What Stays in Vegas Read online

  It became a national catchphrase, often altered to “What Happens in Vegas, Stays in Vegas.” Oscar Goodman, elected mayor in the boom times two years earlier, said the campaign was born of necessity as casinos started laying off thousands of workers right after the 9/11 attacks. “We started to think in terms of what could attract people to Las Vegas: an adult playland. That’s when that change from the family destination came,” he said. “And that slogan was a slogan basically of freedom, that people should leave their cares and woes wherever they came from, they could come to Las Vegas and have a good time without any guilty conscience and then return to the aggravation of their own town.”

  Visitors on Las Vegas Boulevard. Source: Author photo.

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  Throughout its history, Las Vegas has encouraged outrageous behavior. The city promises guiltless eating and drinking, sex, and gambling. And discretion. Casinos do not ask where anyone’s money comes from, and dealers might not even utter a client’s full name for many years.1 Casinos whisk their VIP gamblers into private rooms beyond public view.

  In the early years of the “What Happens Here, Stays Here” campaign, Facebook and Twitter did not exist. Internet data brokers selling profiles and criminal records about all Americans had barely started to appear. Smart phones and tablet computers ready to snap compromising photos were not ubiquitous. Of course, the limitless freedom to behave badly without consequence never really existed. But back then, it was easier to believe that it might.

  During the early years of the ad campaign, I worked as the Reuters bureau chief in San Francisco and frequently visited Las Vegas. In early 2008 I followed then-Senator Barack Obama as he toured the employee areas below the MGM Grand Hotel on the Strip, hoping to win votes from unionized employees in the Democratic presidential caucus. Sensing a bad photo op that could offend voters who did not approve of gambling, he, Hillary Clinton, and other candidates avoided the casino floors. I was intrigued to peer into the vast lower complex hidden from hotel casino guests. Here thousands of workers dine in their own cafeterias, pick up uniforms from massive dry-cleaning operations, prepare meals for guests, and do all the tasks it takes to keep a hotel with thousands of rooms running smoothly.

  On another visit to Las Vegas I met Vera Rhodes, who was attending a swingers’ convention. A woman in her fifties who said she was a virgin until her marriage at age thirty, Rhodes said she was making up for lost time during the convention’s late-night parties. I asked if I could quote her by name in an article. Then, personal data was not as widespread on the Internet. She said fine. Now, years later, Internet searches for her name still turn up her enthusiastic description of her nocturnal exploits. In 2014, I decided to see if I could find her again, even though I had no contact details or clues about her whereabouts eight years later. An Internet search found data brokers offering to sell her address, phone number, and other details for a few dollars—a relatively new development described in Chapter 6.

  In the Internet era, it is getting ever harder to keep personal information—what happens in Vegas—to stay in Vegas.

  The Inner Sanctum

  What changed over the years since I first visited Las Vegas is that businesses everywhere started collecting as much information on their customers as possible. With a lot of money at stake, casinos played an important role in expanding the corporate use of customer data. Starting in the late 1990s, a self-described math nerd became the driving force behind Caesars, making them a widely admired engine of data collection. Boosted by vast banks of computers, Caesars today know the names of the vast majority of their clients, exactly how much they spend, where they like to spend it, how often they come, and many other characteristics. They even know exactly where many of their customers are at any given moment—whether they are sitting at a specific Wheel of Fortune slot machine or playing blackjack in the wee hours of the morning. They gather all these details with the consent of those who choose to participate in their loyalty program.

  Gathering so much data about customers has proved enormously lucrative. Caesars Palace evolved into the headquarters of the world’s largest casino company, called, naturally enough, Caesars Entertainment. Executives from many industries looked to the company and its CEO, Gary Loveman, to understand how gathering information about customers could boost the bottom line.

  In 2012, I returned to Las Vegas to ask Loveman’s permission to peer into the secretive world of data gathering at Caesars Palace, located at the fifty-yard line of Las Vegas Boulevard, the famous Strip. After navigating through a maze of slot machines, restaurants, cafes, and lobbies, I found the correct bank of elevators for the executive offices. I had expected to find the bigwigs occupying the penthouse level overlooking their empire. But I was told to make my way to the mezzanine level. A lone receptionist to one side greeted visitors after they passed through a set of glass doors. She buzzed me into a separate, spacious antechamber. I watched as a waiter in tails trundled by pushing a food cart, a shiny silver dome covering the CEO’s meal.

  View of Las Vegas Boulevard, the Strip. Source: Author photo.

  Las Vegas had become a vast data collection machine. Because of the huge amount of money at stake, casinos have used customer information to innovate in a wide array of activities, including direct marketing, loyalty programs, surveillance, and photo recognition technology. Sin City is also a major source of public records because more couples marry here than anywhere else in the United States. If things do not work out, Nevada has long made it easy to split up, and divorce records provide even more information that ends up in public dossiers. Powered by fast computing and cheap storage, businesses from corner stores to international conglomerates gather information about clients from many different sources. All told, private firms, whether in Las Vegas or elsewhere, know more about us, including our intimate secrets, than ever before.

  After a few minutes I followed Loveman’s assistant along the same path of the waiter. A tall wooden door doubling as a wall in the antechamber slid to the side, and we proceeded to a windowless conference room with wood-paneled walls. Loveman arrived and took a seat in front of his lunch. The CEO had a bit of a baby face although he was in his fifties. Broad-shouldered and oversized enough to require an extra-wide jacket, Loveman was a commanding presence. With a deep sonorous voice, he apologized for dining solo. But, he explained, he did not have time for a proper lunch on that busy day.

  He gave the impression of not suffering fools gladly, so after some small talk, I got to the point: I asked if I could follow Caesars from time to time over the course of a year to study how they collected data on their clients. Initially, he expressed some caution.

  He had good reason. He had navigated several difficult years. Many casinos had suffered a losing streak following the 2008 financial crisis, but Caesars had taken an especially heavy blow. Revenue had fallen from a peak of nearly $11 billion in 2007 to $9.1 billion the next year and, as things turned out later, would end up stuck in the range of $8.5 billion in 2012 and 2013.

  The drop alone was bigger than the annual GDP of entire small nations. For all the company’s cleverness in mining customer data, it remained many billions of dollars in debt. Some people wondered if mighty Caesars would ultimately have to declare bankruptcy. A more conventional CEO might have shooed away a writer at such a time. But Loveman decided to gamble. He agreed to allow me to see what happened in his corner of Vegas.

  2

  A Harvard Professor Comes to Vegas

  A Business Professor Rolls the Dice

  No one would have ever wagered that someone like Gary Loveman would end up fitting into the casino boss shoes once filled by the likes of Benjamin “Bugsy” Siegel and Frank “Lefty” Rosenthal. Loveman did not grow up in the shadows of the casino world or dream of palling around with the Rat Pack. In fact, through his thirties, he had only once even set foot in a casino, in Monte Carlo, the setting for the first James Bond novel, Casino Royale. His encounter with the European version of gami
ng did not convert Loveman into a regular gambler. He lived in the Boston area; the world of gambling was remote. In any case, wagering invokes the uncertainty of chance. Loveman preferred the exactitude of math and data.

  Loveman had grown up in Indianapolis, where his father worked as a supervisor at a telephone manufacturing plant. In college, when classmates were busy chugging beers and chasing girls, Loveman would frequently stay in, pulling out pencil and paper to calculate stock returns and price-earnings ratios manually, just to see how quickly he could do it. After graduating from Wesleyan University in 1982, he spent two years at the Federal Reserve Bank of Boston. He kept on calculating through graduate school, eventually earning a doctorate in economics in 1989 from the Massachusetts Institute of Technology. His thesis examined differing rates of unemployment in the United States, Britain, France, and Germany. That same year in Las Vegas Steve Wynn opened the Mirage, the first new hotel there in sixteen years. The exploding volcano outside the hotel and tropical scenery signaled the start of a new construction boom that changed the face of the city. Yet the bright neon and glitter of Vegas remained a world away from Loveman, who, with his PhD in hand, landed a job teaching at Harvard Business School.

  Even within Harvard’s rarefied atmosphere, the business school stands apart. Many students and faculty members consider themselves a cut above the rest of the elite campus. Situated on the other side of the Charles River, south of Harvard Square and the historic core of campus, the business school is just far enough away to deter the busloads of tourists who regularly spill into Harvard Yard. With wood floors, stately desks, plush armchairs and couches, and a series of chandeliers hanging above, the main student building resembles the lobby of a luxury hotel. Whereas the rest of campus freely opens its doors to all students, Harvard Business School limits some of its facilities to its own. Future tycoons work out in a deluxe gym closed to others. They compete on their own tennis courts. Dedicated chefs roll fresh sushi in the cafeteria. At another counter, Chinese cooks fry up wok creations on demand. When HBS students mail packages, they need not trouble themselves by stepping into the often harsh Boston winter. The US Postal Service runs a post office in the basement of the central administration building. Customers rarely encounter lines there.

  In class, students sit in amphitheater-shaped classrooms. They cannot slink to the back of the room if they’re exhausted after a late night studying financial charts. Everyone takes the same seat for every class, behind a prominent laminated name card visible to all. Professors keep large seating maps posted on their office walls, which help them memorize the names of their students. If a student invites a friend to visit a class, he or she must introduce the newcomer at the start. The rest of the class politely applauds. Parents, who often help pay for the astronomical tuition, get a standing ovation, as do spouses.

  Loveman arrived when he was twenty-nine, just a few years older than his students. Like a conductor before an orchestra of virtuosos, he faced a daunting task. He had to know more than extremely bright students. Moreover, he had to engage classes of gifted—and demanding—future business leaders. The students had every right to expect a lot. They pay an extraordinary amount of money to rub shoulders with those they expect will become fellow captains of industry, and also forgo six-figure salaries during the two-year program.1 Loveman mastered this strange new world. Even among an impressive faculty of leading business minds, he quickly established himself as a popular teacher.

  Len Schlesinger was one of the HBS professors who worked closely with Loveman on topics related to the service economy. “He was a first-rate, enormously talented young faculty member who was distinguishing himself in a collection of faculty, all of whom were reputed to be great teachers,” Schlesinger recalled. “From day one, really, he established himself as having a great presence in the classroom and a real ability to master the art of engaging with students in a case discussion.”

  At HBS, teachers wield great power. Using the Socratic method, the instructor typically kicks off a discussion by calling on a student, who must outline the day’s case study for five to fifteen minutes. This is known as a “cold call.” At HBS, those who impress know they are doing well when the instructor writes down a summary of their insights on the white board. Anyone cold-called who fails to give a good spontaneous presentation risks humiliation.

  Scott Howe was one student inspired by Loveman’s teachings. A Milwaukee native, he came to Harvard after studying economics at Princeton, where he graduated magna cum laude. From Loveman he learned to focus relentlessly on customers. Many years later he still remembered an assignment in which students had to write two letters to two companies, one with criticisms and one with compliments, both suggesting improvements. “He was by far my favorite professor,” Howe says. “He definitely made an impact on my thinking.” Years later, the student would become CEO of Acxiom, a leading data broker with considerable influence in the universe of personal data.

  Loveman enjoyed setting out business problems in case studies. What are the key problems facing a business, what do the data show, what are the possible solutions? Loveman wrote case studies on topics such as American Airlines, Euro Disney, Southwest Airlines, the Warsaw Marriott, Habitat for Humanity, a hospital company in India, and a Mexican cell phone company.2 He first gained public attention by arguing that computers added little or no boost to workplace productivity in the late 1970s and early 1980s. His 1990 academic paper on the subject, filled with mathematical equations and data tables, concluded that firms would have been better off putting extra money into things other than information technology.3 Over time, others began doubting what he called the “Productivity Paradox,” and the debate faded as computing power advanced.4

  In 1994, Loveman coauthored a celebrated article that would become the foundation of much of his work in the years ahead.5 It proposed the radical notion that the lifetime value of any one customer is significantly impacted by his or her overall satisfaction. Take a pizza restaurant: at a dollar or two a slice, it may not seem that important to pay much attention to any one customer, since pizza eaters tend to hop around. But over a lifetime, a customer who professed high satisfaction with a restaurant was worth $8,000. The lifetime value of a loyal Cadillac owner rose to $332,000. And for a corporate purchaser of commercial aircraft, the value jumped into the billions of dollars. Loveman and his coauthors had set out the logic that would propel companies in subsequent years to gather ever more personal data about customers. “The lifetime value of a loyal customer can be astronomical,” the article concluded.

  Loveman’s transition from academia to casinos happened by chance. Harvard Business School allows faculty to consult for companies one day a week. Loveman started training executives from Harrah’s, a company that opened its doors in 1937 as a bingo parlor in Reno, Nevada, and had continued to expand over the years. The sideline proved interesting and far more lucrative than Loveman’s $120,000 academic salary.

  Casinos provided Loveman with an interesting intellectual puzzle. He was surprised that customers typically showed little loyalty to any one casino company, but instead flitted from place to place. He became convinced that the industry could do better by replacing the gut instinct that often propelled corporate decisions with data analytics. “As I came to learn more and more about the industry, it struck me that this was a very sophisticated business run by somewhat unsophisticated people,” he concluded in his characteristically blunt style.

  In 1995, just after Harrah’s lost millions of dollars trying and failing to establish successful operations in New Orleans, Loveman wrote an unsolicited letter of advice to CEO Phil Satre in which he suggested ways to use the customer data that Harrah’s was already collecting to build and enhance guest loyalty. In 1998 Satre, a lawyer by training, offered Loveman a full-time position as Harrah’s chief operating officer. You can try it out for a year while on academic leave, he told Loveman. If you don’t like it, you can always go back.

  Many HBS colleagu
es scoffed at Loveman’s decision to accept the offer. Not only did the associate professor leave shortly before he would have gained tenure—a job guarantee for life at the nation’s most prestigious business school. Making matters worse, he left to join hands not with a venerable Wall Street firm or prestigious firm on the Fortune 100 list but with an outfit that catered to tastes on the other side of the tracks: gambling.

  Because he would oversee marketing, Loveman had a simple mandate: use personal data to understand clients better than the competition. By gathering information on millions of customers, he believed the company could lure repeat business, catering offers and promotions to the different tastes of each person.

  Loveman joined the corporate world, an academic without any management experience entering a sector famously wary of outsiders. The northerner had to win over employees at Harrah’s headquarters at a mansion on a large estate in Memphis, Tennessee. Many thought he would not last long.

  Some found him intimidating. Peppering his conversation with words such as “stochastic,” “vitiate,” and “encumbrance,” or talking about “elasticities of demand,” did not win over the traditional casino crowd. Even Satre, his greatest supporter, joked that he needed a dictionary to understand Loveman’s presentations. One executive, John Boushy, felt confident enough to prod him from time to time: “Gary, I know you know what that word means, but could you tell the rest of us?” To this day Loveman crams so many $20 words into a sentence that he may pause, realize that his listener may need some help, and add, “Let me decode that a little bit.”