CASINO UPDATE 14

A TIMEFRAME FOR ECONOMIC RECOVERY

Industry experts speak at ICE North America Digital about the e ects of the COVID-19 pandemic on the US gaming industry and how much time it might take for the market to recover.

MODERATOR

JOHN O’REILLY, chairman and CEO, O’Reilly Gaming Group and O’Reilly Law Group

SPEAKERS

GOVERNOR BOB MILLER, Nevada governor 1989-1999

JEFFREY SILVER, Gaming and Hospitality Practice Group, Dickinson Wright PLLC

STEVE GALLAWAY, managing partner, Global Market Advisors

JAMES MAIDA, president, Gaming Laboratories International

JOHN O'REILLY: Could you give an overview of the impact of COVID-19 on the gaming and hospitality sectors?

GOVERNOR BOB MILLER: Obviously the impact is severe. In Nevada it has been particularly severe since it’s our primary industry. As we speak, Nevada legislature is going into special session. The outlook from the governors is that there is a $1.2bn shortfall for this year alone. There have been very significant cuts in governmental expenditure, which will be felt by virtually everybody. Various properties are still not even open and those that are will be dealing at anywhere from 20% to 50% capacity by mandate.

I think there’s the potential to create a situation from which we can’t recover, so we have to try to keep casinos open as much as possible while dealing with the safety of citizens. I think we’d be better off if we had a national policy, which we don’t. It’s been delegated to the states. In Florida, they even delegated it to the counties. If you look at the European Union they have national policy and they have decreased while we are spiking upwards.

JAMES MAIDA: Obviously the casinos are being severely impacted and they are the ones who purchase games and new concepts from the suppliers. The suppliers aren’t getting orders for new equipment, but they’re also losing their participation payments. When casinos are closed no one is playing their games so they’re not revenue sharing on those particular premium products. The trickle-down effect is that the suppliers and the test labs will recover only when the casinos get healthy again and start buying new equipment.

The one area which has not been affected is online gaming. The online gaming suppliers are continuing to submit new products where there's a digital channel, which can be explored. Lotteries are also now reopening and their ticket retailer channels are more open in more states. It’s a big wait-and-see game for the suppliers because they have to wait for the casinos to get healthy.

JEFFREY SILVER: We’re in a situation where we have to think about a couple of things. We have to think about disposable income because our customers need this to want to come to gamble. The experience at tribal gaming is that there’s been pent up demand, at least initially, and they’re seeing moderate levels of continuing visitation. But if people aren’t working nationwide, then there won’t be the kind of disposable income like we had in the last year.

Half of our visitors come from the West and 20% of them come from California. California is in a state of lockdown with citizens living on whatever savings they might have because they’re not working. The number of flights to Nevada has also been impacted because the demand has been so low – just a couple of hundred a week. It’s increasing now but it was in the thousands previously. We’re not getting our feeder from far-away markets.

There’s also a demographic issue because there are people who are my age who don’t want to leave the house. We’re relying on a younger populace and they want one thing, to have fun. So security guards and gaming agents must be on the shoulder of customers to remind them to wear their masks and not get too close to each other.

JO: It appears as if the financial impact on the industry for some is near devastation. Are there any statistics you’ve seen in how much cash-on-hand the industry generally has?

STEVE GALLAWAY: Most of the public gaming companies have ensured they’re in a pretty good position to weather the storm. Most of them have at least nine months while many of them have 18 months to three years of reserves. They’ve been wisely cutting back expenses and spending as little as possible. Many are also making the wise decision to keep their employees. It’s a lot harder to retrain or re-hire. It’s preferable to keep your employees on. First, it’s good for the employees and second, it’s good for the business if you can do that. At some point, though, tough decisions do have to be made to lay off employees. You can’t keep people employed for a year and not at work – it’s just not realistic.

In terms of recovery, we know it’s going to be a long time particularly for Las Vegas. I think Vegas will probably be the last place to recover. It’s already an incredibly expensive place to go visit and on top of that, we already saw visitation being flat. On top of that we see people being hesitant to travel.

JO: Do you see any shifts in the industry as a result of the pandemic in terms of possible licensing or regulatory changes?

JS: The most exciting part of all of this is the fact that we as an industry are a group of very forward-looking innovators. Last week, the Nevada Gaming Commission adopted regulation that’s going to permit cashless wagering. Overall, I see that the regulatory environment is loosening up as such that they recognize the need to have an industry that’s more attuned to this next era we find ourselves in. I’m very happy with the response of the regulators when it comes to the willingness to accept and adopt new ideas. GBM: I think the overview is that we’re in uncharted waters still. Nothing is certain to get us through this dilemma as yet. We’re taking incremental steps. Most recently, there have been discussions surrounding masks and how much they can prevent spread of the virus and what kind of an environment we can have in our casinos. It’s experimental currently and if we look across the world we can see greater success in certain regions. We have a disproportionate number of incidents of COVID-19 in the US and at least in my opinion a lot of that has to do with a lack of national policy.

JO: What do we see as the general timeline for recovery?

SG: It’s so dependent on states’ abilities to prevent COVID-19 cases from expanding too quickly and casinos requiring people to wear facemasks and enforcing social distancing. If people don’t have money then they’re not going to be able to gamble, so we need to make sure that we’re doing this responsibly so that the economy can recover and people will have the disposable income. I do believe that regional America is already being shown to recover more quickly than destination markets like Las Vegas.

OPENING THE MARKET

A panel at SBC Digital Summit North America discussed the current state of a airs with regulation in the US, and what’s key to overcoming the challenges to pass sports betting in certain states.

MODERATOR

ANTHONY CABOT, distinguished fellow of Gaming Law, UNLV

SPEAKERS

JOSHUA PEARL, Penn National Gaming new market operations director

REBECCA GIDEN, senior analyst, Eilers & Krejcik Gaming LLC

STACIE STERN, FanDuel government affairs director

JOHN PAPPAS, Corridor Consulting founder and CEO

ANTHONY CABOT: What impact has the COVID-19 pandemic had on impending legislation?

STACIE STERN: Massachusetts is a state looking at potential revenue and legalizing activity but it’s maybe not top of mind for a lot of these legislators who are looking at its other revenue bills like healthcare or crime that have risen to the top of the priority list. States like North Carolina, Ohio and Massachusetts we thought were maybe shoo-ins for sports betting, I think you’re looking for a 2021 passage.

JOHN PAPPAS: There are a lot of unknowns to when legislators will be able to reconvene, and recent increases in COVID-19 cases where states may have been coming back for special sessions or planning to come back weren’t able to earlier in the year. It’s all up in the air right now. I think in a lot of states it’s really been a wait and see approach to what their path to legislating is, much less the political fights that will have to go on to get something like this done. We actually have to get them together to have those fights to begin with. That is still something that is very unknown.

AC: The media have reported a predicted acceleration of legalization as states begin to minimize their budget falls as a result of COVID-19. Are any of you seeing that or is that just speculation?

SS: I think it’s speculation at this point as conversations are still occurring. But again I think this boils down to people thinking they need to meet in person and have these discussions and of course these meetings have slowed down or completely come to a halt. I would say there are ongoing discussions going on behind the scenes in a lot of states that potentially might not have previously addressed sports betting, and it has accelerated some of those conversations behind the scenes.

REBECCA GIDEN: In the states where maybe it’s even more politically difficult to get things done, we are seeing a couple put it to the voters. The states which have to change their constitutions to have it allowed anyways might be taking a first step instead of going all the way to enabling legislation. Places like Maryland and Louisiana have basically just done the referendums this year to see if the voters are willing to back this after showing interest. Maybe there’s a little more political cover next year. If the voters approve it, there’s a more clear consensus that’s what they want and politicians will be able to use that cover to say their voters actually want this, so let’s get this done.

AC: It seems the public is much more accepting of sports wagering than in the past. Is that your experience as well?

SS: You see states now like Alabama and Wyoming, who has a task force seriously looking at sports betting as the centerpiece, and I don’t think this would’ve happened a few years ago. Attitudes are definitely shifting and sports betting has become a more acceptable form of activity.

AC: Legislation is key as it’s the foundation to how sports betting will roll out in a particular state. What are some of the big-ticket items in terms of what to do and not to do regarding legislation?

JOSHUA PEARL: With respect to legislation, any state that is legalizing is looking for new revenue. In order to push things out in an efficient manner, it’s key to be able to push out an end product that will convert those illegal wagering dollars to the legal market. Any legislation should provide a framework for the regulatory body to roll things out in an efficient manner. It’s key to empower them with tools to be able to create an environment that is competitive

with the illegal markets to be able to shift those dollars over. AC: What’s key for legislation being passed in new states? The biggest thing is don’t handcuff regulators, but empower SS: To give a broader picture as someone who is on the ground them to work with operators to create the best environment in several state capitals and working on legislation, it’s ideal to go for the end consumer. into a state with a model legislation, outlining what worked in

Another thing to mention is the sports calendar is very other states. And while we look at this from our perspective and seasonal, so it’s critical if legislation is passing in the spring, say what New Jersey or Colorado did, for example, there’s a real and if a date is handed down by legislation, not to restrict pride of authorship that comes from people who want to sponsor it from going live before the football season. Likewise, if legislation in some of these states. It’s important to look at the something passes late in the year, not to miss out on a whole environment, and people want to make it better. They Super Bowl the following year or March Madness. want to find something they’re going to improve on from what New Jersey or Indiana has done, which is an important perspective. RG: From a legislative standpoint, At FanDuel, we work together you want to keep the market as with DraftKings on legislation. open and flexible as possible to “I THINK IN A LOT OF What we try to do is talk with the have the most successful market and maximized tax revenue for STATES IT’S REALLY BEEN A regulator if they will have those conversations with us from the states. When we talk about an open market, the big points we want to make here absolutely WAIT AND SEE APPROACH TO WHAT THEIR PATH TO very beginning. That can help to shape the legislation, and if you can get some of the legislators include mobile betting. We see in New Jersey, Pennsylvania and LEGISLATING IS, MUCH to work with the regulator and vice versa, you can avoid some Indiana that as they mature, these LESS THE POLITICAL of those pitfalls that we see in markets are quickly settling with about 85% to 90% of the total FIGHTS THAT WILL some states. The biggest misconceptions amount wagered in the states coming from mobile as opposed HAVE TO GO ON TO GET we’re coming across from state legislators are based on things to retail sportsbooks. It’s clear SOMETHING LIKE THIS around consumer protection. that’s where sports betting is going and that mobile is where DONE. WE ACTUALLY HAVE It really concerns legislators that a mobile device can be consumers want to be doing TO GET THEM TOGETHER safer than going in-person to sports betting. Including mobile and TO HAVE THOSE FIGHTS TO register for an account, which is something we’ve tried to remote registration with mobile is important since some BEGIN WITH. THAT IS STILL educate lawmakers about. This method is one which consumers in some states SOMETHING THAT IS really is safer and you really are several hours drive from their nearest casino, which is a VERY UNKNOWN.” do know who the person is on the device through multiple huge barrier. This way they can participate easier in the activity. – JOHN PAPPAS types of verification. Another opportunity In the few states that do have that states have that concerns in-person registration, such as Nevada, they’re having to work some legislators is college sports. There’s thinking that we around the pandemic by doing drive-through registration need to protect the student athletes, which leads to legislators since the casinos were closed. Illinois has suspended their favoring the prohibiting of college sports, when in actuality in-person registration. The states are seeing that in-person there is already wagering going on in college sports, and registration is really hampering consumers’ ability to just off-shore apps that allow for college sports wagering. play in a legal market place. Those athletes are already at risk, and the greatest way to

States don’t need to reinvent the wheel. The benefit of coming protect them is through the regulated market. That’s when in the second wave after the 2018 and 2019 states rolled out you know there are integrity issues, through the regulated is that there’s a lot of good information out there, about what market, but it seems to not resonate right away with legislators. works and what doesn’t. There’s a lot of template language for They feel they need to prohibit college sports to protect the both legislation and regulation that states should look to, to athletes so it’s an uphill battle to convince them that is not adapt to their own uses, rather than start from scratch. the way to do it.