The Demise of Participation Games
by John-Martin Meyer
November 2, 2008
Operators have closely tracked the effect of the reduction of these games and determined that the revenue is now being redistributed to games providing the house with 100 percent of the revenue
With the announcement by one
of the largest casino operators, to drastically scale back its population of
revenue participation units, as well as its wide area progressives (WAP), some
are rushing to sound the death knell for these business models.
The target games are the specialty licensed
theme games that are only offered in an 80/20 percent split of the net win,
scenarios. The 20 percent goes to the manufacturer. The other group of target
games is the WAP games. These are the multiproperty linked progressive games in
which the casino pays a portion of the coin-in/handle to the manufacturer. To
put the WAP payments into perspective, they are the equivalent of 70/30 percent
to 60/40 percent splits, with the 40 percent going to the manufacturer.
The roots of reduction
The trend to reduce this “external payment” population of games is not new. It initially started at the pinnacle of the “Licensed Theme Game” explosion around 2002. Many of the larger operators were becoming more and more concerned with the poor quality of standard theme offerings compared to the licensed Participation counterparts. The manufacturers were not shy in admitting that main focus was geared toward these participation-type themes, which further exacerbated the situation. The operators scaling back the percentage of this population was their first form of protest against the manufacturers.
Why now?
The
current reaction is more economic nature than protest, but the protest angle is
still alive. The protest is in response to a perception that manufactures are
currently obsessed with creating “server-based gaming” and not focused on
content/theme development.
Manufacturers are asking operators to be patient with the weak
performance of the majority of available themes and the associated small
libraries of options. Essentially, all
currently active games are “dead men walking” waiting to be terminated the day
that the server-based units are approved.
The overall economic environment is much more
challenging than in previous years and the operators are looking for ways to
bring more dollars to the bottom line. When times are good, it is easier to
justify the added expenses of Participation games as a method to diversify your
offerings. When times are tight, it is
difficult to justify paying a company for the privilege of the company placing
its games on your floor while you, as the operator, incur all the costs of
operating that game. This is the point where operators start losing the
“cost/benefit” argument with your bean counters.
Again, the games under
discussion are the specialty participation games and not standard cabinets
placed to augment your general game population. The specialty participation
games are not to be confused with games placed on floors in participation
situations due to business models or capital funding constraints. The motivation
for these two scenarios is vastly different than that of a casino wishing to
bring variety to its wholly owned game population.
The manufacturers’ challenge is to provide the
operators justification to keep the games on your floor. Unfortunately, there
has been no empirical proof that a player will leave your casino because you do
not have a certain participation/WAP offering. The reality is that operators
have closely tracked the effect of the reduction of these games and determined
that the revenue, previously split with “outsiders,” is now being redistributed
to games providing the house with 100 percent of the revenue.
Why are these games so important to the manufacturers?
Besides
the obvious operational profit motive, one of the most direct responses as to
why these games are important to manufacturers lies in the manufacturers’ Wall
Street image and correlating stock price. With Wall Street not always having
the most thorough understanding of the gaming industry, they latch on to
certain performance indicators. Games
sold, recurring revenue streams (WAP and participation), and intellectual
property rights, are the three biggies. Themanufacturers have built their
images around these indicators and need to do everything to emphasize and
highlight them. If one of these key
indicators slips, the overall stock price could be
affected.
The participation/WAP
segment is closely tied into the intellectual property indicator, through the
acquisition and licensing rights of games’ themes, such as Star Wars or
Monopoly. In many cases, the acquisition costs, and ongoing licensing fees,
associated with themes like the “Star Wars” movie saga, are tremendously
expensive. With the current abbreviated lifespan of themes, in many cases, the
revenue generated from these themes
never recuperates the cost of their acquisition and
development.
The
third indicator’s involvement lies in the fact that manufacturers “sell”
cabinets to themselves to be placed in these WAP/ Participation scenarios. New
game sales represent a key indicator of performance. Depending on the sale
price the manufacturers are charging themselves across divisions, a reduction
of games being sold for participation could have a profound effect on the
“average” sales prices being reported to Wall Street.
When a property orders one less game for
purchase, it only affects a manufacturer once.
When a property removes a participation game, it actually affects a
manufacturer simultaneously in three areas just like a cartoon baseball pitch,
in which the batter swings at a single pitch three times and strikes out.
John-Martin Meyer
has held director
positions in major casino properties such as the Grand Victoria in Illinois and
the Excalibur on the Las Vegas Strip during his 20-year gaming career. His work within the Mandalay Resort Group
provided valuable experience in several majorjurisdictions. He can be reached by
e-mail at j-mmeyer@mindspring.com, or by phone
at (702) 373-7758.
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