It was hard not to be taken somewhat by surprise by the scale of dealmaking activity in the slot sector this summer. Rumors of International Game Technology (IGT) being sold were out there prior to the company’s mid-July deal with GTECH, so that couldn’t have come as much of a surprise. But the ultra-quick turnaround of Scientific Games purchase of Bally Technologies was not something many people saw coming even though, in retrospect, we should have.

For one thing, the deal is a perfect personal fit for Gavin Isaacs, the CEO of Sci Games, who was fresh off an expired non-compete connected to the sale of Shuffle Master, where he served as CEO,  to Bally, where he was COO from 2006 to 2011. With a difficult environment for game and system sales up ahead, Bally was smart to seek a deal post-IGT/GTECH. The way forward now is to position your enterprise as a total gaming company that is able to sell to all segments of the gaming industry worldwide, and not be perceived as too dependent on the struggling U.S. brick-and-mortar casino business. From the standpoint of shareholder value, it’s not hard to believe that Bally agreed to merge at the right time.

As for why this is happening, we need look no further than the nearest typical slot floor, which is populated with players who often fall into one or two categories: aging and less discretionary money to spend than in the past. Slot revenues have moved flat to down in many markets, and this has put pressure on operators to protect their margins on the cost side, putting the squeeze on vendors, who in turn feel  compelled to adopt strategies that aren’t always appealing to operators, who in turn push back. Rinse, lather, repeat.

Take premium leased games, or what are called gaming operations from the manufacturer’s perspective. With the replacement cycle weakened, the operations side of the business is vital to the near- and long-term prospects of publicly-traded slot manufacturers. Multimedia Games, for instance, grew operations revenue 11 percent in an otherwise challenging third quarter which saw unit sales drop from 647 last year to 616 for the three-month period ended June 30. But there was negative news on the operations side as well, with the announcement that Oklahoma casino giant WinStar had negotiated a price reduction on a 1,000-unit block of machines from 25 percent of revenue to Multimedia to 20 percent. 

These are the types of things that cause share prices to take a hit and, if persistent, consolidate industries. Everyone is behaving perfectly rationally. The consumer, feeling squeezed, but wanting to game, gambles less of his or her own money after scanning the market for every free play offer available. The operator, looking to protect profits, reduces spend on new machines among other things, particularly when the returns from such games are unpredictable. The supplier, smelling the coffee, sees gaming operations as a way to keep their companies moving forward. The operators, catching on and increasingly squeezed themselves, ask for a better deal. And the biggest customers get the best deals.

It’s enough to imagine that there is another wave of deals ahead, but I learned a long time ago not to trust my instincts along those lines. Let’s hope, on the other hand, that the merged versions of IGT and Bally are able to dedicate more resources and expertise to understanding what games will actually work and with which players, taking at least some of the guesswork out of new games. And that, in turn, operators will gain a better understanding of which new games actually deserve a chance to succeed, without being pulled off the floor because they don’t achieve the same win-per-unit numbers of an established game.