Thank you for watching the tutorial on primary industry research, which focused on providing a financial overview of a sector. We now turn our attention to secondary research topics which focuses on understanding market segments and business models.

We will continue referencing the Las Vegas gaming industry as well as telecom and other industries as practical examples.

Before we begin, it’s worth noting that operational insight is helpful to understanding the rationale for corporate finance transactions, which frequently originate from strategic and operational motivations. As such, coverage bankers are often well-versed in the operations and terminology of their clients.


So to get started, the following roadmap helps identify some of the most pertinent topics for any given industry:

  1. Market Demand by Segment – what segments are growing or declining?
  2. Marketing Strategy – how do companies generate revenues and attract customers? This is the most fundamental trait of any business.
  3. Business Model – how are companies set up to deliver a product or service?

Over the next 10 minutes, we will break these topics down in greater detail.


The first topic we’ll look at is which market opportunities are growing or declining. The quickest way to get a handle on this question is to look at the historic and forecasted revenues and EBITDA for each segment.

Annual reports and analyst research usually segment revenues by geographies or products, which offers insight into segment-specific market potential.

In the case of Las Vegas gaming operators, there are two geographic segments that are of key importance, which comprise – as touched on previously – Las Vegas and Macau.

If revenues are segmented by product area, they would typically be broken into: rooms, food & beverage, gaming, and entertainment, retail & other.

As an important practical tip, you do not need to identify or analyze every segment to reach meaningful conclusions. For example, Las Vegas and Macau do not account for all of the revenues of Las Vegas operators, yet understanding these two segments provides helpful insights into the strategy and business model of these companies. As such, trying to analyze every segment in the same amount of detail may not be worth the incremental effort or even feasible.

We have touched on some of the key characteristics of Las Vegas and Macau before but will go through a few additional points of comparison here. What you should be focusing on is the size, trajectory and notable themes of key segments.

Firstly, the visitor number in Macau has been growing in the double-digit range, while it has remained fairly stagnant in Las Vegas. Even more telling, gaming volume has exponentially increased in Macau in recent years, in part fuelled by a growing middle class with disposable incomes.

On top of that, the disproportionate amount of gaming volume per visitor also drives improved margins relative to Las Vegas.

As a result, there are several new developments planned or underway since the Great Financial Crisis and Las Vegas operators such as Wynn Resorts and Las Vegas Sands have concentrated most of their expansion efforts on Macau.

It should also be noted that the Macau market is subject to heavy regulation which can hold up expansion by foreign entities.

This contrasts with Las Vegas where visitors and gaming volume have, for the most part, stagnated in recent years.

In addition, the visitor focus in Las Vegas has continuously shifted towards incorporating non-gaming entertainment aspects such as restaurants, shopping and shows catered to every type of demographic. Las Vegas has also become a popular location for major business conventions with some of the largest conference infrastructure in North America.

MGM Resorts and Caesars Entertainment remain the oldest and biggest players in Las Vegas with a large portfolio of properties.

Here we provide an example of revenues broken into product segments comprising rooms, food & beverage, gaming and entertainment. Again, it’s important to understand what portion of revenues each segment typically accounts for and how profitable it is. You’d also want to know where the segment is trending and what the main drivers for growth are.

As mentioned, M&A activity is often rooted in strategic considerations on how to exploit growth opportunities through non-organic avenues. Hence, understanding where the growth potential lies and what is driving it is paramount for developing transaction ideas.

Looking at the rooms segment, you might observe that it represents the second largest revenue contributor but the largest EBITDA contributor given its low marginal costs once built. However, you might also note that the total visitor numbers in Las Vegas have been fairly constant, so the market is unlikely to growth aggressively in the short-term. At the same time, there hasn’t been as much capacity addition during and after the Great Financial Crisis as investors have been sitting on the sidelines waiting for demand to catch up with the capacity added before the crisis.

Self-evidently, sales are driven by visitors whose choices are affected by the events hosted in a resort and access to desirable amenities.

The Food & Beverage is another big contributor to resort revenues especially as Las Vegas shifts to providing visitors with sophisticated non-gaming experiences. To a significant extent, Food & Beverage is driven by the number of visitors and similar factors as room revenues.

Gaming revenues and EBITDA typically account for a smaller portion than room and food, but are sufficiently substantial to make the difference between being profitable or making a loss. It should also be noted that revenues may be less correlated with visitors only and visibly driven by rewards programs and high-limit offerings. Like for visitors in general, volume and capacity additions have been relatively flat although high-limit gaming is becoming an increasingly significant profit generator, because of significantly improved margins from disproportionate gaming volume per visitor.

Entertainment Retail & Other by themselves account for only a small portion of a resort’s income. However, Las Vegas visitors are spending increasingly more funds on non-gaming entertainment and basing their choice of hotel in part on entertainment offerings such as exclusive access to a popular club franchise.

To put these margins in perspective, it should also be noted that promotional allowances (such as complementary rooms and food for frequent gaming customers), SG&A and capital expenditures can be significant barriers to profitability.

In the telecom space, a high-level segmentation can be done between wireless and wireline segments, where wireless encompasses voice and data subscriptions including device sales and wireline comprises voice, TV and Internet service.

Some important trends for the wireless segment include an increase in consumer spending in developed countries as the functionality and data consumption of wireless devices increases as well as strong growth in emerging markets where the lack of wireline infrastructure continues to drives wireless usage, although with lower spending pattern.

Important revenue drivers within the notoriously competitive wireless market include network capacity and reliability, competitive pricing and exclusive content deals.

In the wireline segment, there has been a noticeable “cord cutting” trend for some time, which comprises customers canceling their cable TV subscriptions in favor of media content streamed over the Internet. In addition, some customers are opting to maintain a wireless voice service only and forgo the traditional landline service. As such, total revenues in this segment are expected to continue declining.

Competition in the wireline segment consists of telecom companies, who traditionally focused on providing voice services, and cable companies, who traditionally focused on providing TV services. Both types of companies typically offer voice, TV and Internet bundles with the main revenue drivers comprising network capacity and speed, access to exclusive content and bundling with wireless services for integrated telecom companies.