Executive Q & A: Aristocrat Technologies President Nick Kihn underscores company’s redoubled commitment to compete in various gaming segments

Nick Kihn, a New Zealand native, joined Aristocrat in 2002, serving as group financial controller for Aristocrat in Sydney. He later headed Aristocrat’s operations in Europe and Africa, and was based out of London from 2006 until last September when the company called on him to come to the United States to serve as president of Aristocrat Technologies, the company’s North American headquarters based in Las Vegas. Kihn spoke with Slot Manager Editor Marian Green earlier this year about a range of subjects, including the economic recession, technological innovation, and the company’s newest gaming segments.

Can you talk about the economic climate and how it has affected business for Aristocrat?

Certainly it’s a tough economic climate. I think when 2008 ended, we all thought 2008’s behind us and looked forward to what 2009 was going to bring. 2009 is tougher than 2008, especially from a supplier’s perspective, and I think 2010 from a supplier’s perspective, is going to be even tougher than 2009. I don’t think the replacement cycle’s picked up at all. We have had quite a few new casino openings in 2009. And so that is keeping the supplies going in terms of supplying machines.

What I’m concerned about as we get into 2010, we haven’t seen a lot of investment decisions being taken in the last 18 to 24 months. These casinos that are opening up today are the result of investment decisions that were taken two-plus years ago.

And if you read a lot of the analyst reports, they paint a pretty sorry story in terms of new machines that are expected to go into the North American marketplace in 2010. Some saying that it could be as few as 5,000 or 6,000 new machines going into the North American marketplace next year.

If you look at this year, 2009, I think most suppliers were expecting something like 40,000 new machines to go into the North American marketplace as a result of casinos expansions, new casino openings, and what we’re probably seeing this year as a result of cancelations, project cancelations, and delays and postponements until next year, we’re probably only going to see 20,000 to 25,000 new Class III machines into the North American marketplace this year. So it’s been tough for all of the suppliers.

Aristocrat has been fortunate in a way because our customer base is predominantly tribal gaming. We do sell into the corporates, but a high proportion of our sales is to the tribes. They’re some of our very best customers, and what we’re seeing is the local casino and the tribal casino markets have continued to purchase.

Are there steps that you’ve been able to take to help the operators that are kind of cash-strapped?

It’s called flexibility. I don’t know how many pricing models we’ve currently have invented in the last 12 months. We’re seeing a lot of interest in financing leases. There has been in the past a lot of reluctance by a lot of the operators to embrace the leasing model, what we call participation, but given the cash flow situation and economic conditions a lot of these operators find themselves in, they have been more open to it than in the past. So yeah, it’s all about flexibility and customizing plans for our customers.

Which of your product lines are doing the best at this time?

Where we’re focusing today is we’re focusing on the high-end premium products, participation products. These are products we license to the operators so they’re actually out on the casino floor, we own them, but we actually get either a fee per day or a percentage of coin in. And we haven’t been as focused on them as we should have been in the past. Last year we had zero new products come out in that participation range. So this year there’s a huge focus on getting those products out to market. As an example, we have Jaws. We already have forward orders for that product, and that’s an exciting product for us. The Sopranos is now approved, and we’re in the process of rolling them out. MegaMillioniser, which is one of our multisite progressives, as an extension of our Millioniser. That’s approved also, and we’re in the process of rolling that out. So we’ve got a good range of participation-type product about to get into the marketplace.

Does the industry give Aristocrat enough credit for that multilevel product?

If you look at Aristocrat’s operations out here in the U.S., we were really the first gaming supplier to come out with low denomination products of penny, two-cent five- cent products. I mean this market was dominated by quarter and dollar games. We had a whole library of low-denomination games that we knew worked in other parts of the world that we then brought to this market and sure enough low-denomination caught on. Our four-level Hyperlink product was the first of its kind when we introduced it a few years back, and now, of course, a lot of the others are playing in that space.

And that’s why it’s very important for us, and it’s another key focus area for us in 2009 to continue building our R&D teams right here in North America. We have a couple of design teams here in Vegas, but we’re building on that now as we speak.

What are some games that came from those studios?

At G2E you would have seen at the show the Sopranos video product was developed here in Las Vegas, the FX stepper was basically developed and engineered and created by a special studio we set up right here in Las Vegas so it had limited involvement from our R&D teams in Australia. Those are just two examples.

In the last five six years, we’ve really only been selling into the video portion of the market. We hadn’t touched the stepper part of the market - we had a few attempts at it. And those attempts weren’t as successful as we would have hoped. That’s why we poured money and more investment into making sure we get it right and the product that’s just been approved in GLI and will be approved by end of this month [March] in Nevada, which is our FX stepper. We truly believe that this is a product that will allow us to compete effectively in the stepper market.

Licensed themes is an area Aristocrat has been treading cautiously in.

We’ve been really successful as a company in the past creating our own brands. One of our most successful brands is Mr. Cashman. Mr. Cashman is out there still performing extremely well in a lot of jurisdictions. I’ve forgotten how many thousands are out there, but it’s in the thousands and that was a homegrown brand. So we’ve got a lot of brands, which we’ve developed ourselves, like Mr. Cashman and Outback Jack, and we’ve had a handful of licensed themes, like Zorro and Foxworthy. Now we have The Sopranos, and we’ve also got Jaws. We believe that you don’t need to be releasing a lot of licensed themes in a given year, maybe one or two. What’s important is it’s really all about the game. The game’s got to be good; the player’s got to be able to relate to it. Some of our competitors have recently come out with product with all the bells and whistles. We call those games entertainment-style products. I think they’re probably more attractive to the casual player [rather than the regular player]. I’m not saying they don’t have a place, but I don’t believe that they are as appealing to the regular player as our games. But certainly in recent years, there has been a lot of innovation; there’s been a lot of new technology. I expect it will continue.

Where does Aristocrat come down on community gaming?

You know we experimented with it internally a couple of years ago. We have one community-style game, which we will probably be releasing toward the end of this year. We showed it to a number of customers at G2E late last year. I think the jury’s out right now [on community gaming]. We’ve seen a number of products that have gone in, created a bit of a splash in the first three or four months, then get pulled out. As to their overall importance, we need to see how they’ll perform and how this category of games across the industry takes off.

Talk about Aristocrat’s relationships with Pokertek and Interblock?

Well, we don’t do very much here in North America with regards to Pokertek. Pokertek distributes and sells its own products here in North America. But we do help them out in terms of Europe and Australia and Asia with regards to the poker tables. Our investments in both those organizations were designed to extend our product portfolio to give us an electronic table business. Interblock – we own 50 percent of that particular company – has just become licensed here in Nevada [at the end of last year]. They have a whole range of products. They have the electronic roulette product obviously, but they also have electronic dice and they have electronic blackjack product. Their products – we know they work. [For instance,] they’ve got 700 roulette tables in Spain. That’s a lot of electronic tables. It’s a great product.

Getting into this market is difficult, First of all roulette is not as popular here as it is in other markets like Europe. Second of all, we’re finding that when electronic tables are put in a room competing with live tables, they don’t do as well as if they were in fully automated electronic environments. We could probably hazard a guess as to why that’s the case. We believe the product’s not particularly liked by dealers for obvious reasons. So we’ve got a few challenges with getting that product out there in the market. Today I firmly believe that the product will win out. We’re going to be focusing more on dice, more on sic bo than roulette here in North America, because that’s a new kind of game, not competing with dealers...We’re looking at a few initial installations in California.

On the systems side, you’ve had some successes recently.

Last year was a record year for us in the systems business. And this year is shaping up to be a good year for us also. We won a large contract with the Choctaw tribe in Oklahoma, so we’re in the process of rolling out Oasis at their sites. We just turned a system on at M Resort (in Las Vegas). We have almost 100 people here in Las Vegas almost totally dedicated to research and development on our Oasis product line, and we continue to invest in it. Systems is a tough business. We have about 250 casinos in North America that use the Oasis product suite, and we are in the process of building new tools that we can bolt on to our Oasis product, business intelligence and bonusing applications.

We acquired another company in 2006 called ACE Interactive, and it’s basically our server-based gaming platform. And we hope to be formally certified by GLI very shortly here with that platform and we hope to trial it out here in a GLI jurisdiction this year.

How has the economy changed the server-based gaming outlook?

I’m not sure it’s changed because of the economy but it’s changed since 2006. A number of years ago, if you had asked [the industry] where was technology going…we would have all probably said we see whole floors turning to server-based or downloadable gaming. I think what we’re hearing and seeing now is a completely different attitude toward it. It’s not a complete floor replacement as it may have been thought of a few years ago; it’s being seen as a partial floor solution. And that’s fine. The technology that we have today can [provide] either solution.