GUEST COLUMN
by Jeff Jordan
May 1, 2011
Jeff Jordan
More challenging than ever to be an operator buying slot machines
It is more
challenging than ever to spend precious capital to buy slot machines. There are more competitors than ever
and the product has less variation in quantitative performance and qualitative
measures, such as physical size, price levels, product features, technology,
and performance characteristics.
Executives buying slot machines have to spend more time managing vendors
and assessing the product pre- and post purchase than any time in the last decade.
In addition, they are
refreshing less of the floor, as prices of slot machines have risen faster than
slot revenues and capital allocations.
A slot machine today on average costs $15,076. In 2007, the same slot machine cost $12,539 and if you go
further back an operator spent $9,000 to $10,000. In 1998, slot machines for
the opening of Bellagio cost approximately $8,500, and that included titanium
doors that cost an extra $1,000. Suppliers justify the 20 percent price increase from 2007 to
2010 based on technology additions to the base game, e.g., a 2nd LCD
screen.
These price increases may
have negatively impacted the replacement cycle because operators are not
increasing their capital allocations to buy slot machines at the same
rate. In a recent survey by
Goldman Sachs, 72 percent of the slot executives surveyed believed that their
capital to purchase slot machines will be the same or less than last year. The natural impact is that executives
are not able to change their floors at the same proportional rate as they did
in 2004, when IGT was the dominant supplier selling slot machines 35 percent
lower than in 2010. Let’s put this
into context with the broader trends occurring in the
industry.
The supplier
side of the gaming industry has changed along three
dimensions:
The
three dimensions are market concentration, business model convergence, and
market size over time.
• Market Concentration: IGT is no longer the
800-pound gorilla dominating slot machine ship share. There are now five suppliers who each have earned double
digit market share positions, whether you use of ship share or survey results where
operators are asked to allocate share of a new floor.
• Business Model Convergence: At G2E in 2010, the differences in
business models being pursued by the major, minor, or new entrants to the
industry are similar. Most manufactures offer the same product with similar
physical size, price levels, product features, technology design, performance
characteristics, and pre/post sale support.
• Market Size: The addition of new units via market expansion is expected
to improve in late 2011. Even with this improvement growth is still well below
historical rates. The replacement
cycle is also at a historical low point, and there is much debate about the
timing and intensity of its return.
It is difficult to see it returning without significant growth in top
line revenue performance at casinos and/or a meaningful technology enhancement
that reduces operating expenses.
Operators
may want to think creatively about the new normal
Some
ideas that might help operators in this challenging environment
include:
• Look to partner with one or more suppliers to buy
more games at a lower price. Games
sold have a gross margin in the high 40s to low 50s. There is room for suppliers to cut their prices in the
short-term. If the supplier gets
more volume and the operator impacts more of the floor, it could be win-win for
both.
• Develop
a rigorous method for comparing leasing, participation, and purchase
alternatives. The lifecycle risk
of a game or technology platform may make other pricing models more attractive
than a strict purchase. The
paradigm of capping participation games can be self defeating by limiting
operator’s options, particular in a time of a major market shifts and capital
constraints. With leases you can
choose at anytime to replace a game with a better game: the supplier effectively bears content
and technology risks. Purchases
remove flexibility in managing capital and the operator bears these risks. Content and technology risks are not
captured when using WPU as the only measure to acquire slot
machines.
• Conversions
are an excellent means to refresh a slot floor. They are much less expensive than a game purchase and can
produce superior results for the expense.
A potential additional accounting advantage for the slot executive is that
these conversions are often considered an operating expense rather than a
capital outlay. Executives should
look to obtain conversions for free, particularly on older products that may be
still performing well. Conversion
kits are extremely high margin products and suppliers may have lots of room to
deal.
• Reward
suppliers that provide greater product differentiation along multiple
dimensions e.g. pricing, physical size, product features, technology,
performance characteristics, and pre/post sale support. One simple reward is taking greater
risk in putting new and innovative product on the slot floor. Another reward is sharing
information in evaluating product performance.
At
the end of the day, without a strong vision and strategy regarding capital
deployment operators may lose an opportunity to extract more from the supplier
relationships given the changing dynamics in the industry. SlotManager
Jeff Jordan most
recently served IGT as a director in several roles Product Strategy/Marketing
Research, Corporate Strategic Planning, and Strategic Business Development.
Prior to IGT, Jordan worked at
Bellagio as the executive director of slot operations and marketing. At Bellagio, Jordan had the
privilege of opening the property after working at The Mirage. Jordan is a principal at Jordan Gaming
Consulting Group and can be reached at jjordanlv@gmail.com.
Jeff Jordan
jjordanlv@gmail.com.
Jeff Jordan most
recently served IGT as a director in several roles Product Strategy/Marketing
Research, Corporate Strategic Planning, and Strategic Business Development.
Prior to IGT, Jordan worked at
Bellagio as the executive director of slot operations and marketing. At Bellagio, Jordan had the
privilege of opening the property after working at The Mirage. Jordan is a principal at Jordan Gaming
Consulting Group and can be reached at jjordanlv@gmail.com.
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