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Now that the dust has settled over the last round of NIGC Class II proposals, it is time to evaluate what has already happened, what is current, and what might happen next.        

Over the last five years, the NIGC proposed several views, reviews, revisions and final thoughts about what it believed would finally provide the “bright line” between, on the one hand, Class II technologic aids and, on the other, Class III gaming permitted only pursuant to a compact or procedures. The commission’s efforts to provide that bright line never wavered, but the line never became clear. Finally, and to the resounding cheers of many who had followed the NIGC’s progress, Chairman Phil Hogen announced last summer that he would withdraw his proposed classification standards. 

The actual withdrawal did not occur until October, at the same time that the commission published its final technical standards to govern Class II games, and its Minimum Internal Control Standards (MICS). Although the NIGC thereafter dismissed its Tribal Advisory Committees and then empaneled a new committee to advise on further MICS development, the NIGC has not spoken much about Class II in recent months.

Except when the chairman confirms that he still believes a bright line is needed. His statements mirror the text of the public notice withdrawing the proposed classification standards: “The withdrawal does not mean that the commission believes ‘one-touch’ bingo games are Class II,” says Hogen. “Going forward, the commission intends to address this and other classification issues through a combination of training, technical assistance, and enforcement actions.”

Evolution, Not Revolution
Both the rules to govern Class II technical standards and MICS, as promulgated, were greatly changed from their originally proposed form, thanks to the involvement of a Class II working group composed of tribal leaders, tribal regulators, tribal attorneys and industry experts whose suggested modifications to better reflect the technological reality of Class II gaming systems. At the end of a spirited process, the MICS and technical standards were not only transformed in structure, but acknowledged that regulation of a Class II gaming system was different from oversight of multiple Class III gaming devices. Although the working group felt that some of the NIGC’s late changes demonstrated residual confusion about Class II game play, the final rules could, at least, be understood in the context of issues presented by a Class II operation. Those rules are now in effect, and independent gaming laboratories have begun the task of testing Class II equipment to permit compliance certification.

While Chairman Hogen has not publicly embarked on any new classification initiatives, Class II is still generating regulatory interest. As some tribal observers have expected, states remain jealous of the ability of tribes to engage in Class II gaming outside state control. That ability built the impressive gaming operation in place at multiple sites maintained by the Seminole Tribe of Florida, and is also the principal leverage for the Seminole Tribe’s migration to Class III operations. So long as Class II games remain attractive to customers, even compacted tribes can consider the option of placing Class II systems on the floor independent of state jurisdiction-and generate a revenue stream independent of state demands for revenue sharing. It is not surprising that exercise of that tribal right has caused some consternation.
    

California Dreamin’
In California, economic reality has reduced the value of expanded Class III gaming to below the new cost of the “fair share” gaming compacts. After months of operation under the new compacts, some tribes have found the incremental revenues of the new games to be dwarfed by the greatly enhanced revenue share obligation, making the state the primary beneficiary of expanded Class III operations. As a result, some tribes are exploring changing out some of their floor space to Class II games whose revenue stream need not carry the additional burden of state payments.  The state is not amused.

The California Gambling Control Commission (CGCC) has expressed interest in examining Class II games that some tribes have chosen to place on their floors as an alternative to the Class III expansion. The CGCC asserts that it is entitled, under the compact, to determine whether “Class II games” are no more than Class III games with a thin veneer of bingo, as to which the state may claim payments. But IGRA accords tribes exclusive regulatory authority over Class II games, with oversight by the NIGC. The statute permits state involvement only in Class III gaming, and only pursuant to the terms of a compact. Tribes reject CGCC involvement in regulation of Class II gaming. The new “bright line” discussion continues to be the proper distinction, under IGRA, between Class II technological aids, subject only to tribal regulation, and Class III devices subject to regulation through a tribal/state compact. But now the growing question is: who decides where that line falls?

The Sycuan Tribe, in southern California, has been operating Class II games alongside its compacted Class III devices. The Sycuan Gaming Commission has dealt with inquiries from both the NIGC and the CGCC with respect to the status of its games.

Not satisfied with a Class II checklist apparently utilized by those agencies, the Sycuan Gaming Commission has begun to structure a regulatory process to provide a more meaningful discussion of the distinction. It intends to create a regulatory product permitting classification judgments premised on the foundation of broad and deep understanding of what constitutes Class II gaming under the IGRA. As such, the Sycuan Tribal Gaming Commission is planning for an information-gathering proceeding of a kind never before undertaken in Indian Country.

In early May, the Tribal Gaming Commission is expected to convene a hearing to take testimony, both oral and written, on the subject of Class II gaming under the IGRA, the development of technologic aids, the development of regulation and classification of those aids, and the different approaches to resolving the conflicts about which features are critical to game classification. Witnesses will include those with years of experience in traditional and evolving bingo halls, those who participated in the drafting of the IGRA legislation, and others who struggled with the regulation of the games as the technology developed. Collectively, they must address the possibilities for implementing the three IGRA criteria for bingo in ways not contemplated when the peak of technological choice was choosing the color of a dauber.

Congress stated its intent that tribes have the fullest possible use of new and evolving technology. If they are to benefit, the tribes must constantly evaluate how that evolving technology might be deployed while preserving the distinction Congress created between Class II and Class III games. But doing so must not harm legitimate Class II gaming, the one class of commercially viable gaming that Congress protected as the tribe’s exclusive preserve. Tribes have a profound interest in retaining this aspect of their governmentally operated economic enterprise.

Tribal regulators have deep expertise in regulating within that preserve. The Sycuan Gaming Commission is poised to begin the next effort to provide meaningful game classification, as guidance for its own facility, for state and federal regulators. Other tribes, seeking to keep and clarify control over their own operations, might benefit from the effort. And all of us will learn from the information assembled.

When the NIGC opened its office on the morning of March 10, 2008, it surely found its fax machine inundated by comments filed in response to the four proposed rules to govern Class II gaming. The comment period had ended at midnight the night before. Hundreds of letters were filed in the final few days, ending a long, strange year in which the NIGC solicited unprecedented input into its regulatory process.

The Bright Line
In the spring and summer of 2006, the NIGC proposed two sets of rules. The first would set up classification standards for Class II games, and also redefine an “electronic or electromechanical facsimile of a game of chance,” which the Indian Gaming Regulatory Act excludes from Class II gaming. The second proposal created a set of technical standards for Class II games: the detailed specifications imposed on manufacturers seeking approval on matters of game integrity and security.

The response to both proposals was overwhelmingly negative. When the commission’s own economic impact analysis revealed that the promulgation of those rules would devastate the existing Class II market, the commission, to its credit, paused in its process.

Somewhat later, after a series of work sessions with industry experts had convinced the commission that its own technical standards proposal was dramatically unsuited to the technological realities of Class II gaming systems, the commission paused further. It withdrew the proposed rules and began to listen some more. For more than a year, it had a lot to listen to.

Working Together
December 2006 marked the formation of what became known as the Tribal Gaming Working Group (TGWG), an informal collection of tribal leaders, tribal gaming operators and regulators, businessmen and engineers with expertise in Class II gaming development, and lawyers representing all those interests. The TGWG formed to deliver additional assistance to the Tribal Advisory Committees charged with providing expertise to the NIGC in the formulation of Class II rules.

Through a series of intense meetings held throughout the country, interspersed with conference calls that ran for hours, the TGWG deconstructed the NIGC technical standards. It exposed the original proposal as resting on the mistaken assumption that Class II gaming systems should be measured by technical requirements appropriate to stand-alone slot machines. The TGWG advocated that the technical standards be restructured to reflect, instead, a system in which central generation of numbers in a bingo game is transmitted to a collection of player interfaces, enabling players to play against each other in a common game. This approach preserves the structure of bingo for any medium of play, whether manual ball draw and paper cards or electronic designation of bingo balls displayed on players’ electronic screens.

TGWG work continued with the knowledge and occasional involvement of NIGC staff, with eventual dialogue in which NIGC staff, the Technical Standards Tribal Advisory Committee (TTAC) and members of the TGWG discussed, attacked and defended proposed revisions to the technical standards developed by the TGWG.

Nearing the end of the process, the NIGC continued to make changes that the Advisory Committee and TGWG asserted would undermine the purpose and efficacy of the technical standards. But a revolution has certainly taken place, in that the NIGC, in its most recent proposal on October 24, 2007, now proposes to regulate Class II gaming systems, and not some renamed slot machine.

At a Minimum
A similar process addressed Class II Minimum Internal Control Standards (MICS). For some years, the NIGC has required that tribal gaming operations adhere to the Minimum Internal Control Standards set forth at 25 C.F.R. Part 542. Tribes have successfully challenged the commission’s authority to impose such standards on Class III gaming. The remaining provisions, purporting to regulate Class II, were woefully inadequate, and the NIGC determined to develop a new Part 543 to address Class II alone. It reconstituted a MICS Tribal Advisory Committee (MTAC), and eventually agreed to subject its own proposed new MICS to the scrutiny, comment and suggestions of the still active TGWG.

Over a period of several months, the MTAC and TGWG worked with NIGC staff to reorganize the MICS to reflect the play of the game of bingo, with the goal of enabling tribal gaming regulators to monitor the play of each of elements of the game, tracking the criteria of bingo as set forth in the IGRA. Like the technical standards, the revised MICS aimed to provide satisfactory controls for the play of bingo whether or not technologic aids were used.

Throughout this productive and extraordinarily cooperative effort, proposed changes to the classification standards were nowhere to be seen, and were not available for discussion. The NIGC broadly indicated that it had had enough input from prior discussions, and was eager to complete the task of establishing a “bright line” between Class II and Class III gaming. Those who had been laboring to establish that same bright line between such forms of gaming through carefully crafted MICS and technical standards were disappointed that the NIGC declined to consider that work sufficient, or at least to avail itself of the assembled expertise of all facets of the Class II industry.

    
Technological Aids
On October 24, 2007, the NIGC published its set of four new Class II definitions, in the Federal Register. Public outcry was immediate and intense. A principal objection was (and is) that the NIGC’s proposed classification standards departed from the statutory bingo criteria, the same criteria held be courts to be the “sole criteria for bingo,” created new and arbitrary requirements for the play of the game of bingo only if that game is played through technologic aids. Even though the IGRA expressly authorizes the play of Class II games with equal force “whether or not technologic aids are used,” the regulatory scheme would impose significant restrictions on game play for all forms of the game not using paper.

But the NIGC went even further. Not content that its artificially restricted bingo game would be significantly distinct from a Class III game (and significantly degraded in economic viability, according to the NIGC’s own new economic impact study), the commission undertook to redefine the facsimile definition presently in force. Adopted in 2002, and approved by reviewing courts, the existing definition tracks the language in the Senate Report accompanying IGRA, requiring that a permissible technologic aid be “readily distinguishable from the use of electronic facsimiles in which a single participant plays a game with or against a machine rather than with or against other players.”

The proposed new definition eliminates the distinguishing limitation that precluded play against a machine. Instead, the NIGC would establish, essentially, that all games played exclusively with electronic aids are facsimiles. It then purports to establish a safe harbor for any that achieve compliance with the classification standards, which are applicable to all games played solely through electronic aids. But that effort may not work.

The IGRA categorically excludes facsimiles from Class II gaming. If the NIGC determines that all solely electronic games are Class III facsimiles, then it may not have the ability to bring such games back into the realm of Class II merely by determining acceptable standards for such facsimiles. Class III gaming is outside the NIGC’s regulatory scope of authority. While it may seek to determine where the bright line exists between Class II and Class III gaming, it lacks governmental power once it crosses that line. Many fear that the facsimile definition alone may be enough to wipe out the now vibrant industry of Class II electronic bingo. At the very least, the facsimile definition is merely a surplus requirement to comply with the classification standards.

Hey Grandfather
The NIGC stumbles into yet another paradox. Recognizing that the classification standards would render nearly all existing games obsolete, the NIGC proposes a “grandfather” provision that would delay application of the new standards to existing games for a period of five years. Many object that even such a five-year term would improperly truncate the useful life of a Class II gaming system. But many more are concerned that the NIGC’s own language could render the grandfather provision wholly meaningless. The rule itself states:

“Nothing in this part is intended to authorize the continued operation of uncompacted Class III machines that allow a player to play against the machine.”

Given that games not compliant with the classification standards, are, by the NIGC’s terms, uncompacted Class III machines, this sentence could make it impossible to rely on or apply the grandfather clause.  

The details of the proposed classifications standards are not significantly different from the version proposed in May 2006. To its credit, the NIGC eliminated some of the requirements whose goal was patently to delay and extend the duration of game play.

But many other restrictions remain. The initiation of each game is delayed by two seconds, except in the most heavily populated gaming facilities. Players are required to interact with the game at least twice, and often (and unpredictably) more times, according to the NIGC’s additional rule requiring that slept bingos trigger additional ball releases and extended play for others in a game. All games must have an overly precise label (“This is a game of bingo”) that seems too simple to offer much in the way of education to a player.

Bingo game rules created by the NIGC pose significant threat to future options for game development, which may require more flexibility in the configuration of a bingo card than the NIGC permits. This is yet another arbitrary distinction not found in the many jurisdictions in which paper bingo and other electronic bingo have flourished. Games similar to bingo are defined out of existence. The play of Bonanza bingo is forbidden in electronic form (even though it remains permissible in paper play).

Compliance issues are unclear for bingo minders, or for future development of other compact, handheld play, thus handicapping an obvious avenue for new technology. But only for tribal play, because the rest of the electronic bingo industry will continue to develop, leaving tribal Class II play fossilized and unprofitable.
 

Other Concerns
The myriad comments raise other serious questions.

The NIGC’s economic impact study suggests that the effect on Class II gaming operations would be immense, with billions of dollars of quantifiable losses. The study itself cannot measure the economic harm imposed by depriving tribes of leverage to negotiate new compacts, or to seek less restrictive compact amendments.

Nor can mere dollar figures adequately represent the catastrophic harm incurred when a small tribal facility, one whose revenues primarily support job creation, can no longer keep its doors open because the Class II games can no longer compete with nearby Class III-type games in a recalcitrant state that refuses to compact. While the NIGC has announced its intention to commission a cost/benefit study, that study has not been completed. Many wonder how the NIGC will attempt to justify benefits sufficient for the adverse regulatory costs.

Finally, the process of the NIGC’s rulemaking, and its substance, pose substantial threats to tribal sovereignty. The NIGC’s rule threatens to eviscerate Class II gaming, the one form of tribal gaming that the states cannot control. Tribes seeking to conduct gaming will, as a practical matter, be at the mercy of states that cannot be compelled to compact in good faith, and which will demand more concessions of revenue and regulatory control. Moreover, the proposed regulatory structure substantially transfers tribal regulatory power to classify games to private laboratories, whose “certification” of games as Class II would occupy the place of a primary (non-governmental) regulator. Tribes are prohibited from using their own laboratories to conduct such certification.

And lastly, the process itself illuminates the defect in the NIGC’s own consultation efforts. While the NIGC discussed some aspects of rule development with its tribal advisory committees, it did not engage in broader, meaningful consultation with tribal governments that may not have had representation on the committees. And while the NIGC did benefit from the significant expertise of the TGWG, that group did not function in the role of government consultation, and its advice was roundly rejected on all matters critical to classification determinations.

If the NIGC is to protect the critical asset that is Class II gaming, it should avail itself of all the information necessary to make good decisions. In particular, it must both seek and apply all available technical and governmental expertise to all facets of Class II rulemaking.

Now that the comment period has ended, the NIGC must fulfill its obligation to consider how the comments affect its determination to go forward with the proposed regulations. Chairman Phil Hogen has frequently commented that the commission is not unalterably committed to all the rules. If the shortcomings in the MICS and technical standards can be addressed, then those rules can provide useful tools for tribal regulation of Class II gaming.

Undoubtedly, the classification standards and facsimile definition, if adopted, will give rise to significant litigation. Even if tribes do not file immediate challenges, the defects will likely encourage the United States Department of Justice to resume its own enforcement proceedings against games the NIGC has newly determined to be uncompacted Class III games. The proposed rules threaten a new era of legal uncertainty, unnecessarily raising the cost of doing business in Class II.

Some less creative reporters and editors in the mainstream media have characterized Indian gaming as “the new buffalo.” 

But some tribes are calling it a “one trick pony.” Others are looking at alternative “herds,” using hard-won expertise to generate commercial casino enterprises and other projects in non-gaming fields.

Several successful gaming tribes are forging partnerships with once bitter rivals; and looking outside of their states-sometimes way outside-to develop opportunities with a combination of gaming savvy and cash.

The Mohegan and Pequot tribes of Connecticut have fearlessly ventured beyond the protective cover of a near monopoly across state borders to take on commercial gaming companies on equal terms, playing by the same rules and sometimes as equal partners.

Indian Bank
Dr. Randolph Baker, Sycuan professor of Travel Gaming Management at San Diego State University-one of the few universities offering degrees in tribal gaming management-notes the recent formation by the Rincon and Colusa Indian tribes of California of the first tribally owned private equity fund: First Nations Capital Partners LLC. The tribes, from opposite ends of the Golden State, will be the primary investors, owners and managers of the specialized $25 million fund.

Rincon’s Tribal Chairman Vernon Wright commented, “Gaming has been good for us, but it’s a one-trick pony. That’s why we’ve made economic diversification one of our top priorities.”

Gaming tribes have gotten into financing before, most notably when the Southern California Viejas Band of Kumeyaay Indians bought Borrego Springs Bank four years ago.

Around the same time, the Sycuan tribe bought the U.S. Grant Hotel in San Diego. The Mississippi Choctaw have been in the electronics business for several years.

The first time a tribe went into commercial gaming was in 2000 when the Sault Ste. Marie Tribe of Chippewa Indians, which had several casinos in Michigan, opened the Greektown Casino in Detroit. Using those revenues and its reservation casinos, it bought more land while increasing services to its members.

According to Baker, “Other tribes are looking at taking their gaming bounty that won’t last once the quasi monopoly they enjoy because of Indian gaming, has diminished. As more states introduce gaming that will bite into that monopoly. Ten to 12 percent of gaming tribes bring in 80 percent of the revenue. The Seminole Indians are a classic example of going into a totally different area, of paying $1 billion to buy the Hard Rock restaurant brand. Their casinos in Florida bring in several hundred million dollars a year. You can easily afford to diversity with those kinds of revenues.

“One way tribes diversify is to go into commercial gaming. The second is what we see in San Diego county, where they are buying orange and avocado groves and reinforcing the economic engine that drove their success. The forward-looking ones say ‘this is unique opportunity that probably won’t last.”

“Good economics is good economics,” says Baker. “I see several scenarios, none of which are firm: On one hand we have wealthy tribes sophisticated enough to diversity: tribes in the Pacific Northwest, California and Connecticut. They are creating tribal corporations that are going to become multifaceted. This will provide opportunities for members of the tribes who live in adjacent communities.”
    

Expand and Diversify
An example of this kind of thinking comes from the San Manuel Band of Mission Indians, which owns San Manuel Indian Bingo & Casino in Southern California. It has chosen to invest some profits in non-gaming economic projects, although a lot is still going to expand the existing casino operation.

Spokesman Jacob Coin says, “We are mindful that the goal of IGRA is to strengthen tribal governments and create an economy. For San Manuel, creating an economy constitutes an important element to secure long-term revenues. The more diverse, the better we feel our future will be. That’s why we have chosen to look at expansion and diversification.”

San Manuel is investing in several industries, including a bottled water company that taps a source on the reservation, a home and office delivery market, and very soon 12 acres in Highland owned by the tribe but not reservation land will become San Manuel Village, a commercial development that will include a Hampton Inn Suites, an office building, restaurants, retail, banks and more.

San Manuel has partnered with three other tribes: Viejas Band of Kumeyaay Indians, the Forest County Potowatomi Community and the Oneida Tribe, both of Wisconsin, to form Four Fires. The largest business investment collaboration for American Indian tribes in history, in 2003 it began a $43 million hotel project-a 13-story, 233-suite Residence Inn by Marriott, near the Smithsonian’s National Museum of the American Indian and just blocks from the Capitol.

Another partnership, Three Fires (the same tribes minus the Forest Potowatomi) built a Residence Inn by Marriott in Sacramento near the state capital and purchased an office building in Washington D.C. and commercial office buildings in other towns.

When the Pentagon closed California’s Norton Air Force Base, the partnership acquired 100 acres in an area that seems prime for warehousing and shipping industrial uses.
   

Commercial Concentration
What about commercial casinos?

“Those kinds of projects are not as high on our list,” says Coin. “Under former Chairman Darren Marquez the tribe decided to look beyond gaming. He used to say that the more diverse your revenue stream the better your revenue stream will be. And we’ve learned the hotel business very well.

“Indian gaming is conducted in a very fragile political environment. Every day that the tribes make the progress  makes somebody wants a piece of the action. Racetracks and card clubs have tried to get slots. Those efforts are not going away. Understanding that this is a highly charged political environment, tribes are mindful that they need to look to other sources, such as hotels and motels. But that doesn’t mean we won’t look at other areas.”

Professor Baker foresees economic diversification by all tribes.

“A potential detriment is that you are seeing the ‘rich Indian syndrome appearing.’ Wise tribes are working hard to counteract that by contributions to other tribes. As economies get tight, certain tribes will face political difficulties. That’s a matter of when, not if.”

James Wortman, lecturer and director of the Gaming Education and Research Institute (GERI), was also administrator of the National Indian Gaming Association’s Casino Management Institute for Hilton College at the University of Houston. He has worked with tribes for 20 years. GERI, education partner of the National Indian Gaming Association, offers casino management courses. This gives Wortman the opportunity to travel and see a lot of different tribal operations.

He notes that the Pequot and Mohegan tribes are not the norm, either in casino profitability, or how they were built.

“The Mohegan and Pequots are sophisticated tribes,” he says. “They have good backgrounds. They make a lot of money. A lot of tribes disagree with how they did that by building up a lot of debt. Most Indian casinos are not looking to build large debt. When building takes place the tribe is ready to give a check for services. Foxwoods does it like most businesses in the U.S. do, by taking out a loan.”

He adds, “Most tribes are interested in self-determination. They use money from gaming for cultural heritage, housing, schools, designed to benefit the tribe. They tend to feel that Foxwoods doesn’t follow that model.

“Foxwoods and the Mohegans are now looking to be investment partners with those tribes, serving as a bank, giving expertise and running and financing operations.”

Some tribes that diversify, says Wortman, do so out of a desire to weather economic storms. “They are saying that maybe it will affect our income and maybe we need to diversity our businesses to be able to survive an economic downturn.

“There’s also a concern, I’ll attribute to Steve Wynn, that right now gaming is a socially acceptable form of entertainment in the U.S. but we are one serious calamity away of being where we were 30 years ago. Gaming could suffer some serious problem. Twenty years ago tables were kings, and then slots and tables. Today, hotels, food and beverage, and retail are profit centers and some casinos bring in more from those areas than from slots.”

Founded by Foxwoods
Gary D. Armentrout, president of the Foxwoods Development Company, recalls how four years ago the tribe developed a two-fold strategy that was defensive and offensive.

“The Pequot tribe realized that as successful as they were with Foxwoods that their market was shrinking as surrounding states contemplated expanded gaming,” he says.

The defensive strategy: invest significant additional capital into the Connecticut property. Make it bigger, better, grander, with more nightclubs, meeting spaces, slot machines and hotel rooms. That resulted in the $750 million MGM Grand at Foxwoods, which will open later this year.   

The offensive strategy: diversify outside of their market by creating the Foxwoods Development Co. to leverage financial and human resources in hotels, casinos and entertainment operations outside their existing market.

“A commercial entity doesn’t have the advantages or baggage of a tribal entity,” says Armentrout. “We are 100-percent owned by the tribal nation. Our six-member board of managers runs and oversees the company.” 

Armentrout was hired in October of 2005 to head the company. His mission: “to leverage the tribe’s financial and human resources by finding opportunities to invest in, partner with, develop and acquire, hospitality-related projects.”

One motivation for creating the company was to provide career opportunities for Foxwoods’ team members.

“Part of our mission is that any project we become involved in we are not a bank-we don’t loan money or make passive investments. We only invest in projects where we have a role to play in development and management. This creates opportunities for employees to move up in their own careers. Anyone we take out of the operation in Connecticut will create a vacancy that creates a ripple effect, letting others move up,” says Armentrout.

Their first project, in early 2006, was consultant to the Chukchansi Gold Resort and Casino in Southern California, near Fresno.

Foxwoods spent six months with them, analyzing their operation, making recommendations on facilities, operations and senior management.

“It gave us an opportunity to utilize many senior management from Connecticut as advisors and consultants,” recalls Armentrout. “It proved very successful both for us and the tribe.”

Next, they answered an RFP from the Pauma Band of Luiseño Mission Indians of San Diego County. They negotiated a development with the tribe, which failed twice before to partner to expand its existing small casino. The ground breaking date hinges on a memorandum of understanding with San Diego County, required by the compact negotiated with Governor Arnold Schwarzenegger, which more than doubled the tribe’s allotment of slot machines.

The estimated $650 million cost includes financing and soft costs. “We’ve worked together to come up with a design (with the architectural team of Hnedak Bobo) for an all-inclusive resort, 400 hotels rooms, large rooms, and 2,250 slots,” says Armentrout.

Foxwoods provides predevelopment funding, oversees the architect, interior design team and consultants retained to do the environmental report and negotiate the MOU, whose main issue unresolved is traffic on the two-lane State Highway 76, still a winding country road.

This historical partnership is the first time one tribe has reached out to help another do a large-scale development.

“Tribes have partnered with commercial gaming companies before. This is the first example of a tribe providing that kind of financial and gaming expertise to another tribe,” says Armentrout.

It’s a testament to the company’s national perspective that its headquarters is in St. Louis, Missouri, not Connecticut. Its initial focus has been with tribes in California, Oklahoma and New Mexico. “It made more sense to be centrally located as we became so geographically diverse,” says  Armentrout.

Philly Foxwoods
Foxwoods’ third major project is in Philadelphia, where in 2005 it partnered with local investors to pursue a slot parlor gaming license. Competitors for the two licenses included Trump Entertainment Resorts and Pinnacle Entertainment.

This created a philosophical dilemma. Pursuing a commercial license required a full background and suitability assessment, scrutiny tribes normally don’t tolerate. It required soul-searching, discussion and debate to proceed. It was, says Armentrout, a significant step for the tribe to willingly to open its books to a third party.

“I’m happy to report that the tribe and the board of management and the facilities managers, were thoroughly investigated and found suitable,” says Armentrout.

“This is the first time that a Native American-managed gaming company has competed successfully against commercial companies for a highly sought after licensing agreement,” he adds.

Foxwoods Casino Philadelphia is still in the permitting process. Groundbreaking is expected this summer. The $640 million project includes three phases: 1) The casino with 3,000 slot machines; 2) A riverfront entertainment district with a promenade, boardwalk, shops, restaurant and additional gaming space to bring the total machines to 5,000; 3) a two-tower hotel of 250 rooms, or residential condominiums, depending on the market.

Like other commercial gaming companies, Foxwoods is monitoring the debate in Massachusetts over three proposed commercial casinos.

Foxwoods went international in March with an agreement with Dublin-based Harcourt Developments, which acquired the former Royal Oasis in Freeport, Grand Bahama, destroyed by hurricane, vacant for three years. Harcourt is committed to gut, renovate and rebuild the hotel tower, casino and two golf courses, with Foxwoods as consultant through design and development and manager after it opens.

The other significant development is Foxwoods’ relationship with MGM Mirage. They jointly created Unity Gaming LLC, based in Las Vegas. Under its tent, they will identify opportunities to develop or acquire gaming operations.

MGM brings the added financial capacity, MGM Mirage brand, plus opportunities that Foxwoods might not otherwise be aware of.

Unity’s first project is one that Foxwoods had worked on before: a bid for one of four Kansas regional casinos, in Sumner County.

Unity’s $425 million project, Chisholm Creek Casino Resorts, includes a 250-room hotel, casino, restaurants, and convention facilities with additional phased commercial development.

At any one time Foxwoods Development has a half a dozen projects in the works.

“Originally our focus was on gaming and non-gaming hospitality but the tribal council more narrowly defined it to be exclusively gaming,” says Armentrout. “Having been licensed and found suitable in commercial gaming opens the door for other gaming jurisdictions, including Nevada.”
   

Mohegan Matters
The Mohegan Sun, Connecticut’s other gaming giant, through its Mohegan Tribal Gaming Authority, while also engaged in multimillion dollar “defensive” expansion at home, recently opened phase one of the Mohegan Sun at Pocono, a commercial racino in Pennsylvania. Phase two will add 1,000 slot machines, dining, a nightclub and retail. It will also continue as a racetrack.

According to Lynn Malerba, tribal vice chairwoman, one advantage of operating the racino is that it can cross-market both operations, separated by a four-hour drive.

“Right now Pocono Downs is small, but once we enter phase two, cross marketing will take on more energy. It’s a wonderful opportunity for folks who may not know about the Mohegan Sun. We have piqued their curiosity about our Connecticut facility.”

Halfway across the continent and on the Pacific coast, the tribe acts as developer and manager for the $300 million casino project of the Cowlitz Tribe in southwestern Washington and of the Menominee tribe of Wisconsin’s proposed Kenosha Entertainment Center and Casino project.

“We have a contract to develop and manage for seven years and then turn them over to them,” says Malerba.

Like the Pequots, the Mohegans have discovered the wisdom of phased projects. “It makes sense. You need revenues from the first phase to help finance the second and not be so leveraged,” says Malerba. The Wisconsin and Washington tribes are responsible for their own financing, although the Mohegans helped obtain favorable rates.

They are one of 13 bidders in the Kansas market, targeting Kansas City, in Wyandotte County. And like the Pequots they are monitoring the Massachusetts market.

“In the short term we are looking at economic diversity,” says Malerba. “Our tribe (whose population is about 1,700) has a changing demographic. Our average age is 26 years. We experience a birth a week. We anticipate a lot of growth and want to continue to provide for education, elder and social care. This is our core competency and helps spread risk. We would certainly look at other industries if we possessed the competency, such as hospitality. It is important to diversify from a geographic perspective but from another business as well so that we are not solely focused on one industry.”

The tribal council is also board of directors for the Gaming Authority. While its executive team advises it on the due diligence of projects it proposes, the council has the last word.

Malerba doesn’t see the Indian gaming boom going away, but she recognizes that now there is more competition from commercial gaming.

Preparations for the Future
The old buffalo herds went away once before, maybe the “new buffalo” might do the same.

“In the Northeast,” says Malerba, “there was a 6 percent growth in how much money was spent on gaming, but a 14 percent growth in machines. It’s one thing to be efficient but what distinguishes us from our competitors is our level of service and amenities, which are unparalleled in the Northeast.”

From her perspective the tribe has made “incredible strides in the last 12 years. We opened the first phase of Mohegan Sun in 1996. We have gotten very sophisticated in how we look at our projects and have established ourselves as a leader.”

The tribe has reclaimed burial grounds in Norwich and repurchased another burial ground that had been made into a park.

“We believe we are paying homage to our ancestors by making sure that our burial grounds are well maintained. One of the most important benefits of gaming is that our history and culture remain very vibrant,” she says. “Hopefully there will never be ‘the last of the Mohicans.'”

It seems hard to believe in 2008, but there was a time when non-tribal casino operators were reluctant to use TITO (ticket-in/ticket out systems) for their slot machines.

Why? They assumed-incorrectly, as it turned out-that one of the most entertaining aspects of gambling for players was playing with cold, hard cash.

“Operators thought patrons wanted to hear the coins drop. They thought they’d always want rolls of quarters. They thought they’d always want to insert cash,” says Knute Knudson, vice president for Native American development for International Gaming Technology, the leading supplier of gaming machines and monitoring systems in the world.

“But Indian Country was way ahead of traditional markets. There were a few holdouts, but everybody got over it, and TITO revolutionized the casino industry.”

Today, it’s next-to-impossible to find cash-based systems on the casino floor, and the operational benefits have been immeasurable. Without coin-handling equipment (which were notoriously prone to jams that held up play), casino costs have been cut as much as 40 percent. No more hand-pays means no more frustrated players, forced to suspend their games during a tedious count.

Coin-handling by staff-an arduous and downright dirty task-has also been eliminated, along with vaults, coin carts, and security personnel. TITO also made multi-denomination gaming machines possible.

Of course, it goes without saying that overflowing counting rooms, like the one immortalized in the Martin Scorsese film Casino, posed a security risk like no other. Thanks to cashless environments, that risk has now been eliminated.

Pioneering for its time, TITO was just one of several groundbreaking innovations- in back-end technology, customer service and casino games themselves-that originated in Native American casinos, then took hold in the industry at large. They include nothing less than the innovations that could soon make server-based gaming an industry standard.

Indian Country First
At first, tribal casinos were driven to technical innovation so they could offer an approximation of Vegas-style slots while adhering to Class II regulations. Their devices looked and played like slot machines-a great lure for the gambling public-but under the hood, they were really electronic bingo drawings or pull-tab games.

Few could have predicted in the 1990s that some Class II games would become the models for today’s Class III game designers. It’s due in part to the fact that many Class III games were developed and became entrenched before the technological explosion that made personal computers, internet and lightning-fast communications facts of daily life.

“Compared to where casino technology is today, yes, Class II is ahead of the curve, because most of it was developed after the turn of the century,” says Aaron Rubin, director of marketing for Video Gaming Technologies, provider of games for Class II and emerging markets. “The prototypes are faster, and just from a raw technical standpoint, we’re ahead.”

Rubin says older-generation Class III games will probably stick around a while because they’re “like the car you’ve already bought and paid for. You own it. It runs. And it’s nice not having car payments.”

But as casino games advance in complexity, speed and entertainment value, he says, those older games-just like that battered old family Buick-may have to be replaced. If games don’t remain competitive-with increased bells and whistles, dazzling 3-D graphics, digital-quality sound and superior hit ratios-they just may become an operator’s loss leaders, and even brand a host casino as behind the times.

It was necessity that made Class II game makers the industry’s mothers of invention, suggests Terry Daly, who is vice president of game systems for Rocket Gaming, which supplies Class II entertainment software and electronic players stations to casinos in 11 states.

“From a designer’s standpoint, from a game standpoint, we needed to create games that kept players interested and on the floor,” Daly says. “We developed a wide variety of entertainment-type games along with more of a gambler-type game and then a cross-section that appeals to both”-all with enough amusement value and chances to win to keep players playing.

“Gambling-type games have pure map models; you don’t win very often but you when you do, you can win big,” Daly says. “Other games are more entertainment-based, where you can play for a long time and enjoy the bonus features.” He described the company’s newest games as “entertaining and feature-heavy.

“We are right in the process of rolling out a series called Jackpot Jubilee (an umbrella for a number of different titles including One Bad Apple, Whopper and Great White Diamond). Each has its own map model and separate bonus features, but they share a common jackpot, plus there are features that take players into a secondary game that allows them the opportunity to win up to four different progressive jackpots.”

Frequent jackpots are a winning concept, says Rubin.

“Unlike at a slot machine, where you pull (the handle) a bunch of times and may never win, Class II always wins.” He adds that more social and interactive play-a fundamental tenet of Class II play-is becoming increasingly popular in non-tribal houses.

“Instead of you playing against the slot machine, you play against other players for a progressive prize. It makes for a lot more interactivity,” says Rubin.

A case in point: IGT’s Wheel of Fortune arena game, with multiple participants at adjacent terminals around a common wheel. It’s become one of the most popular slot machine games in the country.

Server First
Central determination, also referred to as downloadable technology or server-based gaming, may prove the greatest contribution from Indian Country to the mainstream gaming hall.

Born in 1995 with systems developed for California’s Pala tribe, it is now viewed as the next wave in slots technology, with manufacturers investing millions per year in research and development of Class III applications.

“Server-based technology makes a very compelling story, not just for the player, but for the operator,” says Kunal Mishra, vice president of product management and marketing for Atlanta-based Cadillac Jack, a provider of high-speed, interactive electronic games and systems to the global gaming industry.

“By definition, it got its start in Class II gaming because a server always had to be attached to a game to provide the download of content to the machine. Beyond that, it added the technological basis for operators to make instant business decisions to increase the profitability of their floor.”

With server-based gaming, tribal casinos could quickly switch game titles from a remote command center, and offer more and broader community gaming (a prerequisite for bingo, in which players compete for a communally-generated pot).

In time, as systems became more sophisticated and servers made by different manufacturers began to communicate through back-end systems, tickets could be played from one maker’s game to another. All these efficiencies in tribal gaming boosted the revenue-generating power of the casino; the value of every square foot of gaming space could be maximized.

The technology is expected to become ubiquitous across the industry. By 2005, nearly every major slot machine manufacturer brought server-based slot machines to the Global Gaming Expo in Las Vegas, and by 2006, those games were getting trials in California and Nevada.

Server-based gaming also enables operators to tailor games to player preference. Casinos are growing more interested in electronic data warehouses and analytical computer software to track who’s playing and when; in conjunction with server-based capabilities, which can alter the floor set-up and game availabilities with the click of a mouse, casinos can change from penny games to nickel games at will-all from a remote “mother ship.”

In the case of Rocket Gaming, the central base, which powers 4,000 machines, is in Oklahoma.

“The technology throughout the industry is not quite there yet, but certainly server-based gaming is a lot easier,” says Rocket’s Terry Daly. “You can change the game or denomination from a central server point at any location, rather than going out and making a physical change (at the casino); we also have the ability to maintain security. Our checks and balances make sure that everything is as it’s supposed to be, and there are several backup systems in place” so there is no possibility of a crash.

“From a service standpoint, server-based technology allows you not only to download content and change features, it also allows you to identify problems before they actually hit and have an impact on the casino.”

Analysts say server-based gaming could have the same effect on the slot machine floor as TITO, which since 2002 has sent operators scurrying (and spending millions) to replace games.

Advances in technology have also made heavyweight players of tech manufacturers. Thanks to ticket in-ticket out, for example, the stock price at International Game Technology rose more than 570 percent between 2000, when the technology first emerged, and the end of 2004.

Standing Still
Despite the increasing interest in central determination or server-based systems, few foresee the end of stand-alone casino games.

“Some people would like to think that stand-alones will be phased out,” says Bruce Rowe, senior vice president for business development for Vegas-based Bally Technologies, a leading supplier of gaming machines and technology products. “What we’re really starting to see is a migration to bidirectional networks; it’s our belief that there will be an evolution over the next several years towards a robust bidirectional networking capability.”

Such a direction will benefit the industry in a couple of ways, Rowe says:

“One, it will improve the integrity of the games by being able to (easily) hold them, interrogate them and download software. Two, it will improve marketing at the point of play so operators can do marketing and loyalty to the customer before or after their gaming session. Three, it will offer second ways to win for the customer through promotions and bonusing games.

“Those are three of the key ones, as well as improved service at the game-a ‘concierge-in-a-box’ kind of idea that also provides drink and valet services, calls for your car in advance, that sort of thing. There are other ideas for being able to configure games so you have the ideal mix by time of day and day of the week. Otherwise, it’s like having a restaurant and never being able to change the menu from breakfast to lunch to dinner.”

Borrowing Success
Sometimes, says Rowe, technologies first borrowed by the Indians from mainstream environments were improved on the Class II casino floor.

“In the early stages, tribal operations inherited the best-of-breed technology from traditional Class III environments. But as time went on, those tribes-who many times at opening were new to the gaming industry, and had limited financial backing-started to become more knowledgeable and more independent financially.”

Mostly self-governed, “they developed oversight bodies that were often more nimble in making decisions about technology than the large corporations that got them started,” Rowe says. Faced with greater competitive challenges but blessed with more independence and less bureaucracy, the tribes looked for new and better ways to run their operations-and they found them.

“As the market started to mature, so did the sophistication of the operations, the availability of cash to put back into technology and innovations, and the speed with which technology could be experimented with and deployed,” says Rowe.

In the ongoing saga of mainstream and tribal gaming, in many ways the follower has become the leader, and Native American casinos are setting the standards for tomorrow’s gaming industry.