Why new entrants haven’t been a threat for the casino industry
Huge capital requirements
The casino industry has heavy capital expenditures in gaming machines. This contributes significantly to the total output that’s generated by a casino operator. This is why the threat of new entrants to the industry has been low.
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The above chart shows how the revenue generated from gaming machines forms a significant portion of the total revenue for the U.S. states. All commercial gaming states with table games and slot machines collect at least 62% of their revenues from electronic gaming machines. Properties in Iowa—with 91%—and South Dakota—with 90.3%—receive the largest percentage of revenues from slots. Nevada—with 62.5%—receives the smallest portion from slots.
Government policy and regulation
The casino industry is highly regulated by the government at the state and central level. The lucrative nature of casinos makes it an important source of government revenue. However, the social harm makes the government balance the positive and negative aspects of the industry. The government requires that casinos are licensed. There are strict criteria that casinos have to meet. This creates a barrier to entry. Only a few selected players are allowed to enter the market.
Casinos are scrambling to differentiate themselves to meet the customers’ expectations. As a result, potential new entrants are hard-pressed to produce a casino that would surpass the other casinos. A new casino has to overcome customer loyalty in order to attract customers. However, the average customer will usually be willing pay to experience a new casino.
There are established casino players like Las Vegas Sands (LVS), MGM Resorts (MGM), Caesar Entertainment (CZR), and Boyd Gaming (BYD) in the U.S. As a result, it would be challenging and costly for a new operator to carve a separate niche in the casino market. This creates an entry barrier for the industry. Exchange-traded funds (or ETFs) like the Consumer Discretionary Select Sector SPDR Fund (XLY) and the VanEck Vectors Gaming (or BJK) track leisure companies.