Gary Loveman of Harrah's Entertainment: Gambling man

When Harvard Business School management professor Gary Loveman was hired as a consultant to Harrah's Entertainment in 1991, he had set foot in a casino only once, while on vacation in Monte Carlo. But the Massachusetts Institute of Technology­trained economist was soon fascinated with the business. "There's an underlying mathematical structure to it, a rigor that I could get my hands on right away," he says.

So a lucky seven years later, when Harrah's CEO Phil Satre asked him to give up a promising academic career to become Harrah's chief operating officer, Loveman went, in gambling parlance, all in. In January 2003, Harrah's named him to succeed Satre as CEO.

A graduate of Wesleyan University and of MIT, where he got his Ph.D. in economics in 1989, Loveman, 55, has been pivotal in helping Harrah's shareholders hit the jackpot. Since 1998 profits have more than tripled, from $102 million to $368 million, and Harrah's share price has almost quadrupled, from $20 to $74.

Loveman champions intensive customer research and uses the results to cultivate Harrah's largely low-roller customers through "rewards" programs that are fine-tuned to their playing, eating and lodging habits.

Founded 68 years ago in downmarket Reno, Nevada, Harrah's has characteristically pursued a blue-collar strategy of building serviceable but unspectacular casinos away from glitzier destinations like Las Vegas and Atlantic City. That enables customers in remote locales to make more frequent gambling trips.

Now Loveman is tossing the dice in a huge bet: Harrah's has spent $9.6 billion to acquire Caesars Entertainment, which caters more to the high-roller crowd. The deal, which closed last month, triples the company's presence in Las Vegas, adding the Caesars Palace, Bally's, Flamingo and Paris properties to Harrah's Las Vegas and Rio All-Suites casinos. In Atlantic City, meanwhile, Harrah's gains Bally's and Caesars casinos to go with its Harrah's and Showboat hotels.

Loveman is also seeking to build big casinos abroad, notably in the South China Sea resort of Macau and in Singapore. At home he is looking at less exotic but still promising locales: Pennsylvania and Rhode Island. And he hopes that the World Series of Poker, which the company inherited through its acquisition of rival Binion's Horseshoe Hotel & Casino last year, will add further to Harrah's winnings. The CEO spoke last month with Institutional Investor Senior Editor Justin Schack.

Institutional Investor: Gambling depends on people's behaving irrationally about money. So were you a behavioral economist?

Loveman: I was very interested in behavioral economics. But the field was in its infancy when I was in graduate school. A lot of the most exciting work, by people like Steven Levitt, the guy who just wrote Freakonomics, was not yet in anyone's sight. But I want to take issue with the premise of the question, which is that people who go to casinos are irrational.

Why?

It's based on the presumption that going to a casino is a financial transaction, akin to making an investment. But that's not how casino patrons think of it. When you go to a film for $8 or $9, or when you pay $45 to walk through Disney World for the day, you don't view it as irrational. The same thing applies in gaming.

But what's the takeaway for the consumer comparable to viewing a film or experiencing Disney World?

Casino customers get a sense of exuberance and excitement that's associated with an uncertain result. Americans today are fascinated with things that have uncertain outcomes. Look at the popularity of Survivor and American Idol. People like the gradual escalation of tension that leads to a winner. And if we can put a little wager on that uncertain outcome, we get even more attached to it. That's the way a slot machine works. If you happen to get a seven on the first spinning wheel, and then another on the second, you're waiting in that one moment for, hopefully, the third seven. That feeling is what people are buying as entertainment in a casino.

What's your top priority for Caesars?

To present the broader portfolio to the combined customer base. We want people who like to visit Las Vegas, for example, to know that we now have a broader offering there.

Harrah's has done very well cultivating middle-market gamblers who make day trips to local casinos. Caesars has pursued high rollers and not performed as well. Why buy it?

This is a transformational deal. We made a strategic decision that we wanted to be much more heavily invested in destination markets. By acquiring Caesars, we quickly got four new businesses in Las Vegas, two new businesses in Atlantic City and two in the Mississippi Gulf Coast resort area. The alternative was building new resorts in Vegas. Each one of those is a four-year undertaking, and when you're finished you have one more of them than you had before -- which is nice, but it's not four.

So you're not confident that gambling will expand to new venues?

We're concerned about thestability of the environment in several Midwestern states. Illinois, for example, drives our investors crazy. Every January when the legislature convenes, there's a new debate on raising casino taxes and other competitive issues. So we sought to make a greater allocation of our investments to states that we consider stable for gaming: New Jersey, Mississippi and Nevada.

You're moving into Pennsylvania and Rhode Island. Are they stable?

It's a little too early to tell. The tax rate in Pennsylvania is high, but we believe the conditions there are stable and predictable. The problem is in states like Illinois, where one year it's one thing and the next year it's something else.

You roughly doubled your debt to acquire Caesars. Will your cash flow increase fast enough to negate investor concerns about your leveraging up?

Oh, absolutely. The big question we get now from investors is what we're going to do with all the cash in a year or two, not whether we can cover the debt.

What will you do with the cash?

We'll be big investors in Singapore if we're fortunate enough to win the project there. Macau may be another place where we'll devote significant resources.

What about elsewhere overseas?

It's hard to judge the pace of these things country by country. But it's clear that the experience in Macau has gotten the attention of other Asian and Southeast Asian countries that this might be an important stimulus to tourist activity.

How will you lure new customers?

People generally become gaming enthusiasts after they're 35 to 40, because they have more disposable income and more leisure time. The demographics of this country are extremely favorable to that pattern. But a lot of people who are interested in gambling are just not satisfied with what's available in a casino. So we have to be innovative. The World Series of Poker is a great example. We have to tap into the enthusiasm people have for poker and turn it into something that is equally enticing in the casino.

Are you concerned about the social impact of gambling?

I'm concerned about people who suffer from the addictive consequences of a psychiatric disorder associated with gaming. It's a much smaller number of people than most think, but for those who are afflicted it's a very bad thing, and we have to take it very seriously. But I don't consider there to be a broad social impact. I don't believe in this calculus that our critics try to put forward, about balancing the private gains and social costs associated with gaming. It's flawed.

What's wrong with that way of thinking?

It's fundamentally nonlibertarian. Think about applying that calculus to alcohol. The social consequences would be far more damaging, because alcohol is a physiologically addictive substance, not a psychiatric problem. A much larger percentage of active drinkers become addicted than do active gamblers. Just the casualties from drunk driving would far outweigh any social consequence one could allege as the result of casino gambling. But in our society we view the right to consume alcohol as a fundamental liberty of mature individuals. We also let people buy automobiles that have 400 horsepower and eat double cheeseburgers at restaurants.