Next casino should expand the market, not just mine it
To grant a second gaming license or not to. That is the question facing the Pennsylvania Gaming Control Board. It shouldn't be. While the commission has been holding hearings to determine whether a second casino should be built, the commissioners have missed the point.
It is not about ensuring one casino's survival but how to maximize gaming revenue and economic activity for Philadelphia and Pennsylvania. The best way to do that is through competition. Grant the second license to the bidder that best adds to overall economic activity, and let the battle begin.
It might surprise everyone how survival of the fittest really gets the business juices and revenues flowing.
The issue of a second casino license exists because the group that had been awarded that license could not get it up and running. The license lapsed and new bids went out.
In the interim, revenue from gaming slowed. That raised questions about the viability of two casinos in Philadelphia.
So, how should we sort this out?
First, we need to know what the purpose of the second casino is, other than that the law allows for two casinos in Philadelphia. Is the casino there simply to raise revenue for the state or, as I believe it should, also be a foundation for greater economic activity in the city? The board does not seem to have a clear idea, or at least has presented no explanation.
If the purpose of the casino is to just provide a place for gaming, then another box of slots, with gaming and a few other amenities, would fit the bill just fine.
But should it be something else? This is a public project, since government is limiting access to the market. Shouldn't it trigger significant additional economic activity, as well? Philadelphia has failed to recognize that opportunity. Just look at the sports facilities and even the one operational casino, SugarHouse. Few additional businesses can be traced to their locations.
The strategy should be to pick a project that has the potential to add to other economic, non-gaming activities. This is critically important. Why? Think Atlantic City, where the casinos walled off not just the questionable parts of town but also the Boardwalk and ocean. Once you entered into a casino, you could have been anywhere.
In the short run, that strategy successfully led to gamblers focusing strictly on gaming and the amenities inside the buildings. Once the gaming monopoly was broken, Atlantic City had few other activities to fall back on.
A better way for Philadelphia would be to widen the potential market, rather than just deepening it by catering only to those who want to gamble. For example, Las Vegas has been making the city more "family-friendly" to attract visitors for non-gaming purposes.
The concept of broadening the market has clear implications, not only for which contender should be chosen, but also for the claim that the market is maxed out and cannot support another casino.
Consider SugarHouse's testimony that another casino would cannibalize the market and make it difficult for SugarHouse and maybe the new casino to survive. That may not be the case since gaming need not be the only source of revenue. And in any event, the stakeholders knew there were going to be two casinos when they made their investments, and government's role is not to protect them against competition.
But even if the argument has merit, it still doesn't make the case for not awarding a second license. There is no reason to think that SugarHouse is the best gaming model possible. Instead, through competition, either both casinos will find ways to survive and grow the market sufficiently, or the best model will prevail.
SugarHouse has not captured significant gaming revenue. Evidence of that are the five groups competing for the remaining license. Those groups say there is a lot of money out there to be made, and it is worth it to let them try to prove they are right.
The next casino should expand the market, and not just mine it. It should help foster additional economic activity and mesh with the strengths of the city, such as the hospitality sector. The more the project creates an attractive force for other businesses, the more it will add to the city's and region's economies.
The Gaming Control Board should award the second license to the group that best fits this model, and I bet the casino owners will make the two work.
Joel Naroff is president and chief economist of Naroff Economic Advisors Inc., in Holland, Bucks County.