INDUSTRY TRENDS
Saturation vs. Equilibrium: A Distinction With a
Difference
by James M. Klas
W
ords matter. Words do more than communicate what we think at a point in time. They
shape what we think in the future. That is the basis
for the maxim that whoever defines the terms controls
the argument. From a less combative perspective,
words can clarify and focus, leading to greater
understanding. However, they also can confuse
and misdirect, leading to errant conclusions and
misguided actions.
One word that has been used with increasing
frequency regarding the gaming industry in general,
including Indian gaming, is saturation. More and
more often, you find discussions about whether
particular gaming markets or even the industry as a
whole is “saturated.” The word saturation, like any
word, has a specific meaning and associated
connotations. Used accurately, it leads to logical
conclusions regarding appropriate future actions.
Used inaccurately, or perhaps better put, imprecisely,
it can lead, using the same logic, to future actions that
are, in fact, not appropriate and even damaging.
A different word, one that has a different meaning and
different connotations, therefore leading to different conclusions and actions, is equilibrium. Equilibrium is the more
precise and more accurate word to describe the current
conditions in the gaming industry and its various regions and
markets. It is a distinction with a difference. An industry or
market in equilibrium requires very different actions as future
conditions evolve than one that is saturated. To understand
the difference and why it matters, begin with the definitions
of each word, taken from Merriam-Webster Online:
Saturation: the act or result of supplying so much of something that no more is wanted.
Equilibrium: a state in which opposing forces or actions are
balanced so that one is not stronger or greater than the other.
The extended definition of saturation is the highest possible
concentration such that no more can be added. By contrast, the
extended definition of equilibrium is of a balance that is stable
unless acted upon by an external force, a substantive change in
conditions. Technically, even saturation can be affected by a
change in conditions, although that aspect is often forgotten.
As used in relation to the gaming industry, saturation is
intended to indicate that nationally, regionally or locally all of
the demand for gaming is satisfied. No increases in supply or
32 Indian Gaming
October 2014
changes in other conditions can induce more demand for
gaming. The evidence offered in support of this conclusion is
the decline in revenue at existing properties or markets as
new casinos open in their proximity. The most recent high
profile example is Atlantic City, but other markets and individual
casinos have been held up as examples across the country. The
evidence itself is accurate and easily verified. It is the conclusion, the definition, the word - saturation, that is incorrect.
The industry as a whole has actually shown remarkable
resilience in the face of the Great Recession and continues to
show growth potential. Based upon analysis of industry
statistics from the NIGC, the AGA and state gaming commissions, total casino revenue in the U.S. on a fiscal year basis in
2013 equaled over $65.4 billion, up 44.6 percent from FY2003
and nearly $2 billion higher than the prerecession peak of $63.5
billion in FY2008. Two regions of the country, the Northwest
and the South Central, never experienced a decline in revenue,
even during the height of the recession. Only one region, the
Southwest, which includes Nevada, has failed to fully regain
its prior revenue peak. Even there, roughly 37 percent of the
revenue lost in the recession has been recovered and revenue
has grown in each of the last three years. Figure 1 above shows
casino revenue trends by region for the past ten years.
Economics is about equilibrium, the balancing of supply
and demand in the market. The balancing does not happen
INDUSTRY TRENDS
instantaneously. Significant changes in supply and demand or
the conditions that affect them take time to reverberate through
the system before a new balance is attained. As a result,
short-term shocks, such as the Great Recession or changes in
the gaming regulatory environment, can mask long term trends
and potential as the pendulum swings to and fro before the
new balance is achieved. Much of what is being described as
saturation today fits into this category.
A measure of equilibrium in the gaming industry is average
win per gaming position. It reflects the spread of gaming
demand across the entire supply of gaming machines and
tables available. In a truly saturated market, a change in
supply would yield a one-to-one inverse change in average win.
In a market that is not fully saturated, a change in supply will
yield less than an equivalent change in average win as the
market rebalances.
Figure 2 above shows the change in total gaming positions
and average win per position for the past two years by region
and in total. Only one region, the Southwest, has experienced
a decrease in supply as the industry continues to rebalance from
the Great Recession, in particular the effects of the housing
bubble that are still being felt. Average win per position has
increased in the Southwest during the same period by a higher
percentage than the decline in supply, indicating even here a
rebalancing rather than saturation.
Only one region, the North Central, has experienced a
decline in average win per position during the past two years,
accompanied by the second highest growth in supply of any
region. Again the fact that average win has declined by a
smaller percentage than the increase in supply indicates a
rebalancing of the market to a new equilibrium point, rather
than full saturation. For other regions and the country as a
34 Indian Gaming
October 2014
whole, increases in supply have actually been accompanied by increases in average win per position, a clear
indication of further growth potential.
The resilience of the Indian gaming segment of the
industry is already known. Indian casinos experienced a slight decline in 2009, more than recovered
by 2011 and have continued to grow. The regions in
the Southwest, Region II and Region III, have
experienced a decline for the same reasons as Nevada
but are moving slowly in the right direction. The
regions in the Northwest and South Central, Region
I, Region V and Region VI, showed no ill effects from
the recession. Region IV showed a very small and brief
decline followed by rapid recovery and further expansion. Supply growth in the North Central region is
still being absorbed at present. Region VII experienced
a small decline and has remained fairly stable since
but is primed for further growth if/when new tribal
facilities develop in Massachusetts and New York.
If the distinction between saturation and equilibrium is clear, what is the difference? How does it affect
the industry, various markets and individual casinos and tribes?
Gaming is affected by the laws of supply and demand like any
industry. However, its highly but unevenly regulated status still
creates artificial curbs on economic activity that can change
rapidly and with major effects. New casinos in Massachusetts
and New York would be one example. Off-reservation projects,
or changes in compact terms regarding the number, operating
rules and types of games are others. The potential for important regulatory changes and resulting changes in economic
equilibrium, for better or worse from a tribal perspective,
remain possible, even likely.
Money can be made in a state of equilibrium even if it
remains stable. Identification of niche demand segments,
enhancements in amenities, renovation and updating of
gaming floors and especially greater and more focused efforts
in database marketing and customer service can yield significant incremental impacts aside from larger structural changes.
Given the lingering recessionary pattern of declining average
spend per visit; efforts focused specifically on encouraging
increased spending from existing customers will be important.
Most importantly, the difference between equilibrium and
saturation means that it is neither necessary nor even wise to
simply stand pat and stop looking to the future. With detailed
planning, appropriate scaling, careful cost and financial
structuring, and continued focus on improvement at all levels,
the rewards that can be gained will be worth the risks. ®
James M. Klas is Co-Founder and Principal of KlasRobinson
Q.E.D., a national consulting firm specializing in the economic
impact and feasibility of casinos, hotels and other related ancillary
developments in Indian Country. He can be reached by calling
(800) 475-8140 or email [email protected].