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Gaming Profile -- J. Terrence Lanni

MGM Mirage Chief Speaks Out

Gaming Profiles

Back to the beginning

By Len Butcher

As Chairman of the Board of MGM Mirage, J. Terrence Lanni oversees a gaming empire that has interests in Nevada, Michigan, Mississippi, New Jersey and Australia. This gaming industry veteran is no stranger to the highs and lows experienced by the industry, nor to the ever-changing landscape of an industry that continues to grow worldwide.

In a recent interview, lasvegas.com columnist Len Butcher talked with Lanni about the issues facing gaming, his company, Wall Street, and the industry in general.

LB: Let's start off with the hot topic of the day, and that's the proposed ban on college sports wagering. When you were in Washington recently, did you meet with any senators to discuss this potentially damaging piece of legislation?

J. Terrence Lanni

TL: Yes I did, not last week, but on my previous visit there several weeks prior. I met with members of the United States Senate and the House of Representatives, and the leadership of both parties in both Houses and spent some time talking about this issue.

On the whole issue of the NCAA proposal to outlaw college wagering, we have the facts. We have reality on our side and it's a matter of properly explaining it to people. It's a difficult situation because this is truly a feel-good bill. When Cedric Dempsey of the NCAA tells Frank Fahrenkopf (American Gaming Association president) that the reason he's changed his point of view on Nevada, is that he feels if this regulated, licensed, taxed gambling on Nevada sports is outlawed, the line (point spread on games) would go away, he's living in another world. The Newspaper Guild of America said that if you think if this is bill is passed, we're going to stop publishing the line, then you've got another thing coming. So this is true naivete on Dempsey's part.

What it is, is an organization, and I must admit I've never been a fan of the NCAA, that operates without oversight, that bullies its members, that operates in a God-like fashion and no-one is going to question what it's going to do. And I've always thought that it exploits the student athlete.

LB: Why do you say that? Can you give me an example?

TL: Sure. It takes an athlete 18 years of age, male or female, puts them in a program where the organization is making great sums of money through the television networks for the institutions that they are, quote, "working for," while they're attempting to get a good, solid education.

It tells them, as athletes, they must practice four hours a day. If you're on the basketball or football team, you're traveling two days a week, so you've got to work your courses around that. Then they say, "Oh, by the way, you don't get any money for this." So how, when you're going to college, unless you're the son or daughter of a rich person, are you able to get an education, handle the athletic aspect of your scholarship, and not have some form of payment, even it's minor, so that at least you can go out to dinner with your friends? It's absolutely ludicrous.

LB: So are you saying that the universities should pay college athletes to play?

TL: What I'm saying is that these universities are making a fortune on sports, and so is the NCAA. They signed a $6 billion television agreement just for the Final Four (college basketball championship series) with network television over 10 years.

Now the NCAA says 94 percent of that goes back to the institutions, which is great, as it's a lot of money for them. But 6 percent of $6 billion is 360 million bucks, which means $36 million a year. What are they doing with it?

They've got $36 million a year coming in yet spending only $140,000 on what they call a terrible problem -- sports betting on college games. If they think it's such a big problem, why aren't they spending more money on it? They even admit that there are staggering sums of money wagered illegally. Studies that came before us at the National Gambling Impact Study Commission, argued that between $80 billion and $380 billion a year is illegally wagered.

The portion that is legally wagered in the United States, in Nevada, the only place where it's legal to wager on college sports, amounts to about $600 million a year. They also like to say, "Well, you know, these bets are all being laid off in Nevada." You tell me how you stick $80 billion, at the low end, into $600 million. It doesn't fit.

So there's no logic to it. The facts are on our side, but they can get coaches who can tear at people's hearts, who can cry at a moment's notice, who will get up there and say, "All I care about is the student athlete." My question to them is: What student athlete who has shaved points, what student athlete who has made an illegal wager on a sporting event, has ever been prosecuted at their institutions? They don't even have any instances of that.

The only time we had any prosecutions was when the books in Nevada were able to provide information to the FBI and NCAA that caused the Arizona State situation to be investigated. It is a canard for them to say that this ban will do away with it. All it will do is force it further underground and make it more illegal.

LB: So is there a solution, do you feel, that would satisfy everyone concerned?

TL: What they should do is accept the bill that was presented by the Nevada delegation that says we're going to have a study of the situation to find out what the problem is, before we decide on the solution. They think they've got the solution, but they haven't determined what the problem is. They haven't defined it and they need to define it.

As well, they have to be far more accountable. Their institutions need to be accountable. They (NCAA) are now able to take a member institution and if they violate recruiting, or they violate the student's responsibilities, helping them with grades or whatever, they can be fined, they can be put on probation, they can lose a lot of money from their television rights and post-season play.

Why don't they do that for legal gambling, illegal gambling, point shaving? They don't care about it, that's why. I think they are despicable.

The reason I feel like this is that I don't like dishonest people and they are dishonest and disingenuous on this subject. It doesn't take a rocket scientist to understand that there is a problem, but we haven't defined the problem yet. How much of it's legal, how much illegal? If this study provided by the Justice Department determines that we're a big part of the problem, we'll understand that and accept it.

I don't believe that it will, but we'll live by the results. I think they should live by the results also. What will happen here, if they get this bill passed into law, is that they'll say the problem is no longer a problem, where in reality, the problem will be a bigger problem.

LB: Having said all this, combined with what you know from your talks behind the scenes in Washington, and you're gut feeling, how do you think the vote on legislation banning college sports betting, will go?

TL: I think if the bill goes to the floor without proper discussions, without the ability to go before committees to explain it to all the members, it will probably pass on some kind of a voice vote because it's such a feel-good bill.

When people sit down and listen to some of the facts we share with them, it helps enlighten them, because they've heard only one side of the story. To me, it's kind of funny. If you really have this deep-seeded belief that this is a problem and you're going to deal with it fairly, to tie the bill to March Madness to get the focus on it during the most important period of time in college sport, is a bit disingenuous.

LB: I know you have stated clearly your feelings about the NCAA, but do you believe that organization has the power to control, and to ensure, that their member institutions follow their orders, or maybe for wont of a better word, suggestions?

TL: For sure. People should really take a look at the NCAA. They'll find out a lot more about it. They really do have the control of these institutions. To get college presidents or coaches, who are currently part of the system, to speak against it (NCAA) in a public forum, is very difficult.

Because the wrath of an organization that has, in effect, its own powers -- not unlike a CIA or FBI -- for investigations, it can make life miserable for an institution or a person. They're very dictatorial. This is not a democratic organization, as much as they would have you believe it.

LB: Probably the biggest issue facing the gaming industry is Internet gambling. Will it be legalized here, and if so, what are your company's plans to be a part of it?

TL: I do believe that Internet gaming is here to stay, and I think it should be licensed, taxed and regulated. I don't support legislation that cannot be enforced. That just causes great levels of frustration for everyone.

I don't know what the current positioning is of Sen. Kyle of Arizona. He has indicated some interest in re-presenting the Kyl Bill, which did pass the Senate before, but didn't get through the House. I don't know if that is or isn't going to happen, but let's just assume that there will be some type of federal prohibition on Internet gaming.

Internet gaming is operating in some 22 countries around the world right now, quite legally. I think at some point, when they see the money that's being shipped offshore which is not being taxed, not being regulated and is not benefiting anyone other than people operating in Antigua, the Isle of Man, Gibraltar and other places, there'll be levels of frustration and a hue and cry that will say, "Wait a minute, this is wrong."

When that happens I don't know, but I'm convinced it will happen, and that's only if the Kyl Bill becomes law here in the United States.

Where our company has positioned itself is that we've taken an interest in a company called Wager Works, in which we have an equity interest through preferred stock.

They are launching, as we speak, on a soft basis, six Web sites for fun play based upon volume of activity, not violating any of the interpretations of the regulations and laws here in Nevada. In fact, we're working closely with the Gaming Control Board and Gaming Commission to make sure that what we're doing meets their requirements.

Wager Works and MGM Mirage is licensed here and we are not going to do anything that would jeopardize our licenses. We want to make sure that moves along and that's our first phase. We're doing this, if it's the only thing we can do, to get people to hit into our six sites, our brands, and to allow redemption to get people to come into our live casinos. That in itself will be a winner for us.

LB: But that certainly isn't the only reason for making that move. You mentioned that was your first phase. What follows?

TL: You're right. We didn't enter into it with that thought purely in mind. That was Phase One. Phase Two is that we would definitely want our company to be in a position to use Wager Works as a vehicle, along with the MGM Mirage branding, to go into countries where Internet gaming is legal and operate it on a for-profit basis only. That would only be done at the time that we would convince the necessary authorities in Mississippi, in Michigan, and here in Nevada, that there are safeguards in place, that protect, as much as possible, against any abuses.

You'll always have exceptions, just as we have people gambling in our casinos as we speak, who are under 21 years of age. We could be fined, and even lose our license for that. I think one of the mistakes that people have made on the Internet is that they say, "We can get a fail-safe, firewall system that noone's ever going to hack into."

Well, they hack into the Department of Defense, they hack into the CIA, so we're always going to have hackers. And you're always going to have instances where someone under age is wagering, but I think that through more technological advances there will be ways that will severely restrict this, and it will become truly a rare exception.

Technology and proper firewalls will be created that can convince the authorities on the restrictions that require foreign gaming approvals where we operate. Once that happens, we'll be in a position to operate legally in jurisdictions where Internet gaming is approved, with a regulatory system that meets the standards of the regulatory bodies that we deal with here in the United States.

LB: How difficult do you think that will be to accomplish and are you aware of any technology being created now that would satisfy gaming regulators?

TL: Interestingly enough, I was in Washington last week and attended a presentation by a company that is working with the Department of Defense and others. With a camera, they do digital imaging of a person. They can put this camera on a computer and if I were to log on to wager, they can verify that it's Terry Lanni and I'm sitting in front of the computer. This camera digitally reads me and says, "Yes, you are Terry Lanni, and yes, you're well over 21."

In a study they did for the Defense Department, they took an individual and within 45 seconds did an imaging of this person with a camera the size of a pencil eraser attached to a computer. They were able to then have that person identified, because that person was scheduled to go to the Super Bowl. With the number of people who were at the Super Bowl, within a period of seconds, from the time he entered the stadium, he was identified and located.

You can imagine the applications it can be used for in fighting terrorism, but it can also be applicable to Internet gaming. These cameras are $30 each right now, which is nothing. If you had a legalized Internet gaming site, you'd get that camera for someone, or a credit for them if they gave you say, $60 of wagering, or whatever. If this camera works how I understand it to work, it goes a long way in satisfying the underage issue.

Now you still have the issue of, is the person making the wager actually in Manitoba, Canada, or are they really in Helena, Montana? That's an issue that still has to be dealt with and I know that there are greater minds than mine working on it right now. I think, however, that if you can get to the point where you can control that and guarantee that you have rare instances of people under 21 wagering, and rarer instances of wagering from jurisdictions where Internet gaming is illegal, you'll be in a position to operate in other jurisdictions. That's Phase Two.

Phase Three is what you talked about at the beginning of this short question and very long answer. At some point the United States is going to understand, if it does outlaw Internet gaming, that it has deprived its citizens of economic equality, if you will, with other people who are making great sums of money with it. I'm a great believer in it. I believe that technology will allow you to operate within levels of tolerable occurrences and violations and that there can be a process that would allow a regulatory body to fine you, take your license away, what have you, if you abuse or violate the rules.

LB: Las Vegas has experienced a change in the past decade in the sense that it is no longer looked on as strictly a gaming destination, but rather a travel destination that offers much more than gambling and that change has reflected on the revenue generated at the hotel-casinos. What do you think brought about this change, and how has it affected your company?

TL: During the early days of Las Vegas, everything basically was free and you more than made up with it from the gambling. That was great when you spent two or three million on a facility. Now we spend ten million on a restaurant. As you put more and more into these hotel/casino properties you need everything to become a profit center.

What's really the most dramatic change is that we are all watching each of these areas far more closely than we did before. There's also the changing morays and needs of people. You could get away with some basically pretty cheap things in the early days of Las Vegas. People didn't have high levels of expectation. They wanted glitz, but you could give them flocked wallpaper and cheap carpets with bizarre colors and it worked.

But now, people understand quality and at every level. They know the difference between good and bad. So because of that, we've all had to rethink the whole process of what we're going to offer, because we're competing against other forms of entertainment, other resorts, other food establishments, other suite products. We all had to upgrade them dramatically. When you do that, the cost upgrades dramatically.

So what's happened because of all of this, is that the revenues of the company are just about split down the middle -- fifty percent from non-gaming activities and 50 percent from gaming. In our company, we're closer to about 45 percent non-gaming, but that's in the total panoply of properties owned by MGM/Mirage.

Some differ dramatically and the reason for that is you have to segment our company into three different areas here in Nevada. The more modest area of properties as far as product cost to the consumer would be the Golden Nugget downtown, the Boardwalk on the Strip, Laughlin, and the three properties at Primm and Stateline. Mid-range would find Treasure Island, New York-New York and Monte Carlo, of which we own half. Then you get to the higher end, which includes The Mirage and Bellagio. When you get to MGM Grand, it encompasses all three.

LB: What were the reasons for purchasing the Mirage Group?

TL: We looked at all the opportunities for external growth and thought there was some limitations in that. As much as we were impressed by companies that have focused on riverboats, that just wasn't going to be our business. I'm not saying that is something we would never do.

We looked at the products we had and felt we were more destination-resort oriented. We then looked at the product that was offered by the Mirage corporation and saw three things there.

One, great management. Two, tremendous physical facilities. Three, basic aspect of great brands. When you put those together and the fact that they're destination resorts, all in excellent condition, we thought it was a logical combination to bring these two companies together.

LB: When you talk about brands, wherever you decide to expand in the future, what name would you brand, seeing that you have a choice of three prominent names to use, like MGM, Mirage, Bellagio?

TL: This could change from time to time, but I think you have to judge the particular market place. I really honestly think that to brand a second Bellagio would be a big mistake. Bellagio is an entity unto itself and a cloning of this elsewhere is probably not in our future.

If you take a look at the Golden Nugget name and The Mirage and the MGM Grand name, I think those are names that are more desirable, and maybe more applicable to clone in some other jurisdiction. We have the MGM Grand in Detroit, so we've already committed the MGM Grand name there.

We are now, in our own internal thinking, trying to come up with the final answer to what we want to name the second site next to Borgata in Atlantic City. We know we want it to be a tropical theme, we know we want it to be very much atrium vegetation inside because of the disparate weather that exists in Atlantic City.

The tropical theme certainly lends itself to The Mirage. Now whether it will be called Mirage is something we have yet to determine, but I certainly think it's applicable to consider the Mirage or the Golden Nugget name, in addition to the MGM Grand, as names that could be utilized in other locations in the United States, and frankly, potentially overseas.

LB: Speaking of overseas, it has been the history of Las Vegas casinos to be hesitant about going into foreign markets, other than as operators of casinos on a contractual basis for owners of foreign casinos. Because of the potentially lucrative markets around the world, do you see your company taking a hard look at moving into foreign markets as owners and operators?

TL: We'll consider opportunities in any part of the world, but we have some requirements. One, we will not invest the shareholders' capital in countries that we consider to have significant risk of loss of capital from change of government, instability of government, what have you.

Where we think it's a stable government and we believe that there are good laws as far as repatriating funds and we think the marketplace is appropriate, we would definitely consider it. We have a casino in the Northern Territories of Australia, which we own and operate. It's a small one, but it's one that's in a country with a stable government, stable economy and the ability to repatriate funds without any restrictions.

In South Africa, we felt there was a risk, although we felt it was a great opportunity, but we chose there to only get development, management and operating fees, and success fees, which has been good for the company.

We are looking at other markets. We know that Macao is opening and we're considering that market. We know that there are some potential opportunities in the United Kingdom. If we can find the right fit, we think that would be an excellent means of furthering our involvement in European marketing. For all of the strengths of international marketing that a number of casino companies in Las Vegas have had, we have all, as an industry, not done a very good job of marketing in Europe.

We think that having some presence in the UK, and/or on the Continent, would afford us not only the opportunity to do well in those local jurisdictions, but also broaden the recognition of the name and the marketing capabilities that we have to bring people into our properties here in the United States.

Such as the Borgata project in Atlantic City and the second site in the H-tract next to it, which is our emphasis for the next development for this company. So we see there's a lot of crossover benefits available to us.

LB: Where does this put any other development plans for the Boardwalk?

TL: We have 35 acres altogether leased or owned by us on the Boardwalk, and still have a small portion of land which we have been unsuccessful in obtaining and that's going through a condemnation process as we speak. We have an additional 14 acres near the Trump Marina, which interestingly enough was originally sold by the MGM years ago to Mirage and now we end up owning it again.

We have the 55 acres next to the Borgata site and then beyond that another 25 acres for a third site. We're considering each of those sites and what, if anything, we'll do. Our current focus is on the second, 55-acre site and we do believe that Atlantic City, the new Atlantic City if you will, is more likely to occur at that part of Atlantic City as compared to the Boardwalk. Our current focus is much more on the H-tract than it is on the Boardwalk.

LB: We have heard that next year we will experience a predicted increase in visitors of two percent, still an increase, but down from the seven percent increase we experienced this year. With that in mind, plus the fact that the economy seems to be slowing, how do you feel about the announcement that we may see the beginning of construction for some three new hotels, not counting Steve Wynn's Desert Inn property?

TL: Well, first, you have to realize that on weekends, most of the hotels here are running at almost100 percent occupancy, and through the week, although not full, have a very high occupancy rate.

I think the real issue here is that if someone is just building capacity without an emotionally-exciting aspect to it, we don't really want it. Obviously, in a free society, you have the right to build whatever you want if you can get the financing, but I don't think it would be any good for Las Vegas.

To build a property with just more rooms, without additional attractions, would be a major mistake. The quality product would be a product that is special, that is a must-see attraction, that makes people say, "Ive got to come and see it."

Bellagio is a perfect example. The Venetian is another must-see attraction. By not mentioning others doesn't mean I don't feel they fit into that category, but the point I'm making is that you have to build something like these properties. To build a 700 or 2,000-room property with a couple of restaurants and nothing else, that doesn't bring people into Las Vegas. It's just more rooms fighting for the same number of people.

This town, in the past 15 years, does much better when there's something special, that gets the attention of the rest of the world. People coming to town, according to the Chamber of Commerce, will visit three to four hotels, so if you're doing what you're doing well, as long as your property is one of those must-see attractions, you're going to get some benefit from that new property. We need new, exciting properties which will bring new business.

That's why we would be very pleased to see Steve Wynn be successful putting his financing together and his thought process together, because we know he'll build something very exciting. And when he does, we think we have some exciting properties in the MGM Mirage family that the people who he brings into town, will also want to be a part of what we do.

LB: Gov. Kenny Guinn recently said that he felt the casino industry, and I'll paraphrase his remarks here, should chip in to finance a national advertising campaign for Nevada. What do you think of the governor's suggestion, and will your company participate?

TL: I'd love to see some of the other businesses in the Nevada community, who benefit so richly from this industry in which I find myself employed, participate in some of these programs also. The big department stores, the auto dealers, the restaurants outside of hotels, any number of businesses, do quite well as the result of the number of people coming here.

I think there should be broader form of representation on the part of other people who benefit so much from operating in Nevada. It's always, why doesn't the gaming industry do this or why doesn't the gaming industry do that?

We all spend a great deal of money advertising. The room tax, for instance, goes right into the Las Vegas Visitors and Convention Bureau. We sponsor that. We, as an industry, sponsor the Thomas & Mack facility, which is in direct competition with our Grand Garden Arena. And they bid against us for the same entertainment acts, and are willing to bid more because they're willing to take losses. We're a for-profit corporation and can't do that.

We do tons of advertising and marketing. If you take a look at the balance of trade in the United States, we're one of the few industries with a positive balance of trade with the amount of money that we bring from people coming from outside this country, into the country. That's another form of great value. I think we're doing more than our fair share.

LB: Mayor Goodman, as you know, desperately wants to turn downtown Las Vegas into a showcase for the country, if not the world, and is determined to do it. I know that the mayor and the gaming industry on the Strip aren't exactly on the best of terms, but do you think the mayor's on the right track?

TL: Well, we have a major investment downtown and we think the finest property, the Golden Nugget, that represents about half of the EBITDA for the entire downtown market.

I think the mayor has been utilizing the bully pulpit rather well, as a matter of fact. It can always be better, but I think he's well-intentioned, and although I can't speak for the industry, I think many of his proposals make a great deal of sense.

LB: Have you noticed any kind of an impact on your properties from Indian gaming, or is it still too early to make any kind of assessment?

TL: I think it's too early to tell because the deadline for the placement of the slot machines is May 15. There's still some properties under construction as well. If you look at the physical separation of the tribes in the remote areas of California, the two areas that would have the most opportunity to build some critical mass would be the Coachella Valley, Palm Springs, and the Greater San Diego area.

I think it will have an impact on the more modest end of our business -- Stateline properties, Laughlin, Golden Nugget downtown. Less impact as you get into the Strip with the destination resorts.

We, as a company, are less dependent on California than some of the other companies here. We have a far greater amount of business coming in by plane, generally from other parts of the country. I would think that southern California represents about 40 percent of the business for Las Vegas, and for our company, it would be in the high 20s. Now that's overall. If you went to Stateline, they would be 98 percent dependent on the southern California customer.

LB: Do you have any worries about how the industry will do this year, because of what we're seeing in the stock market and some of the massive layoffs that have taken place across the country?

TL: I don't worry about anything, because people worry about what they can't affect and that's a good way to get sick. My wife will attest to this, that I'm just not a worrier. To me, you just deal with the circumstances and the cards that have been dealt to you.

I think this is going to be an interesting year for business in general in this country and I think it's going to be very important for us to be very deft in our ability to deal with whatever comes our way. I guess this is where we really earn our money in a year like we're going to see in 2001.

But I have very positive views about Las Vegas, the critical mass that exists here, and the excitement. It's not going to be matched soon, anywhere, and even if there is a bumpy road here for whatever period of time, people still want to get away and this is still a bargain compared to a lot of other places.

LB: How much of an effect does Wall Street have on the way Las Vegas hotel/casinos do business?

TL: There's a lot of different firms, a lot of different analysts, some more competent than others. I think it's difficult to generalize. I will say this. I think as a nation we have made a mistake with Wall Street and its relationship with any industry, on the basis that we're so quarter-to-quarter oriented.

It bothers me because I think it forces more and more managers to tend to be very short term in their thinking, worrying about doing something that will really work for the next 90 days. I don't think that if you're looking for shareholders' value, that's the proper thing to do.

You have to be a reasonable risk-taker. In taking risks you have to make some decisions that might be great two to five years out, but may not necessarily be as wonderful in the next six, nine or 12 months. This type of monitoring, following, encouragement, verification, analysis and evaluation, is much too short term. Someone has a bad week and suddenly the sky is falling.

Then when you have a good quarter, they say now it's going to continue straight up. We have to realize that there are cycles, and we will continue to have cycles and that we have to think long term. I try to be very long term in my thinking. What's the best position for this company for the future? And I try not to be distracted with what, sometimes, representatives of Wall Street try to do in talking about what are you doing this quarter, or next quarter.

I don't feel at all under any pressure to provide what Wall Street wants. I want to provide what our shareholders need. The better the shares do, the better we all do. That's my goal.