States see $ sign in gaming, analysts skeptical

By Joan Gralla

NEW YORK (Reuters) - Staring at the video lottery terminal at New York's Yonkers Raceway, Diane sighed as $300 was reduced to $20 in less than a minute.

"I don't want my son to know; that's all the money I had," she said.

Diane and her friend Frances, two middle-aged gamblers, are core customers of the Empire City casino. Its 5,300 slot machines are a source of revenue for the state of New York which also wants to turn Long Island's Aqueduct Racetrack into a "racino" by adding thousands of slots.

A growing number of U.S. states are considering legalizing slots to try to generate revenue to plug budget gaps, even as the recession has hurt the country's gaming industry.

The warning signs for New York and other states considering expansion into gambling to fill their coffers is illustrated by Las Vegas, where the "win" -- the money a casino collects from gamblers minus the winnings it pays out -- has fallen for 17 months through May.

Gambling is just one revenue source for many of the 50 states but the money can add up quickly. Connecticut, for example, has garnered $5 billion from its two Native American casinos since they opened in 1993.

The problem for states is not merely a lack of demand among middle-aged and senior players. Diane comes to play about once a month and would come every day if she could afford it.

The question states are asking is whether younger players will find slots, reincarnated as video lottery terminals, as alluring as older players, and whether the new "Transformers" -- consumers who have morphed into savers during the downturn -- will return to gaming with their previous fervor.

Craig Parmelee, a Standard & Poor's analyst, said it could take three to four years for consumers to resume spending freely enough to rekindle gambling revenues.

MARKETING EFFORT

The Empire City casino, owned by the Rooney family, owners of the Super Bowl football champion Pittsburgh Steelers, said a new marketing effort had countered the downturn's effects.

All but about 40 cents of every $5 plunked into the video lottery terminals is returned to gamblers, Marketing Director Ryan Murphy said.

New York state collects about 66 percent of that 40 cents in taxes, while the lottery and breeder purses get another 7 to 8 percent, Murphy said. So the casino keeps about 10 cents.

The proliferation of new sites has put states at risk of cannibalizing one another's revenues. After years of failed attempts, Maryland legalized as many as 12,000 lottery terminals, partly to block Delaware, Pennsylvania and West Virginia from siphoning off gamblers.

Other states, including Kentucky and Ohio, are reviewing whether to legalize slots as neighboring Indiana has done.