Hedging their bets
Casino gambling may be coming to Massachusetts, courtesy of the Mashpee Wampanoag Indians. But around the country, other Native American tribes are finding casinos an increasingly risky bet -- and are spreading their chips around the table.
LAST YEAR NANJING AUTOMOTIVE, China's oldest car manufacturer, announced that it was constructing a North American plant to build MG coupes, having bought the remnants of the storied but bankrupt British sports-car manufacturer at auction. The factory would be located, Nanjing announced, in a North American nation, but one with lower tax rates than the United States, more flexible zoning, possibly looser labor regulations, and none of the typical US wariness about Chinese economic competition. It would be located in the Chickasaw Nation, in Oklahoma.
In Massachusetts, especially in recent weeks, talk of Native American entrepreneurship has focused almost entirely on casinos. Last month, even before the federal government's Bureau of Indian Affairs officially recognized the local Mashpee Wampanoag tribe, politicians, activists, and media commentators were already debating whether the newly empowered Mashpees would be able to turn the tide in the state's long-running debate over whether to legalize gambling. All along, the tribe has made clear its desire to build what it called a "destination-type casino" in Massachusetts.
Native American gaming is a $23 billion industry, and successful tribal casinos boast profit margins far higher than those of the average Fortune 500 company. Tribes like the Mashantucket Pequots and the Mohegans, in Connecticut, and the Seminoles of Florida have grown rich off of their casinos and high-stakes bingo halls (the Pequots' Foxwoods Casino is the largest in the world). According to the most recent data from the National Indian Gaming Commission, 226 of the 563 federally recognized American Indian tribes have at least one casino. The Chickasaw Nation has 18.
But even among those tribes, like the Chickasaw, that have done well by gambling, there is a growing sense that it is unacceptably risky to rely too much on it for revenue. Tribal gaming has been expanding at a ferocious pace in the past decade, doubling between 1995 and 2000, and more than doubling again since then. Tribal leaders and industry analysts worry whether such growth is sustainable. "There is a genuine question," says Gabriel Galanda, a Native American lawyer in Seattle who specializes in Indian gaming litigation, "as to when the bubble might burst."
As a result, just as tribes like the Mashpees are pressing for their share of the casino market, others are already starting to look past it. In December, the Seminoles, who derive 90 percent of their tribal budget from gaming, bought Hard Rock Cafe International -- which, along with its casinos, comprises a global chain of hotels and restaurants -- for $965 million. Tribes like the Tulalip in Washington and the Salt River Pima-Maricopa in Arizona are building mammoth retail, office, and entertainment complexes on their land. The Rosebud Sioux are planning to expand their single wind turbine into a large-scale wind farm to sell power to surrounding electric utilities. This year the Winnebago of Nebraska are projecting $140 million in revenue from Ho-Chunk, Inc., a diverse conglomerate that, among other things, develops software, builds houses, designs ad campaigns, operates hotels and sells gasoline, office supplies, and pharmaceuticals. According to CEO Brian Campbell, the Chickasaws plan within a decade to be generating half of their income from non-gaming businesses.
Already, according to Joseph Kalt, a political scientist at Harvard's Kennedy School of Government and head of the Harvard Project on American Indian Economic Development, the non-gaming share of the Indian economy is growing as fast as the gaming share, and three times faster than the US economy as a whole. And some Native American business leaders are brashly sketching out a future in which tribes grow into major players in the national economy. "You're going to see some tribal GEs emerging in the next several years," predicts Lance Morgan, CEO of Ho-Chunk. "You'll see large diversified tribal conglomerates that are completely non-gaming based."
Still, some within the Native American community worry that efforts to expand beyond gaming have so far been mostly cosmetic, that the investments have been visible but unprofitable ventures that need to be propped up by gaming profits. And there are concerns, too, that many tribes haven't yet dealt with the distinctive problems that come with being at once a political entity and a functioning business -- problems that are magnified as tribes move into more competitive industries.
The majority of American Indians are not in the position of trying to determine how best to protect their gaming riches. Overall, Native American poverty and unemployment rates are some of the highest in the country. And even among those tribes that have casinos, the majority are small operations that serve sparsely populated markets. Many struggle to stay in business. Monoliths like Foxwoods and Mohegan Sun are the exceptions.
But even some of the wealthier gaming tribes are worried about their future. With the steady growth in the number of recognized tribes, and with existing tribes opening multiple casinos, some regional markets are starting to approach saturation. Less than a week after the Mashpee tribe gained recognition, New York Governor Eliot Spitzer approved a plan for a $600 million St. Regis Mohawk tribe casino in the Catskill Mountains. Either a Mashpee or a Mohawk casino would take away business from Mohegan Sun and Foxwoods, which rely heavily on gamblers from New York City and Boston.
And, as in Massachusetts, state legislators across the country, lobbied by non-Indian gaming companies, are starting to see gambling as a rich vein of revenue and are pushing to legalize it on non-Indian land, a development that would further crowd the market.
Many Native American business leaders share a suspicion that, one way or another, Congress and state governments are threatening what is in many regions an Indian gaming monopoly. The Indian Gaming Regulatory Act, the 1988 federal law that laid the legal foundation for today's Indian gaming industry, requires states to negotiate with tribes to open gaming facilities. But those facilities cannot offer games that are illegal in the state. A Massachusetts Mashpee gaming facility that opened today, for example, would be able to offer bingo and lottery games, but not casino-style games like blackjack, craps, and roulette. Tribes have been aggressive about defining legality: The Pequots argued successfully in court that the fact that Connecticut allowed charitable organizations to hold "casino night" fund-raisers was all the legality they needed to offer casino gaming at Foxwoods. But states could, in theory, put tribal casinos out of business by simply outlawing gaming outright.
As Lance Morgan puts it, "Gaming is an artificial market. There's no reason why the state couldn't put a casino closer to the region's major city, just as there's no reason that a state couldn't make gaming totally illegal."
The Winnebago of Nebraska faced these issues early. Their casino, far from any major city, was never going to compete with Las Vegas, but the facility faced particular competition from casinos across the border in Iowa, which had legalized riverboat gambling around the same time as the tribe's WinnaVegas casino opened.
The Winnebago response was Ho-Chunk Inc. (Ho-Chunk is an alternate name for the tribe). The collection of companies brought the tribe $400,000 in revenue in its first year, 1995, but in the dozen years since then it has grown into today's $140 million conglomerate.
CEO Morgan is frank about the edge his company derives from its tribal status. As minority-owned businesses, tribal companies like Ho-Chunk are given special status in the bidding for federal contracts. According to Seattle attorney Galanda, there are other advantages as well, from tax deductions on production equipment to deferred or reduced US customs duties on imported goods to relaxed zoning laws. In many states, tribal businesses, because they are owned by sovereign governments, don't have to pay corporate income taxes or property tax, or charge sales tax on goods sold on tribal land.
"Like any business, we're trying to find ways that the tribe has advantages and exploit them," says Morgan. "Largely we're trading on a simple price advantage."
In a sense, tribal governments bidding for business are simply doing what state and local governments do when they're competing with each other to be the site of a major manufacturing plant. Some American Indian tribes have even started to bill themselves as an outsourcing alternative to south and east Asian countries; they offer some of the financial benefits of sending work overseas with fewer logistical and political complications.
Still, it's an open question whether many tribes are actually reducing their reliance on gaming money. Steve Denson, a Chickasaw who teaches at the Southern Methodist University Cox School of Business, is skeptical of much of the diversification talk. "On paper it looks like some tribes are diversifying," he says, but if the new businesses aren't actually turning a profit, "you're just using the seemingly limitless profits from casinos to bail them out."
Some diversification efforts have fared worse than others. A widely promoted bottled water company started in 2000 by the San Manuel Band of Mission Indians struggled for five years before closing and reopening in a much scaled-back form. And alternative energy projects on reservations have had difficulty integrating themselves into the complex bureaucracy of regional energy utilities.
Harvard's Joseph Kalt argues that certain tribes are ill-equipped to compete in sectors where their built-in advantages are significantly smaller than in gaming. "Gaming is a ready-made business," he argues. "You can have someone come in and set up a casino for you." Government contracting or real estate development or heavy manufacturing are far more competitive. Many tribes, Kalt points out, have only recently developed reliable court systems and regulatory bureaucracies, vital components for attracting business.
According to Kalt, one of the greatest hurdles for tribes is the fact that they are governments as well as businesses. As such, he says, "they have to figure out how to separate politics from business and investment decisions." The Winnebagos' early attempts to go into business in the 1980s, says Morgan, "failed miserably because politics would creep in." Questions of where to invest and whom to hire and fire all became tied up in political hog-trading. Morgan and Kalt credit the eventual success of the tribe to the fact that Ho-Chunk now functions largely independent of the tribal leadership.
For most tribes, truly weaning themselves from gaming money will be a painful process. But for Steve Denson it's something that needs to happen, and not only for financial reasons. "Right now our reputation is that we have casinos and sell cigarettes," he says. "That's something I don't want to hand down to the next generation."
Drake Bennett is the staff writer for Ideas. E-mail email@example.com.