What’s wrong with gambling?
I don’t mean morally, although many folks object an industry built on betting. I’m asking about the business: by the end of September four of Atlantic City’s 11 casinos will have closed or gone bankrupt. Gambling revenues in New Jersey have fallen to $2.8 billion from almost $5 billion. In Mississippi, revenues have fallen from $2.9 billion to $2.1 billion. Takings have even tumbled in Nevada, though not by as much.
Part of the problem has been the proliferation of casinos. 39 states now have casino gambling, up from 2 states—Nevada and New Jersey—25 years ago. Why should New Yorkers drive 2 ½ hours to Atlantic City when they can play the slots just a few minutes away in Queens? Also, many consumers are still skittish after the financial crisis. In spite of its high-roller image, more gambling earnings come from middle and low-income customers, and that segment of the economy is still stagnant.
But a big disrupter has been online gambling. If you don’t want to drive hours, why even drive minutes to get the buzz that comes from winning a wager? Internet sites and mobile apps provide immediate access. The same forces that are disrupting entertainment, publishing, banking, and many other industries are killing centralized gaming. It’s just more convenient to play online than to go to a casino.
Gambling is an industry with low barriers to entry and lots of internal competition. Margins are under continuous downward pressure. Sometimes the most successful investment in an industry is no investment. As the 1978 Kenny Rogers song says, you need to know when to walk away and when to run.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!