” of capital investment by his client than Harrah’s proposed $512 million casino.

He believes Forest City has a shot at $617.7 million.

“Being the only game in town and with a sizeable project with multiple amenities and given Harrah’s industry-leading marketing tools, I don’t think that’s an unrealistic marketing figure,” Mr. Weinert said.

The Allegheny Institute for Public Policy said yesterday the disputes over the revenue estimates are one reason the state should have auctioned casino licenses to the highest bidder rather than selling them for a flat fee.

“Had state officials let the slots license sell through an auction process, casinos dueling over who will produce the most revenue would be irrelevant because each applicant’s revenue expectations would determine how high they would go in the bidding process,” the report said.

“If Harrah’s truly believes they can rake in twice the revenues of other applicants, Harrah’s would easily win the license by out-bidding the other license seekers.”

(Mark Belko can be reached at mbelko@post-gazette.com or 412-263-1262.)

This article appeared in the Pittsburgh Post Gazette. © Pittsburgh Post Gazette