“Everybody else, like Wal-Mart, knows how to price their product,” Mirman said. “We should be the Wal-Mart of [gambling].”
Phil Satre moved Harrah’s headquarters from Memphis to Las Vegas, linking the company more closely with its counterparts. Satre was also preparing for his retirement on a ranch in Reno. He set up a horse race between Loveman and Colin Reed to succeed him.
Satre created an “Office of the President”—an awkward triumvirate of himself, Loveman, and Reed. Reed, and then Loveman a few months later, was appointed to the board of directors.
Loveman had been the manager of little more than a research assistant at Harvard. He struggled with the breadth of his new management responsibilities for thousands of employees. With the board, he sometimes stepped into his old professorial habits.
“He’s gotta watch himself,” Satre said once. “I had a board member come up to me and say, ‘Would you please tell Gary that we’re not his students?’ I had to take him aside and say very carefully, ‘Gary, please remember when you’re talking about our marketing, these aren’t students, they’re our board members.’”
With the move to Las Vegas, Harrah’s dowdy casino there became all the more obvious. It was neither large enough nor nice enough to house the headquarters, so the executives set up shop in a suburban office park.
Satre and Colin Reed thought they’d found a solution in the Rio, where Tony Marnell had introduced high-caliber restaurants; one of Las Vegas’s most popular impressionists, Danny Gans; and all-suite hotel rooms. In August 1998, Harrah’s agreed to buy the Rio for $518 million in stock and the assumption of $370 million in debt.
Then Bellagio opened, and then Mandalay Bay—a new resort from Circus Circus, which promptly changed its name to Mandalay Resort Group. One new combatant was fancy, the other hip, and both competed for the Rio’s sophisticated-traveler business. Without the savvy Tony Marnell to help guide it, the Rio got trounced.
Loveman and his managers became obsessed with the Rio’s unnerving baccarat business. Rating customers, extending credit, reviewing surveillance tapes, negotiating for business—Loveman found it all “about as romantic as a ball-bearings contract.” And it paid off with disappointing and huge swings in earnings.
Kerry Packer, the swashbuckling Australian media giant, lost an eight-figure sum at the Rio in 1999, only to win it back again the following year, swinging Harrah’s earnings each year. Something was going terribly wrong, and no one could figure out what it was. The Rio’s earnings before interest, taxes, depreciation, and amortization fell from $98.7 million in 1999 to $29.2 million in 2000.
People have since speculated that the Rio was hit by a sophisticated card-counting syndicate. Bruised and frustrated, Loveman shut down the high-roller operation, laid off the personal chefs, and started offering the Rio’s high-roller suites to conventioneers. “You don’t know who’s swimming naked until the tide goes out,” he said. “It turned out that we had naked people all over the place.”
It took four years to bring the Rio’s cash flow back up to its 1999 level. Meanwhile, the Rio’s food quality deteriorated, the famous Napa Restaurant was shut down, the jolly sommelier Barrie Larvin left for greener pastures, and the air got smokier. Soon, the place that Tim and Nina Zagat had heard was the best hotel in town was much like any Harrah’s—in need of a good vacuuming.
Loveman argued that there was little that could have been done to compete with Bellagio and Mandalay. “The Rio was my responsibility, and I take the blame for the things that didn’t go well with that,” he said. “It’s fair to say we paid too much.”
But the rest of the world looked at the Rio and concluded that the folks at Harrah’s couldn’t handle a classy place like Bellagio or even Caesars Palace.
When he offered the job to Loveman, Phil Satre had warned the professor that he would have to be licensed as a gambling executive by every state the company operated in.
Thanks to the industry’s underworld history, casino executives undergo repeated background checks so thorough that their childhood neighbors and their own children may be interviewed. They routinely turn over checkbooks, credit-card and bank statements, even medical records. The idea is—and this goes back to Bobby Kennedy’s attempts to clear the Mob out of Las Vegas—that running a casino is a privilege earned only by upright citizens.
Loveman wasn’t emotionally prepared for the invasion. “When you sit in a room like this and have an Indiana state cop ask you what kind of medication you’re taking—I find that outrageous,” Loveman says. “Who would you rather license than me? I’m thirty-eight years old, married to the same woman my whole life, an academic of modest means.”
Loveman publicly compared casino regulation to McCarthyism, the Crusades, and the Inquisition. Personally, he found the argument academically enticing. The nation’s gambling regulators, most of them former cops and FBI agents, did not share his enthusiasm. They turned up the heat on him. Loveman expected that other casino executives would join him in pushing to rewrite the casino licensing laws. They wisely didn’t.
“When I did that, exactly no one came out and supported me. Because they all knew,” Loveman says. “I was so naïve when I took this job.”
New propeller heads continued to come on board. A woman in Internet marketing had a PhD in physics from Cornell. A new guy in casino operations held a law degree from Harvard. Loveman recruited talent from Columbia University, MIT, Duke, and Northwestern University.
“I’m glad I got hired when I did,” joked one old-time gambling manager, Michael St. Pierre, who had run several casinos for Harrah’s. “I’m not sure I’m smart enough to get a job here now.”
Every once in a while, one of Loveman’s old students would show up. One of them, named Damian Mogavero, pitched him on a technology that would analyze restaurant performance. Loveman took a quick look and called two of his lieutenants. “Can we do this?” he demanded, wanting to know if they could develop it themselves. They couldn’t. Loveman called for a car to drive them to the Rio. Twenty minutes later, Mogavero was making a presentation to the property’s operations people.
The product, called Slingshot, collects every form of data imaginable in a restaurant, including who ordered what dishes at every seat at a table, and which waiters got the highest tips. Waiters and waitresses are a restaurant’s “sales force,” Mogavero says. They need to be taught how to sell the “Perfect Check”: a patron who orders an appetizer, entrée, dessert, and drink.
The propeller heads had taken over.
Six years after Loveman had joined Harrah’s, the propeller heads’ work culminated in an “alpha site” for testing the innovations in East Chicago, Indiana. East Chicago is a blue-collar town scrunched between the big city of Chicago and the more roughneck Gary, Indiana. A four-deck riverboat docked on the shore of Lake Michigan, the Harrah’s casino there was attached, via a wide plank hidden under carpeting, to a Harrah’s hotel tower that sat on land. Next door sat one of the picturesque steel mills for which the region is famous.
The propeller heads laid out the casino floor based on lessons from drugstore retailers like Walgreens and CVS. The concept was to place high-demand products, such as Wheel of Fortune slot machines, in hard-to-reach places where customers would seek them out, just like they have to seek out the sinus medication.
A “party pit” was built in a hard-to-miss, attention-getting central area, stocked with blackjack and roulette table games. Dealers in the party pit were extroverts, trained to periodically break into song. This was the casino’s high-energy core.
Around the edge of this core, Harrah’s replaced nickel slots with $5 Double Diamond and Hot Pepper games that had previously been cloistered on an upper deck for high rollers. Now low-rollers could turn from the party-pit tables and take a flier on their way out. “This is the candy bars by the cash register,” said David Patent, vice president of casino operations.
The average bet on these machines soared to $10, compared with $
2 in the casino overall. Overall, East Chicago’s profit margins rose to 15 percent in the third quarter that year, compared with 12 percent in the busy first quarter, when that casino usually expects to earn its highest margins.
Harrah’s tested its luck ambassadors at East Chicago.
To demonstrate one afternoon, Brenda Freeman Winfield peered into her computer and discovered Richard Pearlman, an eighty-one-year-old from Buffalo Grove, Illinois. Pearlman had lost about $100 at video poker. This was not, normally, enough to qualify for an “intervention,” as Harrah’s called it. But for the purposes of demonstration, Pearlman really was lucky that day.
His face showed signs of disgust as Winfield approached his Deuces Wild machine with a cheery greeting. How was he doing?
“Terrible,” Pearlman growled.
“This will change your luck,” Winfield told him perkily, and she handed the old man a $5 cash voucher. Pearlman’s craggy face brightened as he signed for the voucher, and he seemed to regain some zip. He winked and asked Winfield to throw in “a blonde and two redheads.”
Then he turned back to his Deuces Wild machine, tucking his voucher into a rear pocket.
Chapter Twenty
AVID
I don’t think of myself as a predator.
—TERRY LANNI
Most casino titans don’t see themselves or their business the way many others do.
When a new journalist approached Gary Loveman for an interview in 2005, Loveman asked what the fellow’s beat was. “Alcohol, tobacco, pornography, and gaming,” the reporter replied.
“Now, I don’t want to be in that group,” Loveman later griped, horrified.
Yet a great part of the world views gambling as a vice. Perhaps it’s the early Mafia days or the remnants of America’s Puritan origins, but it is never far from anyone’s mind that gambling has the power to ruin.
Few people agree on how big the population of addicted gamblers is. Estimates on the low side are in the range of 3 percent of all gamblers. According to some researchers, another 4 percent or so are headed toward addiction, and the rest are simply playing for fun. Anti-gambling advocates insist the number of pathological gamblers is several times higher and that impressionable teenagers are at an increasing risk, given the growth in legalized gambling available and advertised in the United States.
The industry’s lobbying group, the American Gaming Association, estimates that revenues of casinos, racetracks, lotteries, and other places where bets are taken legally amounted to $78.6 billion in 2004. Roughly $50 billion of that was wagered in commercial or tribal casinos—an increase of 10 percent in one year.
Harrah’s took in $7.1 billion in revenues in 2005. By comparison, the entire U.S. box-office receipts for movies in 2005 were a mere $9 billion, according to the Motion Picture Association of America. And while movie attendance continues to drop, gambling revenues have doubled in the past ten years.
As a result of its riverboat focus, Harrah’s has derived much more of its revenue from gambling than many of its competitors—85 percent in 2005, compared with 46 percent for MGM Mirage, which is busier selling food and hotel rooms than gambling. So while one might compare a Steve Wynn casino resort to a Disney resort—for the variety of available activities—a Harrah’s casino has nothing to hide behind.
If we take the gambling industry’s figures for granted, it would be easy to assume that only a small percentage of that $78.6 billion came from gambling addicts. That would be a poor assumption. Harrah’s propeller heads discovered that 90 percent of Harrah’s profits come from about 10 percent of its most avid customers.
Harrah’s data suggests that addicted gamblers are providing a disproportionate share of all casinos’ profits. Which raises an uncomfortable, if moot, question: What would happen to casino profits if the addicts were eliminated? (The same could be asked of the lottery—a state-run system of gambling with far worse odds than a slot machine and where a number of heavy players also provide a disproportionate share of profits.)
Even casino operators are uncomfortable with gambling when it comes right down to it. They prefer to use the euphemism “gaming,” which sounds like more fun. Most of them don’t even advertise gaming: They focus their ads on food, shows, and shopping.
Loveman says “gambling” with regularity. “I don’t think it needs a euphemism,” he says. He doesn’t accept the premise that gambling is any more harmful than, for instance, alcohol manufacturing. “It really pisses me off,” Loveman says. “It’s the constant presumption that you’re a criminal. I’m proud of the company. I’m proud of the entertainment we provide.
“Nobody goes to a Best Buy and asks why poor people are pushed to buy warranties that are of no use to them,” he says. Loveman points to tobacco as an example of a truly problematic business: “You’re talking about a product that is addictive to its customers en masse. The vast majority of cigarette customers cannot quit without heroic efforts.”
Casinos argue that they can’t tell which of their customers are pathological. Loveman argues with near-religious fervor—and the evidence bears him out—that the vast majority of people are responsible about their finances. Gambling, he says, should be a matter of freewill.
How much freewill is involved though when a retired receptionist and her truck-driver husband are pitted against a team of MIT-educated mathematicians armed with meticulous studies of Pavlovian response? At least as much as is involved when those same scientists are working for credit-card issuers or Best Buy. Consumers are bombarded by highly researched and heavily disguised marketing strategies everywhere, whether they realize it or not.
So the question is—is gambling moral and ethical?
It wasn’t long ago that pathological gambling was viewed as a moral problem. Researchers generally agree these days that some people are prone to addictive behaviors because of the way their bodies respond to certain kinds of stimulation.
There are physical similarities in the brains of pathological gamblers and alcoholics and drug addicts. For instance, as with drug addicts, studies have found that a high number of heavy gamblers have abnormal dopamine receptor sites, leading them to get too little or too much dopamine, a chemical messenger in the brain. Drug addicts may use illegal substances to stimulate their brains. Gamblers are also stimulus seekers. “Gamblers, if they’re addicted to anything, it’s the action and excitement,” said Henry Lesieur, a sociologist and president of the Institute for Problem Gambling, in 1997.
Arnie Wexler, a former pathological gambler who now consults on responsible gambling programs, describes it this way: “Somebody puts a card in the video poker machine and a guy comes out and says, ‘Jack, Happy Birthday!’ The compulsive gambler gets juiced up and the endorphins [start] flying when somebody recognizes them. It fuels the fantasy of a gambler. They get high off it.… A noncompulsive person would just say, ‘That’s nice.’”
Casinos figured that out intuitively long before Harrah’s made a mathematical science of it. But the old-time casino operators were more prone to concede the dark side of their business. “The only part that’s fun about gambling is when you win,” Frank “Lefty” Rosenthal told PBS Frontline in 1997. “I don’t agree with the premise or the concept that it’s entertainment.”
Rosenthal once ran the Stardust, Hacienda, and other Las Vegas casinos before being run out of town for alleged Mob connections. Once a gambler himself, his biggest innovation was introducing horserace and sports betting to casinos. He gained real fame when he was played by the actor Robert De Niro in the movie Casino, alongside Sharon Stone, who played Rosenthal’s wife, Geri.
“The public, being so uneducated, doesn’t realize how vulnerable they really are to what we call ‘the heat’—the heat being you start out very lightly, very small, very conservatively, and then you lose your control,” Rosenthal said to PBS. “And when you work in the industry and you work behind the counter and you watch their eyes and you watch their habits and you see someone with an extrem
ely high I.Q. go down the tubes, you recognize that we all have an Achilles’ heel. And I’ve witnessed that on thousands of occasions.
“It’s the only industry that I’m aware of in the world,” Rosenthal said, “where the player really has virtually no chance.”
Someone who would agree with Rosenthal, but works on the other side of the line, is Tom Grey, a former Green Beret and an ordained Baptist minister. Grey is an evangelist, but he doesn’t preach about God these days. He preaches about gambling. Slot machines are a mindless plague spreading across the world, in Grey’s opinion.
Gary Loveman is Tom Grey’s dream come true. Grey has spent the past fifteen years looking for a smoking gun that will do for the casino industry what internal memos did for the tobacco lawsuits. “Their goal in marketing—all that data—they know exactly what’s happening to those gamblers,” Grey says. “[Slot machines] change the equation.… Now I can monitor how many drinks a guy had in my tavern—and I’m responsible.… I think the technology is going to be their downfall.
“[Steve Wynn] sees the problem with his pirate ships and understands that his resorts’ success depends on being unique and in limited supply,” Grey says. “But Loveman sees it just like golf courses or Wal-Marts—you ought to put them everyplace.
“He believes his own bullshit,” says Grey in an unministerial turn of phrase. “He’s the guy who’s going to stand in front of Congress with his arm raised and answer yes when they ask him, ‘Did you really mean to turn this lady who gambled once a week into an everyday gambler?’… Loveman is going to be key because he’s a person who is going to talk freely and with pride about addicting the nation.”
Loveman’s biggest problems in trying to “normalize” gambling in the minds of Americans are some of his own steady customers.
Winner Takes All Page 20