Inside Asian Gaming

INSIDE ASIAN GAMING | May 2008 Casino Marketing You may be tired of hearing me constantly repeat that the casino business is about creating value rather than making money. Value is a nebulous term that can relate to both the customer and the casino. It can even relate to a public company’s shareholders or to a Native American Tribe’s members. “Volatility Comfort Level” (VCL) is one of the many variable factors that can affect value. Therefore, it is important to review the concept of VCL and clear up the many misconceptions out there. Do you know your casino’s VCL? For that matter, do you know your own personal VCL? For example, if you went to a Roulette Table, would you be comfortable betting $1,000 straight up on a number that pays 35 to 1 odds? This represents high risk but high potential reward—a high VCL. Would you be more comfortable betting only $10 on Black or Red, which is an even money bet with minimal risk but also minimal potential reward—a lowVCL? Simply stated, VCL is tolerance of risk relative to the potential value that can be gained. As I mentioned previously, it is one of the subtle factors that can have a dramatic influence on value or perceived value in a casino. It can also influence profitability. Without profit, a casino would have a hard time creating value. Given the recent consolidation in the US casino industry, new casino developments in Asia and the unsteady US economy and financial markets,VCL is become increasingly important. Given the recent spate of consolidations in the US casino industry, it is worth observing how industry giants make decisions around on VCL. For example, Harrah’s, which is known to have a relatively lowVCL, recently acquired Caesars Palace,which has a very high VCL. This is comparable to the situation when low VCL Circus Circus—which is basically a grind casino with low VCL—decided to build the higher-end Mandalay Bay Casino, which has a relatively high VCL. More recently, MGM Mirage Corporation acquired both Mandalay Bay and Circus Circus.Thus, Harrah’s and MGM Mirage are two industry giants with properties within their respective portfolios that have diametrically opposed VCLs. The big question is what will happen next? Will Harrah’s operate Caesars Palace with a very high VCL? They could downgrade the VCL of the property, but by doing so they would denigrate Caesars Palace’s cachet as a high-roller property. Instead, Caesars recently adopted an even higher VCL by announcing the highest betting limits in Las Vegas. Another option would be to spin off Caesars Palace and sell the property and thereby keep the Harrah’s corporate VCL consistent throughout the company. This would simplify various marketing programs and yield cost savings on some of their marketing efforts. The same could be true for MGM Mirage, which will also have to decide what to do with grind properties such as Know Your Casino’s VCL Casino marketing consultant Steve Karoul explains why everyone in the casino industry should be aware of the concept of “Volatility Comfort Level”