The year 2008 is proving difficult, and most of us feel the pinch of a difficult economy. Las Vegas visitation is down, along with spending on gambling, rooms and shopping. The news from other gaming jurisdictions is equally dreary. Are people just unable to afford us right now, or have they simply tired of recreational gambling?

Truth is, we’re still at 90 percent of last year’s revenues, so lots of people continue to shop, stay and wager, but we expected 2008 to be yet another growth year. When growth doesn’t happen, we get nervous. When the market actually shrinks, we get scared. What we really must do is get busy.

The difficult task of right-sizing capacity to market demand is under way. Painful decisions to cut projects and personnel were quickly-and considering the difficulty-efficiently, executed. Now we face the even more troubling question: does this downward turn mark a brief pause in, or the end of, our growth era?

Bright managers-and we’re fortunate to have a lot of them-understand the answer to that last question is largely up to us. If we sit on our hands and worry, the downturn will be permanent. Cutbacks help us stay solvent but will not restore growth. Only if we adapt to the market, overcome consumer reluctance and offer better value, do our best years lie yet ahead.

I’ve participated in a lot of discussions this summer on how to return to growth and the question I hear most is “Whatever happened to innovation?” Managers want better systems and tools with which to measure customer behavior.

Most of all, they want new games that will draw more players. Many operators feel shortchanged on the innovation front. They look at the computer industry generally and the Internet specifically and see rapid innovation. Recreational gambling technology, by comparison, seems a decade or more behind.

Perhaps there’s truth in that comparison. Back in 1897, Charlie Fey invented the slot machine. Electricity wasn’t common then, and Charlie had to make do with gears, levers and springs to build his game.

Modern designers have stepper motors, microprocessors and other amazing electrical technologies. Do we squander the power of these tools by using them to simply mimic what Charlie did 111 years ago? Have we accomplished anything in game design that is truly innovative?

The answer to both, I believe, is yes.

Computers have allowed game designers to create pay tables, bonuses and math that were previously impossible. Electronic circuitry allows unparalleled reliability. Perhaps the biggest innovations, though, have been in pure wagering capacity. Back in Fey’s day, each wager was a single coin, and jackpots were often manually paid. Today we accept paper currency as wagers and print paper receipts for cash outs. Coins, and the cost of handling them, are virtually extinct. Wager size is whatever we wish it to be, though we almost never settle for a single credit.

Without this enhanced reliability, efficiency and capacity, the modern casino is not economically possible.

Innovation has focused on capacity primarily because that’s exactly what we’ve asked for. Until this past year, expansion was the prime concern: open new casinos, expand old ones, increase efficiency and process the hordes of customers waiting to open their wallets. Game designers met those demands.

What are the chances, though, that a game consisting of symbols on spinning reels or decks of cards are THE best, most entertaining and most efficient wager opportunity we can offer? With the power of computers and networks, why don’t we have better, more imaginative games and systems?

Twenty years ago, in 1988, electronic gaming machines were just becoming commonplace, and most of us had never heard of the Internet. Ten years ago, two Stanford students reinvented something called a search engine and put up a web page named after a little-known mathematical term with a box into which you could type words. Today, Google is a household word and has, by itself, achieved a market valuation far in excess of all the public companies in gaming combined.

Why hasn’t some of this turbo-charged innovation, so apparent on the Internet, reached our industry by now?

The answer is found in risk-or perhaps more importantly –our aversion to risk. The Internet is a wide open venue. Anyone with a personal computer can build a Web site.

For example, back in 1995, a twenty-something programmer named Pierre Omidyar sat down at his living room computer to create a Web site on which to sell things. He called the company Echo Bay, and 13 years later, that company’s stock carries about the same value as the combined shares of MGM Mirage, Boyd, Wynn and Las Vegas Sands. Just look up eBay on the Internet to verify my calculations.

In fairness, there are 10,000 Internet businesses that fail for every eBay success. Importantly though, there is no barrier to entering the Internet business, and there are huge barriers to breaking into the gaming business.

Let’s start with licensing. As you undoubtedly know, gaming is highly regulated. The reason for this, we’re told, is to ensure the integrity of the industry and there’s good reason to be concerned. Throughout history, gambling has more often than not involved unsavory characters of every kind. Regulation exists to ensure fair games run by honest people and it perhaps is unfair to compare gambling to the Internet.

But regulation has evolved at least partially through politics, fear and monopolistic desires. All gambling regulation is locally defined and enforced. There are hundreds of jurisdictions worldwide, many with differing technical standards for games and all with separate licensing and investigation requirements. Some sort of technical approval process is perhaps useful. But do the standards of Nevada really need to be different than those of California or Mississippi? Is it not possible to structure a game to a common set of standards and have that game be considered fair to players in each of these locations simultaneously?

Regulations and licensing were largely created to control casino operators and game suppliers were thrown in mostly as an afterthought. Where a casino operator needs a license only in those locations where a casino is placed, a game supplier needs a license in each location where games are sold. Even worse, the game supplier must be investigated by each jurisdiction separately. The cost of these investigations is significant in money and time, as each investigation can cost $25,000 or (much) more and requires many months if not years to complete.

Still worse, a startup company cannot even legally work to develop a gaming device in some states until after it is licensed. And worst of all, the licensing process for that startup company-even if it is just a single person working evenings on an idea-is exactly the same as for the corporate goliath working to build an $8 billion casino. Does that make sense?

Where Internet entrepreneurs cover their costs by raising capital from investors, life is far more difficult in the regulated environment. That’s because every investor in a licensed corporation, even if they hold only a single share of stock, must also be investigated and licensed. A venture capital firm excited by the commercial possibilities of a new gambling machine quickly loses interest when it is learned that each principal and every investor in that venture capital firm must be investigated too.

These inefficiencies would seem to wreak havoc on equipment manufacturers-and they are a burden. But a funny thing happens on the way to licensing: once your licenses are accomplished, they instantly because assets and create formidable barriers to new competition. In effect, our marketplace trades the price of licensing for reduced innovation costs.

Licensing and regulation is only the first barrier to innovation. Proprietary standards come next. To build a game today, you must be compatible with a variety of player tracking and accounting systems.

You have to sign a proprietary agreement with IGT, for example, in order to gain access to the SAS protocol. That agreement is a legal document that is difficult for a startup company to obtain and negotiate. Further, it contains language which prohibits you from using the protocol to accomplish certain transactions that might otherwise be commercially desirable. In other words, the protocol can be used to limit competition.  IGT is not the Lone Ranger in its policies-they just ride the biggest horse.

The Gaming Standards Association has worked hard over the last decade to create open standards, but the protocols have yet to be widely deployed.

Casino operators share responsibility for innovation shortfalls. Casinos demand new games be placed on free trial, often with prerequisites of exclusivity and up-front discounts-even before the game is tested. On top of that, casinos are often reluctant to consistently share detailed performance information with game suppliers. Instead, the supplier is simply told the game is doing well or that it should be removed.

All new ideas have deficiencies. Without time to improve and performance information as a road map, most startup companies either die or are absorbed by larger entities that can tolerate these obstacles.

There are good reasons why we all behave the way we do. The recent downturn in recreational gaming revenues reminds us all though, that innovation is lacking. The jurisdictions that regulate depend upon gaming revenues to fund schools and social programs. Our game suppliers need continued expansion if they’re to prosper and casinos must have a steady supply of innovative new games if revenues are to climb.

We all benefit by rethinking how we regulate, cooperate and purchase.

One more issue to consider is reputation. Many individuals outside our business still don’t hold us in high regard-if they think of us at all. The result is that bright young minds don’t consider gaming as a career opportunity. When I started EDT back in 1981, I was stunned to offer jobs to engineers in Phoenix only to be told that they’d never want to be involved with the business of gambling because it is “dirty.” Yet they thought nothing of coming to Las Vegas for a weekend.

The past 27 years have brought great improvements to our image, but I know few college-age people who regard gagame design as a career opportunity.

During G2E, I hope to solicit support for a project to encourage young people to consider recreational gambling as a career and simultaneously enhance our hopes for innovation. The idea is to create a contest that offers prizes to students with the best ideas for new gaming machines. Of course, the idea could also be extended to include other categories , such as marketing or table games.

We at Acres-Fiore will put up $25,000 in prize money and offer internships to game-category winners.We’ll even consider helping the winner implement the idea as a real-life gaming machine. This contest could help us recruit new innovators and publicize the industry as a valued provider of careers.

The next Charlie Fey is out there-we just have to persuade him to work on casino games instead of a new Internet auction site.

If you’ve got ideas or interests e-mail me at john@acresfiore.com.