The Market Speaks: A Misesian Perspective on Las Vegas

0:00This is to be hopefully more entertaining that it is educational because I certainly don't pretend to be an educator, although I did teach at a place called Paul Smith's College, it's an upstate New York and it is a two-year school that is involved in hotel training and forestry and things of that nature. But tonight I want to talk to you about a topic that, as I call it, the market speaks and here in Las Vegas it occasionally yells. and it's what I call a Mesian perspective, I guess, on Las Vegas, the Venetian and on global gaming. But I would first like to welcome you here to the Venetian, I'd like to thank you for joining us here for your conference on Austrian economics and the financial markets. We are a free market economics groupies here, I guess you would say, and we enjoy it and I would point out Diana Forbisch who is our Associate General Counsel has been a member of the Institute here for a number of years. I am a member also as well as a member of

1:01Fee and I've been involved with the Henry Haslett Foundation, etc. So we are free market economic groupies and we welcome you here so feel at home here because that which is built around you is built we think to a certain extent on the principles that you all envision and Communication. I'd also like to thank you for what you do, because you stand on the shoulder of those giants like von Mises and help us look ahead. And you help folks like us be what we call consciously competent. It's one thing to do something right. Perhaps it's another thing to kind of think about it, know about it, and be conscious about how you do it. And I guess one good example of that, as I told Lew earlier, I have his marked up pamphlet here on why Austrian economics matters and I'm going to refer to it because I actually have notes and things in it. I enjoyed reading it and I enjoy hopefully I'll draw some parallels perhaps at least some quotations from what he was talking about

2:03in that pamphlet. This evening I'd like to try to give you a little kind of a homespun Museum idea of Las Vegas overall on our market position and our market view and how we at the Venetian act and react as relates to our market and tell you a little story about how our single-minded pursuit of a very unique business plan, although it did face some externalities shall we say at the beginning, actually won and proved out in the market itself. So what I want to do, I want to start with our hometown. We live here. This is Vegas. This must be the most purely competitive market in the world. You may see it as a fun place to visit, but to us, it's a see you a billion and raise you a billion, high market or high wire economic gambling act because these buildings are very expensive to build and you really don't know if they work until after you build them and after the market says, yes, I like

3:05So, you can walk out our front door and watch the match happen today. If you walked out our front door and you turned right, and you walked about a half block down, you would see Steve Wynn building his resort. We spent about $1.6 billion building the original Venetian. We added to it, we now are at about $2 billion. Wynn is now spending $3 billion building Wynn Resort and between our building here and the whole, you're looking at now what we call the Palazzo. The Palazzo is another $1.6 billion investment and when we're done in 2007, we'll have 7,200 suites, 2.4 million square feet of meeting and exhibition space about the the size of McCormick Place where we are now, 1.2 million square feet of mall space, 3,800 seat theaters, museums, restaurants, 11 swimming pools, 150,000 square feet of spa, it will be the largest resort in the world by far.

4:13So what we're saying here is I bet or we bet our market insights, our resource allocations are better than yours. There's really no other market I know of like it, where you get instantaneous market research. You can look out your window and see where the foot traffic flows back and forth. You can watch the foot traffic. You can then, moment by moment, by computer, watch the games play and actually watch dollars flow in through the door. Here, the market is bigger than yours. The market speaks every minute of every 24-hour day. Las Vegas is proof positive that Adam Smith was right.

5:00Man creates endless demands out of countless possibilities. And you can see it right here. Endless choices. If you can imagine it, if you can build it, and if you do it right, people actually buy it. If you combine this idea of endless possibilities and endless choices with Lew's comments on page 8 and 13, He says economic value is subjective, that certainly is true, and economics is a social science dealing with people who make choices that change their minds and even act irrationally. Well, here it is very, very true, you know, we're built on irrationality. It's irrational to go in there and play on those tables, but it does relatively well. Where it's irrational, it is wasteful, it's decadent, it's purient, it's self-indulgent, It's good wastefulness and self-indulgence, it's pretty good.

5:51We are the world's favorite adult guilty pleasure. And with over 37 million visitor free market choices a year, it can't be wrong. Very Austrian, this place, Las Vegas. The problem with all this fun is that they keep score. Every transaction, every minute, every day, it's like a golf scorecard, you add it up stroke-by-stroke, play-by-play, room-by-room, roll-by-roll on the craps table, and at the end of the day, thanks to our friends at Sarbanes-Oxley, Enron, etc. and sector accounting, we compare scorecards, and to the victor flows the capital, to the victor flows the enough capital at a low enough cost to build another one of these or to build several other things inside of one of these.

6:39So it is purely the price system, the profit system, keeping score, allocating resources to the victor. Exhilarating? Yes. Terrifying? Definitely. Because once you make your commitment, it's not like a chef. If a chef makes a mistake, he can eat his cake. Here, when you make a one point billion dollar mistake, it sits there on the strip and eats your capital. And here, you know, we say the market never, the market doesn't just speak here, occasionally it's green. Now I want to turn to our Venetian story here for a moment, a story of what Hayek called the intellectual hubris and on, in his road to serfdom, he primarily focused on government, on the interventionists and the externalities, that interference, that interferes with free Industry Markets with Social Individualism.

7:37Our experiences in developing the Venetian and an innovative business plan that was different from anyone else had ever envisioned before is the story of that intellectual hubris. But it wasn't just government or quasi-government entities, it was competitors, it was our culinary union, it was the good old boys or the people here in Las Vegas who really are quote-unquote in the know. In 1997, on the front page of the Wall Street Journal, it was played out in an article by a young lady named Christina Binkley and Christina wrote about what was unusual about what happened here in Las Vegas. And she says that we here at the Venetian have managed to vex much of Las Vegas with our plans to build the world's largest casino here. And there are quotes from people who know anybody who wants to build 6,000 rooms in a city that's already overbuilt is smoking something.

8:28And all this quote-unquote concern is caused by a highly unusual lineup against the Venetian. Union leaders and gambling company executives alike have been lobbying potential investors not to support the Venetian. And there's a quote from a fellow who was a CFO of Mirage Resorts at the time where he told potential bond buyers that a failed Venetian could be worse for Las Vegas than a successful Venetian. So an interesting lineup of folks who feel, felt very directly that they should intervene with what we were doing. So I want to tell you the story of each of the pieces of the Venetian and the comments that they made. But first, I think I'm going to start with the Sands, because we are on the hallowed grounds of the Sands.

9:16It is that storied place of the Rat Pack, of the Copa Room, of the Showgirls, and Dino and Sammy and Sinatra. Wonderful, nostalgic, and so, of course, this is Las Vegas. We went right straight ahead and blew it up. We can probably address our first interventionist criticism, and that was that this place was just too big, it was just too large. The master plan, it was a massive scope of the project. Government or our government surrogate for competitors, I guess you would say, chimed in. It was too big, it was too aggressive, it was just too much. There would be gridlock, and it might fail, and if it did, it would ruin Las Vegas. in Las Vegas. And of course, as any good Austrian knows, it's impossible to judge market failure without an independent test, and that independent test is the market itself. So we fought through it, we developed it, and we went on. We developed something that they thought was stupid, the convention business. I mean, the conventional wisdom here was, conventioneers don't gamble.

10:22Why in the world would you ever build a huge convention center? But we did, we developed and it worked. We also had some difficulty with the government subsidized or quasi-government entity, that being the Las Vegas Convention Center that went ahead and cut its rates. It was subsidized by us to the tune of about $27 million this year. They charge about a third of our rates here and the public sector loses $40 or $50 million a year out of there and we actually make $15 or $16 million out of our own convention center. So they were a little obstructionist in that process too. Our all suite rooms, we built all All-Suite Rooms. And there was some criticism of that. I mean, after all, they're going to stay in their rooms. What are they going to do? We put minibars in wonderful large rooms in the place. In the 40s and 50s in Las Vegas, there were no televisions in the room because, of course, if you were in the room watching television, you weren't downstairs

11:11gambling. We built a mall. We built a very large mall, a similar kind of a criticism that said, well, if they're gambling, they're not going to shop. If they're shopping, they're and we also built a 17 name brand restaurants and what we did was we asked individual chefs to spend their money and develop their restaurants and allowed them to freely choose who they wanted to be able to work for them. Now that was something that the culinary union really didn't like. Our business plan here was to develop what we call a mixed-use building that happened to have a casino in it, but all those reasons for coming to a destination resort that happens to have a casino in it. So we were not casino-centric in how we thought about our development of the building.

11:57The unions, of course, tried to interfere with what we were doing and put their picketers out in front of our place, ran around and tried to keep people from coming in the building. So they picketed and our customers fortunately pushed them aside and flooded the building. So, at the end of the day, the market spoke, and the market walked by them, and we are fortunately non-union today. We are not, I have to qualify this, we are not anti-union. People are free to make their associations if they want to make their associations. And it's up to that free market for ideas to treat our employees in a way that they don't want to have to have a union. So it's up to them. But we just wouldn't deliver it to them. If people want to spend their money to have somebody represent them besides us, that's up to them.

12:49But to force me to make all my employees pay them money without even going through the election process just didn't work. Now, we do have a good relationship with our construction unions. We have to. We build millions and millions of square feet all over the world. and we do have a good relationship but they've made their decision but our decision here was to allow our own individual chefs to make their own decision and for us to make our own decision and for our employees to make their own decision and it's up to us to make sure that they feel good about being here and don't need somebody else to hire to be able to speak to us or to speak to me. Well that unintended, sometimes the law of unintended consequences help. Believe it or not, we bid for a license in Macau. Macau is a special administrative region in the People's Republic of China, I just used this example. In Las Vegas, if you drew a five-hour flight circle around Las Vegas from New York and up into Canada, Mexico and so forth, there would be about 356 million people within a five-hour flight of Las Vegas.

13:51A place like Macau, there are 3.11 billion people. And within a one hour flight, there are about one billion people. It's about a two hour flight, about two hours and fifteen minutes to Singapore, approximately. 750 million people on the southern coast of China. So it's an extraordinary opportunity. And it was this market plan that really won it for us because they sent a delegation from mainland China. Imagine, mentally, guys in mouse suits walking up and down the strip here and picking out which building they wanted. Our building, because it was not necessarily casino-focused or casino-centric and the business plan relating to the convention business, the mall business, et cetera, really appealed to them and we won the contract over there in Macau based on that.

14:37So it was an unintended, wonderful, unintended consequence. We built this Sands building in 14 months. It's about a million square feet. We spent $265 million on it, and we will pay for that building in its first year of operation. But the real dream and the real future of Macau is the multi-night, multi-day stay. Macau is made of three different islands. There's an island called Taipa and Kuala Lumpur, and there's a landfill in between that we're filling land in now called Cotai. And our vision was to actually build the Las Vegas Strip in China. So this will give you a sense we're going to build our Venetian here, there, 10.5 million square feet, a million square feet of meeting and exhibition space, 18,000 seat arena, showrooms, etc. It is going to be a Las Vegas Macau actually on the doorstep to China. But in addition to that, we've master The Federal Reserve has planned that co-type piece of property for 60,000 rooms.

15:40There are only 450,000 people in Macau, and they kind of step back and say, wow, isn't that too big, isn't that too much? And we say, well, there are 130,000 rooms here in Las Vegas. We can't get any more than 60,000 rooms on that piece of property. They're a little taken back about that aggressiveness, so we started with one piece at a time, and we are now building the first phase, The Venetian that's on your right, six other branded hotels, so we'll have seven hotels arrayed on a Las Vegas strip. It'll be like taking from the Bellagio up to Wynn's New Resort, that proxy piece of property, picking up and plunking it down in China. And the goal here is to develop the Las Vegas of China, and of course the goal is to own all the casinos and all the showrooms and all the buildings. If we could have all of it in all of China I would be very happy to do that. We're avaricious, avaricious as could be. Anyway, so we are

16:36very, very fortunate to have this opportunity. We are building as we speak now, and as I say, sometimes there are some wonderful unintended consequences of the directions that you take. Anyway, we are very delighted that the market has spoken here in Las Vegas. We've added up the scorecard, we've compared it to our competitors, and I have to say the market has worked it out and I think we have now shown all of those that have the intellectual hubris to think that without their money, I mean with our money, and we're spending our money about our ideas to then criticize intellectually how we were going about developing our building as obstructionists. We've proven them pretty wrong. If you hit the button, we'll see some of the results. We were on the highest rate in Las Vegas. We were on the highest amount We have room's revenue in Las Vegas. Hit the button again. We run the highest margins. We have the highest returns on invested capital.

17:32Most importantly, since we went public December 15th, there's another measurement out there, and that's equity value in the marketplace. As of the 15th of February, the last time we had the numbers, Las Vegas Sands has an $18 billion market cap, and that's more than MGM, just about more than MGM and Harris put together. From a place that in 1997 started with about a $280 million equity base with an idea, a different idea, an idea that really challenged the market, that challenged the status quo, that had a fair amount of criticism about what we did and how we went about doing it to be the number one equity value place in our sector of the business, we think is a huge accomplishment, but it's a huge accomplishment for the marketplace because no matter whose opinion No matter who said what, no matter who tried to do what, we work it out here in this marketplace because those folks are free to walk up and down that strip and go anywhere they want

18:34to go and spend their money any way they want to and it's up to us to try to figure out how do we attract them, how do we capture it and then how do we win that game and deploy our capital correctly and deploy it well. The market did speak. It blew away all the externalities, the interventionists that exposed Hayek's intellectual hubris and and we're excited and happy with that and with I guess to close those economic giants that I spoke of when I welcomed you originally here may not necessarily be proud that their free market theories were proven out in the decadent competitive crucible of Las Vegas but I believe at the very least they would achieve a measure albeit perhaps an amused measure of vindication that their hypotheses have been tested and proven and what I think is the most brutally competitive market I leave you with my wish for all of you addressing and attending this conference. That is, that the theories expressed and debated here find equal success in being vindicated in the world's

19:40financial markets and are proven in the crucible of free markets for money, for goods, and for ideas. And may the best of those theories and ideas win. With that, I welcome you all here on behalf of the management and of the staff of Las Vegas Sands and the management staff here at the Venetian. We appreciate your coming here. As I say, we are free market economic groupies and we welcome you here to our house. And if you look around you, this was a house built on those principles. We're very proud of it and we're very happy to have you with us.