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n October 16-17, 2008, the Arizona State University School of Law hosted a conference at Fort McDowell Casino to commemorate and critically examine the 20 years of Indian gaming under the 1988 Indian Gaming Regulatory Act. The event attracted scholars, policy makers and tribal representatives from around the country, many of whom had participated directly in the creation and implementation of the act. Our paper examined the economic impacts of Indian gaming under IGRA and complemented the political work presented by other academics whose work examined the ways that IGRA resolved specific legal and regulatory dilemmas and allowed tribes to pursue Class III gaming without fear of federal criminal prosecution. An excerpt from the paper appears here:

The Growth of Indian Gaming
In recent years the NIGC has regularly released tables and charts reporting the gross gaming revenues of Indian casinos-that is, the total revenues net of prizes paid for every Indian bingo hall and casino across the country. Predictably when these data are released, commentators note the burgeoning Indian sector of America’s growing gambling industry.

Upon the release of the latest gaming revenue figures, which reached $26 billion in 2007, the commission chairman, Philip N. Hogen, noted, “The continued growth [of Indian gaming revenue] is significant considering recent economic struggles throughout the country. The Indian gaming industry has experienced tremendous growth since the inception of the Indian Gaming Regulatory Act 20 years ago in 1988.”
    The numbers warrant Hogen’s accolades of “significant” and “tremendous” (Chart 1). In inflation-adjusted terms, Indian gaming exploded more than a hundred-fold from $171 million in 1985 to $26 billion in 2007, for an average compound growth rate of 26 percent per year after inflation. As the light blue line in Chart 1 indicates, Indian gaming grew rapidly in comparison with the commercial casino sector as well, jumping from 2 percent of its size in 1988 to more than three quarters in 2007. Back in the opening days of bingo halls at Penobscot, Seminole, Shakopee and elsewhere, few observers had any inkling that such growth was in store for Indian Country. Yet while the growth of Indian gaming appropriately deserves its many superlatives, growth has not been uniform over time. (See fig. 1.)

To the human eye, the growth of Indian gaming revenue in the chart appears simply “exponential.” That it is, but there is more than meets the eye: the exponential growth is not consistently so. When the same data is portrayed on a log scale, wherein the intervals between grid lines change from constant increments in the chart to constant proportions, it becomes clear that the pace of Indian gaming growth had three major phases. On the log scale, steady rates of compound growth in Indian gaming revenue appear as straight lines, and there are three roughly straight-line periods in the graph. Up until 1988, compound annual revenue growth was modest-in the single digits. For the five years beginning in 1988, growth leapt to an average of 79 percent per year (light blue line in the chart). And beginning in 1993, growth cooled substantially to a steady 15 percent per year over the 1993-2007 period. Virtually no growth took place in the last of those years: growth was 0.4 percent after inflation. (See fig. 2.)

In fig. 2, the log scale shows steady compound growth rates as straight lines.

Abrupt corners in a graph like fig. 2 beg further examination. That Indian gaming grew quickly in the five years after IGRA probably does not strike knowledgeable participants from that time as news, but the period when that growth took place is striking in retrospect. The Supreme Court decided Cabazon in 1987, and IGRA became law in 1988. The coincidental uptick in growth points to the power of these actions to unleash capital flows-of both financial and human capital-to Indian Country. Clearly, Cabazon certified to the outside world the civil and regulatory freedoms tribes had been asserting, but did IGRA help too?

Legal and political observers, most importantly tribal leaders and representatives, often (and correctly) note that IGRA constrained American Indian powers of self-determination in gaming relative to what Cabazon afforded. But in a very real sense IGRA also lifted from Indian gaming the heavy burdens of political and regulatory uncertainty. 

Of course, the effect was neither complete nor uniform. Gubernatorial recalcitrance held down investment in California for more than a decade after IGRA’s passage. “Friendly” and unfriendly lawsuits in Washington, New Mexico and elsewhere were necessary to settle the nature of compacting authority, game types, revenue sharing, and a host of other issues relevant to the Indian gaming investment climate. The Seminole decision, of course, vitiated a central congressional assumption in the compacting framework. Notwithstanding its shortcomings, however, IGRA went far in organizing the process by which state and tribal claims could be resolved.

Thus to the tribal leader’s correct observation that IGRA constrained Indian nations, the economist raises his familiar question: Compared to what? Wouldn’t Indian gaming revenue have continued at a slow pace of growth under a Cabazon-only rubric as it had done under a Butterworth-only framework?

Recall that state governors and members of Congress were up in arms about regulation and competition against non-Indian casinos. For how long would tribal governments have suffered slow gaming growth, and at what loss of net present value for tribes? Any delay in the arrival of the steep upward slope indicated by the light blue line in fig. 2 would carry consequences in the tens of billions of dollars for Indian Country.

It may forever be impossible to disentangle IGRA’s various abetting and hindering influences from Cabazon‘s broad acknowledgment of tribal regulatory authority because the two come so close together in time, but the acceleration in growth visible in fig. 2 raises the bar for those who lament the state compacting provisions in IGRA.

Yes, IGRA constrained the tribal sovereignty that is so essential to American Indian economic development. Yes, IGRA’s shortcomings as a framework for accommodating tribal and state interests effectively and efficiently are plainly evident.

On the other hand, is not five consecutive years’ worth of 79 percent compound annual growth a necessary proof that IGRA made investors-and tribes themselves-feel much more secure about directing resources toward Indian gaming development? How intensely were electronic gaming machine companies investing in Class II technologies before IGRA? How cheap and accessible was the capital necessary to create a Foxwoods, a Mystic Lake, or an Emerald Queen prior to IGRA, if at all? How readily were state governments cooperating to build highway off-ramps to Indian reservations? Good institutions of government make investors feel secure by reducing political, legal, and regulatory uncertainty, and IGRA, flawed as it was, created an environment that clarified tribes’ role in the federalist matrix of government-to-government relations in a way that was more than just good enough to get that job done. Would Cabazon alone have done as much? If so, when?

The second “corner” of fig. 2 comes in 1993 and presents puzzles in itself and perhaps even challenges the above explanation for the significant uptick in 1988. If IGRA created beneficial investment conditions in 1988, did something make them less attractive after 1993? If so, what? That year brought with it a new administration, and it is conceivable that BIA procedural changes introduced delays or uncertainties. A more plausible scenario is that in May 1994-the year growth fell substantially-Connecticut and Mohegan signed their gaming compact, which among other things extended Mashantucket Pequot’s 25 percent revenue-sharing terms to a second tribe. Perhaps that compact introduced higher stakes into compact negotiations around the country, thereby introducing uncertainty.

On the other hand, that compact extended statewide exclusivity to Mohegan, which would tend to accommodate growth in investment. It may also be the case that the uptick in 1988 was an accounting anomaly because revenues prior to IGRA were not centrally monitored as closely as they were after IGRA’s passage.

This explanation may be weakest because an improvement in the accuracy of reporting would probably not begin and end abruptly over five years. Whatever their underlying causes, the discontinuities in the revenue trend in Chart 2 are remarkable in their own right, and an invitation to more investigation.

The ASU conference looked retrospectively at 20 years of Indian gaming under the frameworks of IGRA, describing jurisdictional conflict, legal and regulatory unpredictability, and political change. As tribes and states look to the future, the global recession and financial market collapse compound the uncertainties.

Nonetheless, the story of economic growth achieved under a framework that settled the place of tribes in the federal system-at least for a few issues and a few years-holds out the promise that Indian gaming can grow rapidly again under conditions that the tribes and the federal government themselves have the power to create. With luck, the states will recognize their enlightened self-interest in supporting such growth as well.

National Indian Gaming Commission
The NIGC has had nearly 20 years of experience in not making up its mind what constitutes a Class II game. Its initial instinct was to prohibit all electronic forms of bingo and pull tabs. After growing courtroom losses, it modified that position, through a series of advisory opinions (non-binding) and 2002 regulations defining what designs were permissible for Class II use as “technologic aids,” and what constituted a “facsimile,” which requires a compact. Even following promulgation of those 2002 rules, however, the NIGC continued to issue confusing advisory opinions (non-binding) and undertook its ill-fated “classification standards.” Under the guise of clarification, those standards attempted to redefine the statutory definition of “bingo,” eliminated “games similar to bingo,” and created an intricate structure apparently designed to render Class II games commercially non-viable. Tribal interests invested thousands of hours in opposing the proposal, which was ultimately withdrawn-and is, therefore, non-binding. The NIGC is due for some significant personnel changes. One commissioner position has been vacant for more than a year, and should be filled before too long. The chairman’s three-year term has now lasted more than six years, and he expects to leave as soon as a replacement can be nominated and confirmed. The direction and ambition of a reconstituted commission will bear watching.
 

States
States have neither the authority nor the expertise to determine whether a Class II game complies with the provision of the Indian Gaming Regulatory Act. Most such efforts focus on a game’s appearance, and on whether, from an outside perspective, it looks, plays and feels like a Class III game. Some years ago, when the United States Department of Justice proposed a similar test-that IGRA did not permit games that were “too fast, fun and lucrative”-even the NIGC fought back. In recent months, some states have attempted to apply the provisions of the NIGC’s withdrawn criteria for Class II games. But those criteria never made it to law, and if the NIGC cannot enforce those standards, even less can the states do so. Further, the states have no right to enforce any standards. When Congress enacted the Indian Gaming Regulatory Act, it did not do so in a vacuum. The Supreme Court had acknowledged tribes’ inherent regulatory authority over bingo operations on their tribal lands, exclusive of state regulation. In the IGRA, Congress took away some of that exclusivity as to a gaming category it called Class III. To operate Class III games, therefore, a tribe must reach agreement with a state over Class III regulatory provisions or, when an agreement cannot be reached, enter the labyrinthine process of litigation and administrative challenges. But Congress did not abrogate any measure of tribal exclusive regulation of Class II games, and provided an oversight role only to the NIGC. State power over Indian gaming is limited to Class III. Since the United States Supreme Court invalidated tribes’ ability to enforce good faith compacting (Seminole Tribe of Florida v. Florida), states can stonewall compact negotiations, or impose unfair compact demands without judicial retribution. Their power is substantial, but it is limited to Class III.

Tribes
Tribes have always been the primary regulators of Class II gaming. Tribal gaming regulatory agencies staff the front lines in assuring the integrity and fairness of the tribal facility, and in that role, have learned much about the functioning of Class II games. Class II technologic aids were developed entirely in response to tribal needs to enhance Class II gaming. In general, such gaming systems were needed in jurisdictions that refused to enter into compacts to permit tribal Class III gaming. Tribal regulatory agencies developed and implemented rules necessary to protect the interests of both the tribe and the gaming public. The first, because the purpose of the IGRA is to provide for tribal economic development. The second, because the public will not long return to a crooked facility. Over the years, Class II gaming has matured at much the same rate as technology in other comparable areas. Tribal gaming regulators have reviewed and evaluated each new game, and have dealt with the inevitable bugs and fixes. That expertise was manifest in the advice provided to the NIGC in connection with the MICS and technical standards proposals. That same expertise can be utilized to provide a better foundation for understanding the proper classification of technological aids to Class II games.

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.

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.

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.'”