Teacher's Bet A former professor at Harvard Business School, Gary Loveman is taking Las Vegas to school. As the CEO of Harrah's, he's building what will soon be the U.S.'s largest gaming company--all by simply treating gamblers as shoppers. By Julie Schlosser

(FORTUNE Magazine) – It looked like a textbook acquisition. For four months Gary Loveman, the CEO of gambling giant Harrah's Entertainment, had been negotiating with Becky Binion Behnen, the daughter of legendary Las Vegas casino operator Benny Binion, for ownership of her Binion's Horseshoe casino. Now, on an early-January afternoon in Harrah's Las Vegas headquarters, the two are about to put the finishing touches on the $50 million deal when three IRS agents are ushered into his office. Behnen, the agents explain, owes the government $9.1 million, and the IRS wants Loveman to pay up. Loveman listens to their concerns, leans his burly 6-foot-1 frame back, and calmly assures the agents that they'll get their money as soon as the deal closes.

It is almost a Vegas cliche: big money, unexpected government pressure, and a never-let-them-see-you-sweat boss. Yet Gary Loveman is not your typical Las Vegas CEO. For most of his career Loveman was a Harvard Business School professor, better known for his theories on the service economy than for his experience in management or business building--of which he had none. Now, as CEO of one of the top gambling companies in the country, Loveman is taking on challenges that go well beyond any case studies, and that include more than just handling unexpected visits from the IRS.

Over the past six years--first as chief operating officer and since early 2003 as CEO--Loveman has helped build Harrah's into what will soon be the world's largest gaming company. When Loveman started, Harrah's had 15 casinos. Since then it has spent $3.4 billion acquiring smaller players and now operates 25 casinos in 12 states. And last year Loveman upped the ante, agreeing to spend another $1.5 billion to buy out not only Behnen's company--which owns the hot World Series of Poker brand--but her brother Jack's Horseshoe Gaming Holding, one of the largest private casino operations in the U.S. (Both deals are still awaiting an okay from regulators, which analysts think is likely by year-end.) In a rapidly consolidating industry--Caesars, Harrah's, and MGM Mirage today collect nearly a quarter of U.S. casino revenues--Harrah's has become the most voracious.

But it isn't just Loveman's willingness to bet big that has made competitors take notice. Loveman has also brought--and kept--an outsider's view of Vegas. He lives 2,400 miles from the Strip, in the suburbs of Boston (in a state in which casinos are still illegal), and commutes to work. He uses words like "isomorphically" casually in conversation. He isn't tanned and doesn't sport slick attire. The only visible piece of jewelry is a thin gold wedding band. No bling-bling, as they say. Not even a bling.

But the most important difference between Loveman and his peers is that he believes Harrah's can win by treating gambling like any other form of retail. That means instead of courting high rollers, Loveman is looking for frequent shoppers--the teachers, doctors, and accountants who walk through the doors to play the odds, again and again and again.

Forget Vegas's fascination with roller coasters streaming through lobbies or Celine Dion barking out hits in a custom-built auditorium. ("Big-name performers often take their profits with them," Loveman says.) Loveman keeps his properties--from the Rio in Las Vegas to a riverboat casino in Kansas City, Mo.--focused on the unglamorous but high-margin casino floor. Last year Harrah's brought in about 90% of its $4.3 billion in sales through its 41,000 slot machines and 1,100 table games--a much higher ratio than its competitors, which count on hotel rooms, ticket prices, and revenues from five-star restaurants. "People don't understand that gaming itself is fundamentally entertainment," says Loveman.

Loveman thinks his approach gives Harrah's a competitive edge and a recession-resistant business. Right now Harrah's is second to $4.45-billion-in-sales Caesars (a stat that will change once both Horseshoe deals are approved) yet generates around six times Caesars' $46 million in profit. And Wall Street seems to like Loveman's approach: Harrah's stock, at a recent $51, is near an all-time high.

"Gary really sees where the business is going," says Eric Hausler, an analyst at research and market-making firm Susquehanna Financial Group. "He has a lot of very unconventional ways to look at the gaming business--looking at it as a retailer, looking at the distribution points, taking a very macro point of view toward the gaming industry. He's really brought a new and different perspective to anything we've seen in the past."

Only in the reality-skewed world of Las Vegas could someone be considered a rebel for thinking that--wait a second--there's money to be made in gambling. But then, it's hard to imagine that any but the most dedicated card counters in Vegas have Loveman's ability to read and analyze the numbers. After graduating Phi Beta Kappa from Connecticut's Wesleyan University in 1982, Loveman spent two years at the Federal Reserve Bank of Boston, running regression analysis on the impact of the burgeoning budget deficit on interest rates. In 1989 he earned a Ph.D. in economics from MIT and, at 29, landed a full-time teaching gig at Harvard Business School. It was there that he moved from examining theories to studying the real world, especially the science behind retail. In his class, Service Management, he taught a blend of marketing, human resources, and operations--pushing students to think outside the box but never taking himself too seriously.

A hit on Harvard's campus, Loveman also started to attract attention from the corporate world. One of the papers he co-wrote--awkwardly titled "Putting the Service-Profit Chain to Work"--is still a top request for reprints from the Harvard Business Review. The study argued that there was a direct correlation between a company's profits and how much it focused on ensuring customer loyalty and on rewarding "front-line" employees who have the most interaction with those customers. Soon companies like Disney, McDonald's, and American Airlines were hunting him down in his cramped ten-by 14-foot windowless office in the business school's library and asking him to analyze their problems.

But Loveman also sought to check his theories on his own. And he thought he saw a good test case in Harrah's, a firm he had gotten a peek into while teaching strategy and marketing courses to its top managers. By 1997 the company was one of the biggest in the industry but was having a hard time unifying its web of casinos. Gamblers weren't loyal from one site to the next, and same-store sales growth was negative at most properties. Loveman sent a letter to Harrah's CEO Phil Satre offering a few ideas about how to grow the company, and within months Harrah's was putting them into place. Impressed, Satre met Loveman in Atlantic City in January 1998 and, over breakfast, offered Loveman the position of chief operating officer.

Rather than quit teaching, Loveman took a two-year sabbatical from Harvard--few professors have successfully made the jump to the corporate suite, and Loveman carefully figured in risk. But he never came back. "A lot of people, including Phil, thought that I'd come in for two years, and there'd be the equivalent of a disk dump--I'd give them whatever ideas I had, and then I'd go away," Loveman says. "But the problem was, I loved it." When Satre decided to retire in late 2002 after 18 years as CEO, Loveman was tapped to take his place.

Even before assuming the top position, Loveman looked to his service-profit-chain paper for guidance. One of his most important goals was to get customers spending more of their gambling budgets at the company's properties. Satre had created a frequent player's card in 1997, but while ahead of its time, it hadn't done much to entice visitors.

Loveman thought he had a fix. Vegas has always treated high rollers right--comping them luxury suites or free meals as a way to keep them coming back. Loveman thought the method was inefficient and had a hunch that some of his most loyal customers were slipping through the cracks. He thought back to a Taco Bell case study he had often taught: In the late 1980s the company stopped trying to be everything to everyone and figured out that its core customer simply wanted cheap and fast Mexican food. The decision rocketed Taco Bell to a decade of growth. Loveman took the idea and helped devise a new three-tiered loyalty-card system that collected reams of data and encouraged people to spend more to get to better perks--discounted rooms, no-line access at check-in, even a separate seating area at the buffet for top-tierers. Sorting through the info, Loveman found that his real moneymakers were the likes of slots-obsessed grandmothers and NASCAR dads, whom he started going out of his way to court.

One trick was to truck them in. Harrah's launched a program giving these frequent rollers (Loveman calls them AEPs: avid experienced players) free or deeply discounted flights on one of its 13 chartered planes from dozens of towns like Grand Island, Neb., or Latrobe, Pa., to its casinos in Laughlin, Nev., or Reno. Upon landing, the passengers are shuttled to the casino and greeted with New Orleans--style beads, feathered dancing girls, and blue margaritas. Then it's time for them to return the favor.

Loveman and his team also launched a two-pronged effort to buy more casinos and persuade states to open up to gamblers, filling his schedule with cross-country meetings of local and state legislators. Loveman doesn't shy away from using his outsider status to his advantage, dropping his dazzling academic credentials and employing the Socratic method to win over reluctant politicians.

For all of Harrah's new size and stature, there are plenty of problems Loveman must deal with. For one, while states are opening up to gambling as a way to fill their coffers, they also see the casino companies as easy marks for taxes and fees. In June, Illinois Governor Rod Blagojevich restructured the state's taxes on casinos, and Harrah's fell into the highest bracket: 70%. To cope, Loveman cut 300 jobs, reduced one of his casino's hours of operation, and eliminated room service--all moves that could alienate loyal gamblers. For another, new competitors around the country are stealing away business. Indian casinos are finding their way into or near towns from which Harrah's used to draw significant customers. Tribes in California have put a dent in traffic to Harrah's Reno, Lake Tahoe, and Laughlin sites.

Loveman thinks he can keep his challengers at bay by knowing more about what makes customers tick than anyone in the business. It's a belief that has won him fans--especially from those in his old line of work.

In late January, Loveman flew to Palo Alto to speak to a class at Stanford's Graduate School of Business. The class of former investment bankers and dot-commers knew plenty about him already. After all, they had spent the previous day reading a 19-page paper detailing Loveman's rise to power, written by their professor, Jeffrey Pfeffer. From a man who once taught case studies, Loveman had become one.

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