Horseshoe revenue silver linings

There's a silver lining to the Baltimore Horseshoe Casino's slow start.

It's way too early to panic over reports showing that the new Horseshoe Casino in downtown Baltimore is taking in about a third less money than consultants had projected. It takes time for new casinos to develop, and this one has only been in operation since August. But even if the trends hold, there are some significant silver linings for the state in the data that have come in so far, particularly as we look ahead to the opening of a near billion-dollar casino in the National Harbor development in Prince George's County.

In 2013, two separate consultants ran estimates of the Horseshoe Baltimore's revenue potential and its projected impact on Maryland's other casinos. One projected revenue for the Horseshoe's first fiscal year of operation to be $354.1 million, and the other estimated it at $328.2 million, assuming in both cases that the casino would only be open 10 1/2 months. So far, it's on track to generate about $274 million for that period. That means less for Maryland's Education Trust Fund, less for horse racing subsidies and less for local impact grants.

Still, there are a few reasons not to read too much into this just yet. Generally, a new casino gets an initial boost of revenue as people check it out followed by a period of lower revenues that eventually rise again as the casino finds its niche, builds customer loyalty and develops its marketing. As both consultants noted, Caesar's, which owns the Horseshoe, is known for aggressive and effective use of customer loyalty programs. Also, casino revenues are somewhat cyclical, so the period we have to measure from at this point may not be indicative of overall, annualized performance.

But the big news so far may be the other thing the consultants got wrong, which is how much the Horseshoe would cannibalize business from Maryland Live, the mega-casino just 14 miles away in Anne Arundel County. That Cordish Cos. property had a substantial head start in developing its customer base, and so far, it appears to be hanging on to it. One consultant estimated that Maryland Live would see its revenue drop this fiscal year to $558 million and the other pegged it at $567 million. So far, though, it's on pace to take in $636 million. The combined total of the two casinos, then, is almost precisely what the consultants expected; it's just the distribution between the two casinos that's off.

There's one other interesting tid-bit in the data so far that counts as good news on a number of levels. At least in the early going, the Horseshoe's revenue is tilted more heavily toward table games than the consultants had expected, whereas Maryland Live remains more slots-focused than its new competitor. Under Maryland law, casinos keep 80 percent of the revenues from table games but just 33 percent from slots. All things considered, it's better for the state if the casino that's overperforming expectations is the one that is getting a larger share of its revenue from slots. It's also better that the casino that is geographically closest to areas of high poverty is the one that is more table game-focused, as blackjack, craps and the like tend to draw those with more disposable income because of table minimum bets and other factors.

It's understandable that Baltimore neighborhoods that were counting on the local impact grants the Horseshoe is required to provide would be nervous to see the casino get off to a slower than expected start. But in the big picture, things look more encouraging. The massive revenue drops at the Hollywood Casino in Perryville after Maryland Live opened suggested that Maryland's gambling market was fairly inelastic, but Maryland Live's resilience in the face of the Horseshoe argues for the opposite.

That's important in light of the MGM casino now under development in Prince George's County. The law authorizing the Prince George's casino stipulates that when it opens, the Horseshoe will get to keep an additional 7 percent of its slots revenues, and Maryland Live an additional 8 percent, for promotions, marketing and capital improvements. The state's gaming commission then has the discretion to grant another 3 percent to the Horseshoe and 2 percent to Maryland Live. The fact that Maryland Live is so easily handling its new competition in Baltimore suggests that might not prove necessary.

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