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With the gaming machine replacement cycle stalled and casino operators’ capital expenditures historically low, slot manufacturers aren’t seeing a lot of upside right now. Two of the largest, Bally Technologies and WMS Industries, in April lowered their quarterly earnings forecasts, two weeks before third-quarter earnings reports were expected. “Casino operators’ capital budgets for replacing slot machines have been at historically low levels for several years, and new casino openings and expansions are now at their lowest level in many years,” WMS CEO Brian Gamache said in a news release. Even more telling was Gamache’s comment that based on recent customer capital budgets and unit demand trends, “we don’t expect meaningful improvements in the industry environment over the remainder of 2011 or, at this point, for 2012.”

Bally CEO Richard Haddrill noted a double-whammy: “short-term difficult market conditions,” and the timing of large systems implementations becoming more challenging to predict.”

The replacement market continues to show little sign of improvement, and casino expansions – traditionally creating growth for manufacturers – haven’t yet materialized.

Other slot manufacturers, such as Konami Gaming and Aruze, are making inroads to the market shares of some of the larger slot suppliers – Bally, IGT and WMS.

“Without a significant amount of new and expansion units shipping, the industry is in a dogfight for market share on replacements,” one analyst Brian McGill of Janney Montgomery Scott said in a note to investors.

Goldman Sachs’11th annual Slot Manager Survey backs up that assertion, suggesting that competition among gaming manufacturers is the “fiercest it has ever been.”

“The dispersion between the gaming manufacturers has narrowed as we now have more companies competing for the same pie or only a slightly increasing pie. What used to be an oligopoly of just three major players is now becoming fiercely competitive with more manufacturers entering markets, getting licensed, and competing,” according to the investment firm’s survey.

Indeed, the survey indicated slot managers believe their budgets may be up about 1 percent vs. down a percent last year. A bright spot indicated that the percentage of respondents expecting to replace more than 15 percent of their slot floors grew to 23 percent this year from 17 percent last year.  “However, our belief is that any small pickup in replacements is likely to be eaten away by share gains by smaller and emerging slot manufacturers,” Goldman Sachs said.

Good news for the smaller, emerging slot makers; not so great if you’re one of the bigger, more established manufacturers.

Goldman Sachs’ report also indicates that today’s slot floors continue to be the oldest they have been since 2001. “However, we do not believe that just because the floors are old, slot managers will look to upgrade their machines. One way we thought slot managers would look to keep their floors fresh was to increase the numbers of WAP machines, but that is not happening, as the number of WAP games on casino floors is the lowest we have on record.”

Pretty grim stuff, but eventually something has got to give. Slot manufacturers have stepped up their game, delivering some truly innovative products. Bally Technologies’ U-Spin and WMS’ Star Trek Battlestations come to mind as just two examples.

Now more than ever, players want to be entertained; they want to try newer, cooler products, while still having the tried-and-true favorites on the floor. Savvy casino operators see the power of such content to justify the cost of upgrading their floors but also drive revenue and differentiate their slot floor from their competitors. Those who do reinvest in their floors will reap the rewards, and sooner or later, their competitors will have to do the same.